Mortgage Refinance and Resetting the Clock

The following is a guest post from reader TFB, who blogs anonymously at The Finance Buff where he covers investing, taxes, banking, mortgage, insurance, and other personal finance related topics. You can find more of his posts about mortgage refinances under the “refi” tag.

I refinanced my mortgage recently. The rate on my 15-year loan went down from 4.25% to 3.75%. With a lender credit covering the bulk of my closing cost, I spent about $200 on a refinance that will save me over $1,000 interest every year.

Some people don’t like to refinance their mortgage even when the rate is lower and there’s no fee, because they fear it’s going to reset the clock for the eventual payoff. They reason that when they refinance to a new loan, the payoff date will be extended, and they will end up paying more interest over the life of the loan than they would if they didn’t refinance.

In some cases it’s true. For example, if you are five years into a 30-year mortgage at 5.25% with $200k principal balance remaining, keeping the current loan at 5.25% for another 25 years will cost you additional $159,384 in interest. Refinancing the $200k principal balance into a new 30-year loan at 4.5% will push out the payoff date by five years and cost you $164,813 in interest in 30 years. By refinancing, you end up paying more interest.

It doesn’t have to be that way.

The reason you will pay more interest over the life of the new loan is because you are paying less toward principal in the new loan. Under the old loan at 5.25%, you pay $1,199 a month. Under the new loan at 4.5%, you only pay $1,013 a month. In the first month after refinancing, although the interest is lower by $125, you will also pay $61 less toward principal.

  Principal (first month after refinance)  Interest (first month after refinance)

There are several ways to deal with this problem.

1. Refinance to a Shorter Term

If you refinance to a 20-year loan at 4.25% instead of a 30-year loan at 4.5%, the loan will be paid off sooner (in 20 years instead of 25 years). The monthly payment is only slightly higher. You will pay $1,238 a month instead of $1,199 a month. Paying $39 a month more will save you more than $60k over the life of your loan.

Here you are pushing 100% of the interest savings plus a small extra amount per month toward paying down the mortgage. That’s why it will be paid off faster.

2. Make the Same Payment

What if you can’t or don’t want to pay extra $39 a month? You can still refinance to a new 30-year loan, but make the same monthly payment as before. Because the interest rate on the new loan is lower, more from the same monthly payment goes toward principal. The new loan will be paid off in 22 years instead of 25 years.

With no change in your monthly cash flow, you are able to save a substantial amount of interest by refinancing.

3. Catch Up on Principal

You see in the previous example you will be able pay off the loan in 22 years instead of 25 years if you keep making the same payment as before. If you’d like to maintain the original 25 years target, you can pay less than what you paid before but more than the required monthly payment on your new loan.

How do you know how much extra to add to the required monthly payment? You use the PMT function in Excel. The monthly payment to pay off $200,000 in 25 years at 4.5% interest rate is $1,112:

=-PMT(4.5%/12, 25*12, 200000)

The extra payment required to pay off your new loan in 25 years is $1,112 – $1,013 = $99.

If you are concerned the bank won’t credit your extra principal payment correctly if you just include it with your mortgage payment, you can make a special principal payment once a year, with a paper payment coupon if necessary. In our example it will be $99 * 12 = $1,188.

I made a spreadsheet for these calculations. Plug in your own numbers and see how they come out. Don’t let the fear for resetting the clock stop you from refinancing to a lower rate.

Find more in Real Estate | 10/13/10, 5:00am | Trackback

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Current TD Ameritrade Sign-Up Promotions (Updated 10/2010)

With their new commision-free ETF list, there might be a renewed interest for a TD Ameritrade account (though not from me). Here are the current promotions available. They have different opening balance requirements, different expiration dates, and some are valid for IRAs and some are not, so I’ll leave it to you to see which one fits best.

30 Free Trades For 1 Year – Suze Orman Promo
Open a new account with no minimum opening balance, and get 30 free trades good for one year. Valid for IRAs as well as regular individual accounts. Selected fine print:

Offer valid for one new Individual, Joint or IRA TD AMERITRADE account opened by 12/31/10. Offer is not transferable and not valid with Amerivest-related accounts, TD AMERITRADE Institutional accounts, current TD AMERITRADE accounts or with other offers. Qualified commission-free Internet equity orders must execute within 365 days from date account is opened. Limit one offer per client.

$5 trades for 12 months
New accounts opened with at least $2,000 can get $5 market/limit trades for 12 months. Valid for IRAs. Selected fine print:

Offer valid for new TD Ameritrade IRAs, Individual and Joint accounts that are opened by 11/30/10 and funded within 30 days of account opening with a minimum deposit of $2,000 or more. Internet equity or option trades are $5 for market or limit orders during the 12-month introductory period. Interactive Voice Response (IVR) trades will be $5 for market or limit orders. Broker-assisted trades will be $24.99 for a market order or $29.99 for a limit order during this period. Contract, exercise, and assignment fees still apply. Commission rates are valid 12 months from qualifying deposit of $2,000 or more. At the conclusion of the 12-month introductory period, Internet equity or option trades will be $9.99 for market or limit orders, IVR trades will be $34.99 for market or limit orders, and broker-assisted trades will be $44.99 for market or limit orders. Your new account must remain open and funded with the minimum required funding for 12 months or the account will be reverted back to the standard commission schedule.

Up to 25,000 Delta Skymiles
Open with $2,500 and get 5,000 Delta miles, $10,000 for 10,000 miles, and $50,000 for 25,000 miles. Selected fine print:

Offer valid for one new Individual or Joint TD Ameritrade account opened and funded by U.S. residents with $2,500 or more by 12/31/2010. Not transferable and not valid for IRA or other tax-exempt accounts, internal transfers, current TD Ameritrade clients or with other offers. Limit one offer per client. [...] Account must remain open with minimum funding required for participating in the offer for 9 months, or TD Ameritrade may charge the account for the cost of the SkyMiles. Allow 6-8 weeks from account funding for the first half of the miles to appear in your SkyMiles account. To qualify for the second half, TD Ameritrade account must remain open with minimum funding required for participating in the offer for 6 months from the first mileage posting date.

Up to 25,000 United Mileage Plus miles
Same idea as with Delta above, except for United miles. Selected fine print:

Offer valid for new Individual or Joint accounts opened and funded by U.S. residents with $2,500 or more by 12/31/2010. Not transferable and not valid for IRA or other tax-exempt accounts, internal transfers, current TD Ameritrade clients, or with other offers. Limit one offer per client. [...] Account must remain open with minimum funding required for participating in the offer for 9 months, or TD Ameritrade may charge the account for the cost of the miles. Allow 6 weeks from account funding for the first half of miles to appear in the Mileage Plus account. To qualify for the second half, TD Ameritrade account must remain open with minimum funding required for participating in the offer for 6 months from the first posting date.

30 days free trades + $100, $250, or $500 Cash
If you fund with $25,000 minimum, you can get $100 cash. 100,000 minimum gets you $250 cash. Whopping $250k minimum gets you $500 cash. You also get 30 days of commission-free trades. Here’s basically the same offer valid for 401k rollovers. Selected fine print:

Offer valid for one new Individual or Joint TD Ameritrade account opened by 06/30/2011 and funded within 30 days of account opening with $2,000 or more. Funding with minimum of $25,000 – $99,999 receives $100 cash, funding with minimum of $100,000 – $249,999 receives $250 cash, funding with minimum of $250,000 or more receives $500 cash. IRA and other tax-exempt accounts are not eligible to receive the $100 cash bonus. [...] Qualified commission-free Internet equity, ETF or options orders must execute within 30 days of account funding. Contract, exercise, and assignment fees still apply. Limit one offer per client. Account must remain open with minimum funding required for participating in the offer for 9 months, or TD Ameritrade may charge the account for the cost of the cash awarded to the account.

Find more in Deals & Offers, Investing | 10/12/10, 10:00am | Trackback

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TD Ameritrade Offers 100+ Commission-free ETFs

TD Ameritrade recently announced that they will be offering a list of over 100 ETFs that can be traded with no commission if you hold them for at least 30 days. Supposedly, they asked Morningstar to pick 100 ETFs that would be most useful for long-term investors to build a ETF portfolio.

The current 100 ETFs that make the list include 47 from iShares, 32 from Vanguard, and 12 from State Street. You can view the entire list here. You must enroll and accept the terms, because if you don’t hold the ETF for 30 days, they will charge you a short-term trading fee of $19.99. Their standard price for other trades remains at $9.99.

Going over the list, it does appear to include all the most popular ETFs, including just about all of the ETFs that I have been interested in investing in. However, it doesn’t include all the ETFs from any particular family.

Selected Vanguard ETFs: Total Bond (BNS), Small Cap Value (VBR), FTSE All World ex US (VEU), Total Stock Market (VTI), and Emerging Markets (VWO)

Selected iShares ETFs: Barclays TIPS Bond (TIP), Barclays 1-3 Year Treasury Bond (SHY), and S&P SmallCap 600 Value Index (IJS)

This is after similar moves by other major brokers:

Find more in Investing | 10/12/10, 5:00am | Trackback

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Starting a Home Based Business: Stay at Home Mom Upgrades Volunteer Work into New Start-Up Business

The following is a guest post from reader Leslie, who shares her story of returning to the workforce by starting her own business in Florida. You can see more of her work at on Facebook and soon at LALGraphicDesigns.com (currently under construction).

As a thirty-five year old mother of three, for the past decade I have been fully employed as a stay at home mom. When my first child was born I put my career aspirations and four year college degree aside to focus on raising our children. Before motherhood, I used to work as a graphic artist doing on-air graphics for a local TV station and a national satellite TV provider. Now that all the kids are all in school, with encouragement from friends and family, I recently started my own home based graphic art and design business. This is the story – or at least the first chapter – in a story which just began to be written about my home based business.

After “retiring” to run our household, I kept my artistic and computer skills fresh over the past several years by volunteering and providing free graphic arts services for community organizations, schools, friends and family. Samples of school T-shirt and business logo designs are copied in the margins. Although I committed my energies to raising our children, I had always wanted to run my own business. As set forth below, my contacts through our local parent teacher associations and charities have developed into business clients.

Understanding that a good rule of thumb for a home base business is to keep it simple, I decided to establish a limited liability company (LLC) with pass-through taxation as an S Corporation. This was accomplished in less than a month by doing the following:

mailing an application and articles of incorporation to the State of Florida Division of Corporations to establish the business;applying on-line for a tax id number with the IRS;filing a Form 2553 with the IRS to elect pass-through taxation as an S Corporation;opening a free business checking account with the new tax id number and articles of incorporation. [Note that I am not required to collect sales tax since I am not selling tangible personal property, only a service. Any designs or logos that I prepare will be delivered electronically by email. We carefully researched and confirmed this conclusion with our state sales tax office.]

Satisfying the federal and state requirements was relatively painless. Applying for the home business in our city in south Florida was slightly more time consuming and expensive. The State of Florida first year incorporation fee was only $125. There is no fee to apply for the federal tax id number or to file the Form 2553 with the IRS, apart from the income tax due next year.

Our city requires all home based business to apply for a certificate of use with the building department. The certificate will not be issued until the home is inspected by a city fire marshal. For example, the home based business may not exceed 25% of the total floor area of the home. This was not a problem since the business is based in my office/study. My only equipment is my desk, computer, scanner and related audio visual accessories and supplies.

Our city’s requirements for home based businesses are set forth in the city code and can be accessed at the City of Weston website. The city restrictions are focused on preserving the residential nature of the neighborhood and include: prohibitions on signage visible from the street; restrictions on noise and parking; and the requirement that only residents of the home may work for the business.

The inspector was available within a week to perform the home inspection. All went relatively smoothly, apart from the fact that the inspector reserves the right to show up between 8 a.m. and 4 p.m., with a $162 reinspection fee if you miss the appointment. I will avoid making any direct comparisons to my cable company. A successful inspection results in the issuance of a certificate of use. The certificate of use is necessary in order to submit a “business tax application” with the city. For a home based business, the annual city tax is $157.50. The one time cost of the fire inspection was $100. Our county also imposes an annual tax of $45. When all is said and done, the total start-up cost/taxes paid to the state, city and county was $427.50.

My other start up expenses will be a print advertising budget and computer software upgrades for the latest versions of Adobe Illustrator, Photoshop and After Effects.

South Florida is ground zero in the housing downturn. In this difficult environment, my goal is to provide affordable, high quality graphic design services to businesses that are interested in creating an effective corporate identity and branding strategy. I will also have a secondary focus on schools and charities that unfortunately are increasingly required to engage in round the clock fund-raising. Because my operating costs are negligible, I am prepared to work for an economical fee in order to get my name out in the community. Another selling point for the new business is that I have a flexible schedule and can provide a quick response time if needed. Since the business is ultimately a service oriented occupation, I recognize that 100% customer satisfaction is essential.

Working closely with our neighborhood schools and family members who are teachers, I have discovered that the objectives of a school or charity’s fund-raising can be different from the objectives of a for-profit business. As a general rule, a business uses advertising and graphic design to attract customers. A business will give away for free promotional items such as pens, mugs and almost any other kind of functional object that can display a logo or advertisement. By contrast, a school or charity will raise funds by selling ever more elaborate and creative items such as t-shirts, clothing, backpacks, water bottles, key chains, magnets and any kind of novelty item upon which a motto, image or mascot can be emblazoned. For-profit business, schools and charities all need attractive banners, fliers, brochures, mailers and other advertisements to sell/promote their product, service, events or activities. I have networked with a prominent national educational supplier, publisher and printer to provide extremely cost competitive apparel and promotional items for clients at whole-sale prices.

One initial challenge is to convert the charities, school and related organizations that I have provided free design services for into paying customers. Hopefully, as the market turns around, this will become possible. Charity is of course valuable in its own right. I am learning that as a side benefit, it also provides meaningful exposure and access to businesses and members of the community who will also become customers.

In addition to my experience and bachelor’s degree in graphic arts and illustration, I can partner with my sister who is a successful fine artist with her own company. Between the two of us, we can cover the spectrum from commercial art to fine art and web design.

Making money is the goal of any business. Admittedly, as a stay at home mom, I have competing objectives. Ideally, my plan is to work primarily during school hours and after the kids have gone to sleep at night. This can create as yet unexplored personal dynamics within the family as “Mommy” re-enters the labor market. Thankfully, prior to starting the business, I have never had to sacrifice as a stay at home mom. I can only hope that this balancing act will not present too many challenges for the family. So far, the children are excited about Mom’s new business cards and seeing her advertisements, designs and shirts. I am also thankful that my husband and family are available to provide support and encouragement.

Find more in Career, Entrepreneurial | 10/11/10, 5:00am | Trackback

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How To Be Clutch With Your Money – Book Review

Drive. Click. Choke. Empowered. Switch. Bounce. It seems that the short book with the one-word title is very popular these days. Here’s another one: Clutch: Why Some People Excel Under Pressure and Other Don’t, by Paul Sullivan. The book explores stories of people both overcoming and succumbing to extremely stressful situations.

The people profiled include war veterans, actors, and athletes. In particular, five key characteristics of the “clutch” are given:

focus,discipline,adaptability,the ability to be fully in the present, andbeing driven, whether by fear or desire

What about a financial crisis? Your home value plummets while your mortgage rate jumps, you are suddenly unemployed, or your investments drop drastically in value. How will you respond so that your household survives? Seems a lot different than making a golf swing, but here I tried to summarize the section using the five traits above:

Focus. Take responsibility. Change what you can. Don’t waste time blaming others like the mortgage lenders or the credit card issuers that jacked up your rates.

Discipline. Cut your costs without emotion. Sell liabilities like cars, boats, vacation properties. Walk away from your home mortgage if needed. You should always have enough cash to cover twelve months of your expenses.

Adaptability. What is most important to you? Family? Well, your family will still love you if you live in an apartment and drive a $3,000 car. Learn to live without the rest.

Be in the present. Don’t wait. Don’t think you’ll be bailed out, or something magical will happen. If you rely on hope an sit around waiting for things to improve, you’ll just burn through more of your reserves and end up even worse.

Being driven. Figure out what motivates you. Maybe it is fear of losing it all, or desire for financial freedom.

Find more in Book Reviews, Frugal Living | 10/4/10, 2:32am | Trackback

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Citi Platinum Select Card: 0% APR Balance Transfer for 21 months

What credit crisis? Citibank is now offering 0% APR interest on balance transfers for 21 months on its Citi Platinum Select Mastercard. Not only is it longer, but notice they are not allowed to say “up to” anymore with new credit card laws. If you get approved – this card requires good to excellent credit – then you’ll get the 21 months. No annual fee.

0% introductory APR for 21 month from date of first transfer when transfers are completed within 4 months from date of account opening.

The balance transfer fee is 3% ($5 minimum) so it’s not a screaming deal, but a one-time 3% fee spread out over 1.75 years is quite an improvement over the 6-month offers available just a year ago. The card also includes 0% APR for 12 months on purchases. If you have higher interest debt elsewhere, this is a long and flexible offer.

As an opportunity to arbitrage some profit by borrowing at the low rate and investing it elsewhere, you could probably make a very, very slim profit if you really tried with a bank CD, and maybe a little better with one of those 4% rewards checking accounts.

Find more in Credit Cards, Deals & Offers | 10/9/10, 2:27am | Trackback

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The Rat Race: Does This Cartoon Look Familiar?

Let’s get out of the race!

Image credit to artist Polyp. There’s also an animated version that made me nauseous (perhaps that was the point?).

Find more in Funny, Simple Living | 10/8/10, 2:42am | Trackback

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