Tuesday, December 25, 2007

Some want to Outlaw Subprime Mortgages.. I Have a Better Idea.

Umm, let’s not and say we did.

The American Prospect, one of those high-brow magazines you see in the doctor’s office that you don’t bother picking up, has a suggestion on how to avoid the subprime mess going forward. They want the Federal Government, (who brought you the amazing Katrina response and the Walter Reed medical story last year) to help you sub-primers out there. They want to stop those bad ol’ loan-sharking lenders from ever giving out those stupid mortgages again—by banning them.

While it sounds great on paper, I think this is yet another time where we should not let the government step in and try to “save” grown adults from themselves. Usually, nothing good comes from such moves. Most people got into the subprime (adjustable rate) mortgage market to start with because they were (a) looking for a cheap and temporary teaser rate and were planning on preparing for the adjustable part “later on,” or (b) looking for a low rate because the fixed rates at the time were too high to get into a home. For the future, buyers should beware of such temporary fixes.

The blame doesn’t completely rest with the borrower though—some of the lenders who wrote out these “bad” mortgages were receiving excellent commissions to keep the debt pile growing. Eventually, someone had to take care of it; now bank after bank continues to write down billions (yes, with a “B”) of dollars in debt

Stay away from adjustable rate mortgages (ARMs) and interest-only mortgages because you never know what the future holds in terms of your ability to pay. Stick with the fixed-rate mortgages, and you’ll be less surprised (if at all) about how much you’ll be paying five, ten or fifteen years from now. And above all, don't depend on the government to bail you out of poor decisions--it creates a culture of dependency that usually allocates more power to the feds, and usually that's not a good thing, no matter how good it may sound.

Sunday, December 02, 2007

Raiding the Emergency Fund – The Road Back


Good morning readers! It’s been nearly a month since I’ve written an article, and today I’d like to talk about the use of the emergency fund. There will be a time where you will have to use it—for me, it was definitely this past month through back surgery. We want to address the question of what to do when you have to use your fund.

To review, remember that the purpose of the emergency fund is to insulate your budget against unplanned “shocks.” For instance, if your car radiator goes on the fritz, chances are you didn’t have a “Radiator Repair” line item in your budget worksheet. (Some of you may have a “car repairs” section, which is essentially the same as an emergency fund, just a little more defined). Of course, getting an Aquos big screen before Super Bowl Sunday doesn’t warrant an emergency expense, although it’d be nice to have.

For me, I had to make some purchases that I did not forsee. I spent a couple days in private rooming in the hospital, which cost money. I made some home purchases to improve the upkeep of my house for the recovery period (which has gone on longer than expected). I had to change flight plans at the last minute which also cost money. But, these unforeseen but necessary expenses are perfect for emergency fund spending.

Instead of panicking, it’s best to lean on your emergency fund and to not dip too far into credit card debt, which is far easier to do. The key, however, is to ensure that you work to restore your emergency fund back to its prior standing before moving on. You wouldn’t drive a car after an accident without repairing the car and restoring the airbag (unless you’re just too cheap—and I won’t be riding with you). The emergency fund is there to help ride out the bumps Life sometimes presents. Use it wisely, and work to restore it when necessary.

See you next week.