We have all heard of them. We have laughed them off but secretly have wondered whether they are true or not. Like any other profession, the stock market also has developed quite a lot of myths. While some may be true most of them are not. These are just random stories made up by people who have suffered a loss in the market. Listed below are the top 5 stock market myths which are not trueContinue Reading...
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Buying a new place, whether it be a condo, house, townhouse, and so on, can be a very long and difficult process. When we bought our current house that we live in, it was extremely easy. Of course easy is relative, but it sure did seem easy.
We looked at a lot of houses, but we only put a contract down on one and it was accepted (after a couple of negotiations). Our move in date was set for just a couple of weeks after that and we moved in maybe less than one month from the day that we first toured the house. Even our loan officer said he’s never been through a home process as quick and as easy as process was.
However, I have heard others’ stories about how hard their home buying process was. Some have to wait months to sign the papers and move in. Some submit multiple offers just to be outbid by tons of other people.
There are so many things to think about when you buy a new home, and in today’s post I will be listing some of those.
Put 20% down
Putting 20% down has many positives for a home buyer. It will lower your payment in more than one way, mainly that you will take out a smaller home loan.
If you don’t put down at least 20%, then most mortgage companies will require that you pay Private Mortgage Insurance (PMI). This can add an extra $50 to $150 to your monthly mortgage amount, and possibly even more. We made the mistake of not putting 20% down and now have to pay PMI. We definitely won’t be making this mistake with our next house.
Getting pre-approved is a big step. Not knowing what you can “afford” and looking can be a big problem because you might fall in love with something but then no bank approve you for that amount. If you are pre-approved, then you can eliminate houses out of your search that are not possible due to your budget. It will save you a lot of time and the possibility that you will buy way outside of your budget.
Buy what you can truly afford
Now, just because you were pre-approved for a loan, it does not mean that you can truly afford that loan amount. Banks are notorious for approving individuals for MUCH more than they can afford. When we bought our current house, we were pre-approved for much more than could truly afford. Also, you are pre-approved normally on your gross income, not net income. Your gross income is of course much higher than your net and can make it seem like you can afford a house, when in reality you cannot.
Our real estate agent also gave us a little tip: if you are pre-approved for much more than you ever plan on buying a house for, then ask the loan officer to send you a pre-approval letter stating that you are pre-approved for a smaller amount. This way when you put a contract on a house, the seller and/or their real estate agent do not see some crazy number that someone believes you can afford. This way there will be less negotiations as the seller won’t be trying to get you to your top dollar.
Think about the long-term
How long do you plan on living in your home? A lot of people will say that their first home will just be a starter home, but what if that ends up not being the case and you live there for quite some time? You might want to look into the school district there just in case you do decide to have children, make sure the house is something that you would like for quite some time, and so on.
What tips do you have for a potential homebuyer?
Any smart investor is going to look to look to both protect their investments while also securing the best return possible. It is always a juggling act for any investor, regardless of how much experience he/she may have. Investment tracking is quite a task. While there are many important ways to accomplish this balance, diversification is one of best ways to accomplish both values.
What is Diversification?
According to investopedia, diversification is defined as:
A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.
Why Diversification is Important
Diversification is important, as I mentioned above, because it allows you to accomplish two things at once. The first, and perhaps more important, is to protect yourself from any significant loss. The basic idea is that one area of the market is performing poorly, the others will make up for it. It is also very unlikely for all markets or investments within a market to drop significantly at one time. The risk is inherently lower despite taking a more aggressive investment strategy.
The other major benefit to diversification is the ability to maintain an aggressive approach and thereby maximizing long-term return. Instead of sticking to conservative investments like bonds or cd’s, diversified investors are able to keep their money in high-yielding investments.
How to Diversify Your Investments
While a lot (maybe enough to fit in entire books) could be said about how to actually diversify your investments, I thought I would give you a picture of what I am doing to diversify my portfolio. Keep in mind that my investment history is quite short and over the next few years I plan to diversify it even further.
Employer 403b Account - One of the best ways to start investing is with your employer’s investment account. It often comes with some form of matching, so it automatically gives you a great return on your investment. I personally have mine set up with a mutual fund because of how little is being invested. It provides for some inherent diversification.
Real Estate Investing – One of the ways I am in the process of investing in over the next few months is real estate investing. I believe this to be a secure investment for decades to come and the revenue stream should only increase with inflation.
Dividend Stocks - While I am not an expert on dividend stocks, I have been learning a lot about the benefits of investing in dividend stocks. In fact, dividend stocks over a period from 1972 to 2010 provided a significantly larger return than non-dividend stocks. Dividend stocks offer some minor diversification as there are two revenue streams. The first is the dividend as a form of cash flow and the other in the potential increase in the stock value. If you want to learn more about dividend stocks, there are many great resources like the list of high yield dividend stocks by Dividend Stocks Online.
Side Business - Another way that I am trying to diversify my investments is to build up a side business for myself. Eventually I would like to see it develop into my full-time gig, but I have to sustain a decent income before I make that leap.
While diversification can (and often is) be simplified to investing in mutual funds or ETFs, it is much more than that. It should include different investment vehicles and markets.
How are you diversifying your investments?
As someone who is looking forward to purchasing a condo next year, I have been doing a crazy amount of research on mortgages. Honestly, I keep stumbling upon mistakes that people have made with mortgages. Since I don’t want to be someone who makes a mistake with their mortgage, I’m planning on soaking in all useful advice and attempting to make the wisest decisions I can going forward!
So, what are the worst mortgage mistakes one can make? Well, I’ve compiled the top five mortgage mistakes and hopefully you can learn from what other people have done wrong and not make the same mistake!
1- Taking out an adjustable rate mortgage
Can someone say 2008?! This is what caused our most recent recession among some other things. An adjustable rate mortgage plays into the greedy side of Americans and allows you to buy a bigger house than you can afford. The first few years, you’ll have a really low interest rate but then this rate ends up shooting up over time. The problem with this is that you’ll end up drowning in interest payments and more than likely lose your home! Talk about humiliating…
2- Settling for a reverse mortgage
For the crowd of age 62 and older, a reverse mortgage may seem inviting but it’s designed to bite you in the butt. What a reverse mortgage does is provides a stream of income by pulling out funds from your home equity. This can be paid out through an annuity or monthly payments. It’s up to you what poison you pick because either way, you’ll be faced with hefty fees and you will slowly lose ownership over your home and have to hand it all over back to the bank. Does not sound like fun to me!
3- Skipping the down payment
If there is one thing you need to remember from this article, it’s that you NEED to put down a down payment! Why you ask? It’s not unusual to find yourself upside down with your mortgage if you don’t. You can end up owing more money than your home is worth. At this point, it’s flat out painful. You want to avoid this situation.
4- Can anyone say exotic mortgages?
I bet you’ve never heard of these bad boys. Exotic mortgages may sound enticing but they are dangerous financial vehicles! Instead of building up your equity, exotic mortgages produce negative equity. Yes, you’re naming your payment price, but at some point, all the debt you took out for your mortgage is going to come due. As the years go on, you are increasing the amount you owe. It’s counter-intuitive and I advise that you avoid this at all costs. Owning a home is not worth this risk!
5- Liar, liar, pants on fire: liar loans
Liar loans make me sick just thinking about them. Not only are they irresponsible to take out but they can ruin your financial life. At the core of a liar loan is that you don’t need to produce any verifiable documentation in terms of income and job stability. In theory, people can lie on these loans and the bank will just assume you’re telling the truth. Because you lied on your income statement, you will soon find yourself not being able to make the monthly payments.
Don’t fall for these mistakes!
In conclusion, don’t fall for these bad decisions. While they may seem cool and unique, they are designed for your failure. There is something to be said about ethical mortgages and choosing responsibility over showing off a big house. At the end of the day, you should only be buying enough house for your needs. It’s anti-American to do that but times are changing!
This just in… today’s earthquake in Mineral, VA that prompted the evacuation of several buildings in Washington caused the stock market to soar. Stocks edged a full 1.23% higher before closing for the day after the temblor* hit the East Coast. In other news, butter production in Bangladesh was up 0.615% on August 23, 2010.
And that’s why financial reporting is completely ridiculous… All the financial reporting that talks about stock market movements should come with a required phrase – “We think that the stock market…”. It’s amusing how we try to peg exactly what caused the market movements and why. The truth is these are only guesses.
But seriously, the stock market really did go up after everyone in Washington had to leave their offices. Coincidence? I think not.
* Note: I picked this up from NPR. Gotta love thesauri…
On Friday, Free Money Finance posted a link to Sound Mind Investing’s new and free ebook about investing in gold. You can sign up to get the ebook here if you’re interested. I’ve been reading about this issue of gold, inflation, and the declining dollar for a bit now so I thought I’d check it out.
After reading it, I headed back to FMF’s site to leave a comment and was pleased to find an insightful comment from Rick Francis who writes at Pondering Money. Rick’s question was this: If you believe that the dollar will weaken, political gridlock will continue, and that these are bad things, why not hedge against inflation with something that hasn’t had a “meteoric” (as SMI puts it) price increase? And while you’re at it, why not choose a commodity that actually has practical uses like oil, real estate, or food? (Or if you’re really worried, shotgun shells and bottled water…my words, not Rick’s.)
Take, for example, copper. Copper has a large number of practical applications while gold has only a limited few. Now I’m not saying copper is the right choice. I’m just giving you an example. Oil could be another good example.
Here’s another one: real estate. Or even better, how about real estate with a commodity on it – land with standing timber. Again, I’m not saying these are the ideal alternatives for gold. Rather, I’m simply trying to make the point that there are some other commodities that you can make a better case for investing in than gold. So don’t try to take me to task for a possibly poor choice of replacements. The question still stands: can we find no better, more useful, more reasonably priced commodity to use as a hedge against inflation than gold?