America Invest: May 2014

Friday, 16 May 2014

8 terms to know before becoming a homeowner

By Linda Descano, CFA®May 8, 2014 2:31 PM

Home Sweet Home

This article was originally published on Citi’s Women & Co.

The financial jargon that comes with buying a home can be downright mystifying to first-time purchasers. To help make the process of buying that dream home less daunting, here is a primer on the important terms to know.

1. Debt-to-Income Ratio (DTI)

The percentage of your monthly gross income (that is, income before taxes) that goes toward paying debts, such as credit cards and loans. Not surprising, the lower your DTI, the better your chances of qualifying for a mortgage. As a general rule of thumb, you want to target a DTI of 36 percent or less.

2. Monthly Payment

Your monthly payment includes a portion of principal (amount of money borrowed or the outstanding balance on a loan) and interest. It also may include amounts for the escrow of taxes and insurance.

3. Interest Rate

Your interest rate is the cost of borrowing money expressed as a percentage. For example, if you borrow money at a 5 percent fixed interest rate for a year, the interest charged will be 5 percent of the total amount borrowed. Your interest rate, along with the term and loan amount, determines the size of your monthly principal and interest payment.

4. Fixed Rate Mortgages

With a fixed rate mortgage, your interest rate never increases. Even if rates go up, your rate will remain the same. This makes budgeting easier. Lenders generally offer fixed rate mortgages for 10, 15 and 30 years. The longer the term of your loan, the lower your monthly payment will be. With a shorter term, though your payment may be higher, you’re likely to build equity faster. Fixed rate mortgages are one of the most popular choices for homeowners, especially those who plan to stay in their home for many years.

5. Adjustable Rate Mortgages (ARM)

With an ARM, you pay a lower, fixed interest rate for a set period of time. Then, the rate adjusts based on financial markets for the remainder of the loan term. As a result, your monthly payment could change as the interest rate changes. For example, a 5/1 ARM is fixed for the first five years, then adjusts every year thereafter. An adjustable rate mortgage may be a good choice if you’re confident that interest rates are likely to remain stable or go down in the future.

6. Annual Percentage Rate (APR)

APR represents the total cost of borrowing money for a mortgage — including certain closing costs, interest, finance charges and points — over the full term of the loan, expressed as an annual rate. By helping you determine the true cost of your mortgage, the APR lets you compare different types of mortgages offered by different lenders. All lenders calculate the APR according to federal requirements and are required by law to provide the specific APR for your mortgage in the Truth in Lending disclosure.

7. Points

A point is a fee equal to 1 percent of your loan amount. You may be able to pay points, depending on the mortgage option selected, to lower your interest rate — these also are referred to as discount points. Alternately, you may be able to select a higher interest rate and receive a credit against closing costs. These are known as rebate points. The longer you plan on staying in your home, the more likely you are to benefit from paying points. To determine if paying points is right for you, you should calculate how long it will take for the initial cost to equal the savings you’ll realize through the reduction in your monthly payments. This is sometimes called a “break-even point.” You can see an example calculation here.

8. Amortization Schedule

This is a snapshot of how the interest and principal components of your loan change over time as payments are made. In the beginning, your interest component typically will exceed the principal repayment component. If you have a fixed rate mortgage, your monthly payment stays the same, but the portion of the payment that goes toward principal will increase over time. The interest portion of the payment is calculated on the scheduled amount owed each month. You can see a sample schedule here.

Wednesday, 7 May 2014

rates 8-5-14

Rates »

savings

1.4%

0.8%

0.7%

0.4%

0.6%

0.4%

0.5%

National averages fromBankrate.com

Financial Regulators See Progress And Threats

ECONOMY

Financial Regulators See Progress And Threats

By ANNIE LOWREYMAY 7, 2014

WASHINGTON — Some of the same weaknesses that contributed to the disastrous 2008 financial crisis persist today, the Financial Stability Oversight Council said in its 2014 annual report to Congress.

The report, released on Wednesday, highlights what it called “the considerable progress we have collectively made to improve the strength and resiliency of the financial sector.” But Janet L. Yellen, the chairwoman of the Federal Reserve, said at Wednesday’s open meeting of the council: “Our job is not done. We must continue our collective efforts to monitor risks, address vulnerabilities and build a stronger and safer financial system.”

The “chief accomplishment” in recent years has been the improvement in big bank holding companies’ balance sheets, Ms. Yellen said, adding that the Federal Reserve’s stress tests had “provided a level of confidence in our assessment of how financial institutions would fare” in another downturn.

The oversight council — made up of the heads of the Treasury, Fed and other regulators — also cited the completion of the so-called Volcker rule restricting certain firms from making bets with their own money, as well as new rules on bank capital, leverage ratios and swaps markets.

But threats old and new abound, and the annual report acts as a guide to what Washington is worried about when it comes to Wall Street.

The perception that big, interconnected financial firms might be “too big to fail” persists, the report warns. The markets where many banks look for short-term cash loans remain potential weak spots, too.

“The risk of fire sales continues to be a major source of financial instability in the tri-party repo market,” the report said, referring to a market for short-term loans. “No single regulator has an ability to support orderly liquidations across all investors in the market. Market participants will be critically important in defining a solution to this collective action problem.”

On top of those concerns, sharp increases in interest rates might hit firms that have soaked up riskier assets on the cheap in the last few years.

The report also notes that there has been no progress in overhauling the housing finance market, with lawmakers loathe to touch Fannie Mae and Freddie Mac, in part because the entities, which were taken over by the government during the financial crisis to prevent them from failing, are currently returning tens of billions of dollars to the Treasury.

“Access to mortgage credit remains unnecessarily tight,” Treasury Secretary Jacob J. Lew said at the council’s meeting. “The housing finance system needs fundamental reform.” This uncertainty about the future shape of the system was holding back a broader housing recovery, he added.

The markets also might remain overly reliant on a global benchmark interest rate, known as Libor, that bank employees have been accused of manipulating.

There are potential new or emerging threats as well, the document warns. The nonbank mortgage servicers that collect fees on a growing number of home loans “are not currently subject to prudential standards such as capital, liquidity or risk management oversight.”

Another potential risk is that some big asset managers are providing indemnification to securities lenders. But such asset managers are not required to set aside money to cover potential payouts, nor do they have banks’ deposit funding base, the report noted.

A person close to the development of the annual report stressed that such developments might not be any kind of threat, but that the council wanted to keep tabs on them.

The council also updated its own rules, issuing a new transparency policy that will give the public more access to information before and after its meetings.