Do you know how to squeeze dollars out of your home?

In the last lesson, we discussed interest rate arbitrage as a means to save money. Other than credit cards, mortgage refinancing may be the ultimate way to use interest rates to save money. In today’s lesson, we will discuss how refinancing your home loan may result in huge savings.

Education:

In general, mortgage refinancing is a good move when you can save money by locking in a lower interest rate or payment, shorten your loan term, or restructure debt optimally.

Refinancing is the practice of paying off an existing loan with the proceeds from a new loan, usually of the same size size, and using the same property as collateral. In order to decide whether this is worthwhile, the savings in interest must be weighed against the fees associated with refinancing. The difficult part of this calculation is predicting how much the up-front money would be worth when the savings are received.

Other reasons to refinance include:

• Reducing the term of a longer mortgage
• Switching between a fixed-rate and an adjustable-rate mortgage

Benefits of Mortgage Refinancing

By refinancing, you can improve your financial situation. In particular, you can:

• Lower monthly payment
• Lower lifetime interest costs
• Reduce risk
• Get cash out for other purposes
• Consolidate debt and possibly get tax benefits
• Opportunity to use savings for investment alternatives

Disadvantages of Mortgage Refinancing

• Prepayment fees – If there are prepayment fees attached to the existing mortgage, refinancing becomes less favorable because of the increased cost to the borrower at the time of the refinancing.
• Closing costs
• Loan term
• Equity reduction

Examples – What a 3% difference really means.

 That’s real $$$. Do not ignore this important opportunity to save money.

Resources:

• Quicken Loans (www.quickenloans.com) – Providing valuable information resources and lending options for homeowners.

Important term!s from this lesson:

Action Step:       Watch and learn to find out if you should refinance your mortgage.

Are interest rates draining your wallet?

Managing interest rates can mean HUGE savings in your pocketbook. Today’s lesson will focus on interest rate arbitrage. I will teach you how to understand and manage interest rates to hold on to your hard-earned money.  Believe it not, credit card companies and banks make billions (with a capital B) on the interest that they charge to customers like you.  It is time to take a bite out of their profits!

Education:

Arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. That clinical definition typically describes a complicated investment strategy, but if we strip away the investment focus, the applicability of this term has valuable meaning and practical application for basic personal finance. Here are a few examples to illustrate interest rate arbitrage for practical purposes.

Basic Example: Interest Rate Arbitrage

You have a credit card with an interest rate of 15%. You receive an offer in the mail to transfer your balance to a card with a 0% APR. Arbitrage would be the difference between the 15% and the 0%.

 Arbitrage = MONEY SAVED or MONEY EARNED

In the example above, instead of paying the 15% to a lender, you would keep that 15% in your pocket. This is an area where people lose money because they don’t know their interest rate. If you have a loan (car, house, etc.), credit card, or outstanding tax balance, you should always know what rate of interest you are paying. The higher the federal funds rate, the more expensive it is to borrow money.

Practical Example: XYZ Bank

Banks lend money to other banks at the Federal Funds Rate or the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. Currently, the Federal Funds Rate is .25%. If XYZ Bank borrow funds at .25% and then lend it to you for 5%, they just made a profit of 4.75%. This is how banks make money.

Practical Example: Credit Card Co.

You are a customer of Credit Card Co. and the interest rate on your cash purchases is 20%. If you pay off your balance each month, then you will never have to worry about paying interest. However, if you are like most Americans, you will maintain a monthly balance. In that case, Credit Card Co. would receive a stipend (inject sarcasm here) from you of 20% interest on top of the balance that you owe them. What if you could have kept that 20% in your pocket?

Most people don’t think about interest rates when they slam the credit card on the counter to make an impulse purchase.  But interest rate ignorance is taking more money out of your pocket.  To be prudent and to ensure that you are keeping every penny that you can in your pocket, please take this concept to heart and apply it in your everyday life.

 Resources:

• Federal Reserve (www.federalreserve.gov) – The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system

Important term!s from this lesson:

Action Step:       Find out the interest rates on your borrowings.

1. Review your Liabilities Inventory Worksheet (see Lesson #3).
2. Find the interest rates on all borrowings listed on your Liabilities Inventory Worksheet.
3. Credit a plan to pay off the balance or shift