PERSONAL FINANCE SECRET

HomePosts filed under Search results for Finance Points

Showing posts sorted by relevance for query Finance Points. Sort by date Show all posts

how to finance investment property

How to Finance Investment Property.

You might find the perfect investment property, but before you can buy it you need to obtain financing. Many people will go to a bank and ask for a conventional loan with a repayment period of 25-30 years. Before doing so, however, you should analyze your credit history to check that you are a good credit risk. You have more options than simply relying on a conventional loan. For example, you could cash out the equity in your home or seek owner financing of the investment property.

Method 1 Obtaining a Conventional Loan.

1. Pull together a down payment. You can’t rely on mortgage insurance to cover your investment property. Accordingly, you will need a sizeable down payment, around 20-25%.

2. Consider a neighborhood bank. Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect. Local banks also may have a stronger interest in lending for local investment, so they are a good option.

You might not know anything about smaller lenders, so you should do as much research as possible. Ask people that you know whether they have ever done business with the bank.

You can also check online. Look for reviews.

3. Gather necessary paperwork. Before approaching a lender, you should pull together required paperwork. Doing so ahead of time will speed up the process. Get the following.

two months of bank statements, prior two months’ statements for investment accounts and retirement accounts, last two pay stubs.

information about self-employed income, such as last two year’s tax returns or business financial statements, driver’s license.

Social Security card, papers related to bankruptcy, divorce, or separation (if applicable).

4. Work with a mortgage broker. A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates. The broker can also try to negotiate better terms for you. Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.

Mortgage brokers don’t work for free. You typically will pay about 1% of the loan amount. For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.

You can ask other investors or a real estate agent for a referral to a broker. Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer.

5. Compare loans. If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing. You might be an experienced pro who has borrowed before. However, if you haven’t, then remember to consider the following when comparing loans.

Interest rates. An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money. Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.

Discount points. For some loans, you can pay points, which will lower your interest rate.

Loan term. This is the length of the loan. A shorter loan will cost more each month, but you will pay it off sooner and with less interest.

Origination charge. This amount of money covers document preparation, fees, and the costs of underwriting the loan.

6. Seek pre-approval. You should try to get pre-approved for a loan before searching for properties. Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved.

7. Don’t forget other team members. Purchasing investment property requires the expertise of many different professionals. You should begin assembling your team early—even before you get financing. You will probably need the help of the following people.

An accountant who can help you understand investment tax strategies.

A realtor who can help you sign an appropriate real estate contract.

An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.

An insurance agent.

Method 2 Using Other Finance Options.

1. Use the equity in your home. You might be able to use the equity in your current home to purchase an investment property. Generally, you can borrow around 80% of your home’s value. There are different ways you can tap the equity in your home, such as the following.

You could get a Home Equity Line of Credit (HELOC). A lender will approve you for a specific amount of credit, and you use your current home as collateral for the loan. The credit is available for a certain amount of time. At the end of this draw period, you must have paid back the loan.

You might also get a cash-out refinance. The lender will pay you the difference between the mortgage and the home’s value, but is usually limited to 80-90% of the home’s value. For example, if you have $20,000 remaining on your mortgage, but your home is valued at $220,000, then $200,000 could be available. You could get 80-90% of $200,000 ($160,000-180,000). This option usually has a lower interest rate than a HELOC.

Both a HELOC and a cash-out refinance put your home at risk if you can’t make repayments. For this reason, you should think carefully before tapping the equity in your home to finance investments.

2. Obtain a fix-and-flip loan. You might be able to get this type of loan if you want to purchase a property in order to renovate and then quickly sell. The loan will be short-term and is secured by the property. Fix-and-flip loans have high interest rates, so you need to renovate and sell quickly.

You might find it easier to qualify for a fix-and-flip loan compared to a conventional loan. However, lenders will still look at your credit history and income.

The lender will also want to know the estimated value after repair, which can impact whether they extend you a loan and the terms.

3. Research peer-to-peer lending sites. Peer-to-peer lending connects investors with lenders who are willing to lend. Two of the more well-known peer-to-peer lending sites are Prosper and LendingClub.

Peer-to-peer lenders will require that you complete an application. They look at your credit score and credit history. They may also have minimum credit scores in order to qualify.

You might not be able to get a large personal loan through peer-to-peer lending. However, small businesses can typically borrow more, so if you create an LLC then you might be able to borrow up to $100,000.

4. Find a business partner. You might not be able to secure a loan on your own, in which case you will need to consider other options. One option is to find a business partner who you can invest with.

You will want to screen any potential business partner, just as a bank would screen you. If you are counting on the partner to help pay for the loan, then you will need to check their credit history and employment.

You also need to consider how you will hold the investment property. For example, it might be best to create an LLC and to both be owners of the LLC. The LLC will then hold title to the investment property.

5. Consider owner financing. With owner financing, the owner lends you the money that you use to buy the property. Sometimes the owner will lend only a portion of the price, which you then supplement with a conventional loan. You should analyze the pros and cons of owner financing.

A benefit of owner financing is that an owner might be willing to lend if you don’t have perfect credit or a huge down payment available. You and the owner can work out loan terms that are acceptable to both of you.

Typically, the seller’s loan will be for a short period of time (such as five years). At the end of the term, you are obligated to pay off the loan with a “balloon payment.” This usually means you need to get a conventional loan to make this balloon payment. You should analyze your credit to see if you can qualify for a conventional loan in the near future.

See Owner Finance a Home for more information.

Method 3 Analyzing Your Credit Score.

1. Obtain a free copy of your credit report. Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report.[18] You are entitled to one free credit report each year from the three national Credit Reporting Agencies (CRAs). You shouldn’t contact the CRAs individually. Instead, you can get your free copy from all three using one of the following methods.

Complete the Annual Credit Report Request Form, which is available here: https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf. Once completed, submit the form to Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.

2. Find errors on your credit report. You should closely look at you credit reports to find any errors that might lower your credit score. If your score is below 740, then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. Look for the following errors.

credit information from an ex-spouse, credit information from someone with a similar name, address, Social Security Number, etc.

incorrect payment status (e.g., stating you are late when you aren’t), a delinquent account reported more than once.

old information that should have fallen off your credit report, an account inaccurately identified as closed by the lender.

failure to note when delinquencies have been remedied.

3. Consider whether you should fix certain problems. There may be negative information on your credit report that you want to fix. For example, you might want to pay an old collections account. However, you should think carefully before fixing certain problems.

Negative information must fall off your credit report after a certain amount of time. For example, an account in collections should fall off after seven years. If the account is six years old, you might want to wait and let it fall off rather than pay it off.

If you need help considering what to do, then you should consult with an attorney who can advise you.

4. Fix errors. You can correct errors by contacting each CRA online or by writing a letter. To protect yourself, you should probably do both. Mail your letter certified mail, return receipt requested.

The Federal Trade Commission has a sample letter you can use: https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report.

See Dispute Credit Report Errors for more information on how to fix errors.

December 15, 2019

How to Finance Investment Property

How to Finance Investment Property.

December 15, 2019

There’s Enough Math in Finance Already. What’s Missing is Imagination

There’s Enough Math in Finance Already. What’s Missing is Imagination.

For some of us, it was Spock. For others, a humiliating performance as a pilgrim in the kindergarten musical. For me, it was William Blake’s relentless (and beautiful) attacks on Reason. But everyone at some point encounters – and many of us swallow – the dangerous notion that creativity and calculation are irreconcilable enemies.

This perspective lives at the very heart of our school curricula from first grade through graduate school, as our talents are identified and we, complicit in the scheme, label ourselves ‘artistic’ or ‘sporty’ or ‘scientific.’ No doubt there are real, epigenetic differences in the way people think and see the world, but in epigenesis lies the key: Nature gives us talents, but nurture determines how we use them, and how mono or multidimensional our minds become.

Like many quants – the mathematicians whose equations shape high-stakes decision making on Wall Street – Emanuel Derman arrived on Wall Street with little knowledge of economic theory. Unlike many of his colleagues, though, he had a background in theoretical physics, a field in which imagination and mathematics are happy bedfellows. From 1990-2000, Derman led Goldman Sachs’ Quantitative Strategies group, presiding over the rise of mathematical modeling as the engine driving financial betting on Wall Street.

The nearly insurmountable challenge of mathematical modeling in finance, says Derman, author of the forthcoming Models.Behaving.Badly., is that you are trying to predict the future based the behavior of highly erratic variables – i.e. people. To forecast human behavior with some reasonable degree of accuracy, mathematical models need highly imaginative designers with a profound grasp of human psychology – oracles who can foresee shifts in the global financial landscape and predict people’s reactions to them. Such designers are rare indeed, if they exist at all.

Still, like weather forecasts, the best mathematical models can help us to make better decisions, so long as we keep in mind that their predictive power depends upon the creative vision of the people who designed them, and that it is always vulnerable to refutation by developments in the real world. In other words, so long as we control the tools, not the other way around.

What's the Significance?

Faulty financial models, and Wall Street's overreliance on them, certainly played a role in the collapse of 1998, whose ongoing repercussions are manifest in the demonstrations going on right now in New York City and nationwide. And there are other massive, underlying issues – greed, unequal distribution of opportunity – that bear significant responsibility and intense scrutiny, of course. But math is not to blame – it is a tool, like science, that when guided by imagination and human understanding can expand the scope of our vision. It can help us to peer, however dimly, into the future.

Math’s not to blame, but a religious reverence for mathematical objectivity might be. We are susceptible to a modern-day form of idol worship whereby the sophistication of our technology and data-crunching power sometimes dazzles us into forgetting that these are human creations, designed by people, for people. And when they are applied to human problems, we cannot afford to treat them as perfect, alien entities whose wisdom exceeds our own.

As the early Internet pioneer Jaron Lanier points out in his digital-age cautionary manifesto You Are Not a Gadget, “Software expresses ideas about everything from the nature of a musical note to the nature of personhood. Software is also subject to an exceptionally rigid process of “lock-in.”* Therefore, ideas (in the present era, when human affairs are increasingly software-driven) have become more subject to lock-in than in previous eras.”

If digitized ideas are uniquely vulnerable to lock-in, we need to be exceedingly careful and creative in crafting them. For example, the government-driven “school reform movement” that has swept public education nationwide since 2001’s No Child Left Behind Act, seeks to transform learning based on data-collection from standardized tests, themselves a highly imperfect model of learning. In many cases, school systems rely on data from these tests to make hiring and instructional decisions, to a degree entirely unwarranted by the tests’ current level of sophistication. The clarion call of this movement is the demand for “objective” learning. That’s what the tests are supposedly designed to measure. But learners aren’t really objective. Nor is thinking, which is what, in the end, schools are supposed to teach.

Computers, databases, and other models of reality aren’t going anywhere – the technology will continue to become more sophisticated and its role in our lives will continue to deepen. Now, therefore, is the time for us to recognize where machines can meet our needs and where they cannot – and to design them for human use rather than seeking to adapt ourselves to their shortcomings.

*The process whereby an idea or a model becomes the basis for subsequent development, so that its flaws cannot be remedied without dismantling the entire system that is built upon it.

July 11, 2020

Charlie Munger on Getting Rich, Wisdom, Focus, Fake Knowledge and More.

“In the chronicles of American financial history,” writes David Clark in The Tao of Charlie Munger: A Compilation of Quotes from Berkshire Hathaway’s Vice Chairman on Life, Business, and the Pursuit of Wealth, “Charlie Munger will be seen as the proverbial enigma wrapped in a paradox—he is both a mystery and a contradiction at the same time.”

On one hand, Munger received an elite education and it shows: He went to Cal Tech to train as a meteorologist for the Second World War and then attended Harvard Law School and eventually opened his own law firm. That part of his success makes sense.
Yet here’s a man who never took a single course in economics, business, marketing, finance, psychology, or accounting, and managed to become one of the greatest, most admired, and most honorable businessmen of our age. He was noted by essentially all observers for the originality of his thoughts, especially about business and human behavior. You don’t learn that in law school, at Harvard or anywhere else.
Bill Gates said of him: “He is truly the broadest thinker I have ever encountered.” His business partner Warren Buffett put it another way: “He comes equipped for rationality… I would say that to try and typecast Charlie in terms of any other human that I can think of, no one would fit. He’s got his own mold.”
How does such an extreme result happen? How is such an original and unduly capable mind formed? In the case of Munger, it’s clearly a combination of unusual genetics and an unusual approach to learning and life.
While we can’t have his genetics, we can try to steal his approach to rationality. There’s almost no limit to the amount one could learn from studying the Munger mind, so let’s at least start with a rundown of some of his best ideas.

Wisdom and Circles of Competence.
“Knowing what you don’t know is more useful than being brilliant.”
“Acknowledging what you don’t know is the dawning of wisdom.”
Identify your circle of competence and use your knowledge, when possible, to stay away from things you don’t understand. There are no points for difficulty at work or in life. Avoiding stupidity is easier than seeking brilliance.
Of course this principle relates to another of Munger’s sayings: “People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think.”
And this reminds me of perhaps my favorite Mungerism of all time, the very quote that sits right beside my desk:
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

Divergence.
“Mimicking the herd invites regression to the mean.”
Here’s a simple axiom to live by: If you do what everyone else does, you’re going to get the same results that everyone else gets. This means that, taking out luck (good or bad), if you act average, you’re going to be average. If you want to move away from average, you must diverge. You must be different. And if you want to outperform others, you must be different and correct. As Munger would say, “How could it be otherwise?”

Know When to Fold ’Em.
“Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand—you must learn to handle mistakes and new facts that change the odds.”
Mistakes are an opportunity to grow. How we handle adversity is up to us. This is how we become personally antifragile.

False Models.
Echoing Einstein, who said that “Not everything that counts can be counted, and not everything that can be counted counts,” Munger said this about his and Buffett’s shift to acquiring high-quality businesses for Berkshire Hathaway:
“Once we’d gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.”

Being Lazy.
“Sit on your ass. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum.”
Time is a friend to a good business and the enemy of the poor business. It’s also the friend of knowledge and the enemy of the new and novel. As Seneca said, “Time discovers truth.”

Investing Is a Perimutuel System.
“You’re looking for a mispriced gamble,” says Munger. “That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.” At another time, he added: “You should remember that good ideas are rare— when the odds are greatly in your favor, bet heavily.”
May the odds forever be in your favor. Actually, learning properly is one way you can tilt the odds in your favor.

Focus.
When asked about his success, Munger says, “I succeeded because I have a long attention span.”
Long attention spans allow for a deep understanding of subjects. When combined with deliberate practice, focus allows you to increase your skills and get out of your rut. The Art of Focus is a divergent and correct strategy that can help you identify where the leverage points are and apply your efforts toward them.

Fake Knowledge.
“Smart people aren’t exempt from professional disasters from overconfidence.”
We’re so used to outsourcing our thinking to others that we’ve forgotten what it’s like to really understand something from all perspectives. We’ve forgotten just how much work that takes. The path of least resistance, however, is just a click away. Fake knowledge, which comes from reading headlines and skimming the news, seems harmless, but it’s not. It makes us overconfident. It’s better to remember a simple trick: anything you’re getting easily through Google or Twitter is likely to be widely known and should not be given undue weight.
However, Munger adds, “If people weren’t wrong so often, we wouldn’t be so rich.”

Sit Quietly.
Echoing Pascal, who said some version of “All of humanity’s problems stem from man’s inability to sit quietly in a room alone,” Munger adds an investing twist: “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”
The ability to be alone with your thoughts and turn ideas over and over, without giving in to Do Something syndrome, affects so many of us. A perfectly reasonable option is to hold your ground and await more information.

Deal With Reality.
“I think that one should recognize reality even when one doesn’t like it; indeed, especially when one doesn’t like it.”
Munger clearly learned from Joseph Tussman’s wisdom. This means facing harsh truths that you might prefer to ignore. It means meeting the world on the world’s terms, not according to how you wish it would be. If this causes temporary pain, so be it. “Your pain,” writes Kahil Gibran in The Prophet, “is the breaking of the shell that encloses your understanding.”

There Is No Free Lunch.
We like quick solutions that don’t require a lot of effort. We’re drawn to the modern equivalent of an old hustler selling an all-curing tonic. However, the world does not work that way. Munger expands:
“There isn’t a single formula. You need to know a lot about business and human nature and the numbers… It is unreasonable to expect that there is a magic system that will do it for you.”
Acquiring knowledge is hard work. It’s reading and adding to your knowledge so it compounds. It’s going deep and developing fluency, something Darwin knew well.

Maximization/Minimization.
“In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables—like the discount warehouses of Costco.”
When everything is a priority, nothing is a priority. Attempting to maximize competing variables is a recipe for disaster. Picking one variable and relentlessly focusing on it, which is an effective strategy, diverges from the norm. It’s hard to compete with businesses that have correctly identified the right variables to maximize or minimize. When you focus on one variable, you’ll increase the odds that you’re quick and nimble — and can respond to changes in the terrain.

Map and Terrain.
“At Berkshire there has never been a master plan. Anyone who wanted to do it, we fired because it takes on a life of its own and doesn’t cover new reality. We want people taking into account new information.”
Plans are maps that we become attached to. Once we’ve told everyone there is a plan and what that plan is, especially multi-year plans, we’re psychologically more likely to stick to it because coming out and changing it would be admitting we were wrong. This makes it harder for us to change our strategies when we need to, so we’re stacking the odds against ourselves. Detailed five-year plans (that will clearly be wrong) are as disastrous as overly general five-year plans (which can never be wrong).
Scrap the plan, isolate the key variables that you need to maximize and minimize, and follow the agile path blazed by Henry Singleton and followed by Buffett and Munger.

The Keys to Good Government.
There are three keys: honesty, effectiveness, and efficiency. Munger says:
“In a democracy, everyone takes turns. But if you really want a lot of wisdom, it’s better to concentrate decisions and process in one person. It’s no accident that Singapore has a much better record, given where it started, than the United States. There, power was concentrated in an enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.”
Lee Kuan Yew put it this way: “With few exceptions, democracy has not brought good government to new developing countries. … What Asians value may not necessarily be what Americans or Europeans value. Westerners value the freedoms and liberties of the individual. As an Asian of Chinese cultural background, my values are for a government which is honest, effective, and efficient.”

One Step At a Time.
“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Slug it out one inch at a time, day by day. At the end of the day—if you live long enough—most people get what they deserve.”
An incremental approach to life reminds one of the nature of compounding. There will always be someone going faster than you, but you can learn from the Darwinian guide to overachieving your natural IQ. In order for this approach to be effective, you need a long axis of time as well as continuous incremental progress.

Getting Rich.
“The desire to get rich fast is pretty dangerous.”
Getting rich is a function of being happy with what you have, spending less than you make, and time.

Mental Models.
“Know the big ideas in the big disciplines and use them routinely—all of them, not just a few.”
Mental models are the big ideas from multiple disciplines. While most people agree that these are worth knowing, they often think they can identify which models will add the most value, and in so doing they miss something important. There is a reason that the “know-nothing” index fund almost always beats the investors who think they know. Understanding this idea in greater detail will change a lot of things, including how you read. Acquiring the big ideas — without selectivity — is the way to mimic a know-nothing index fund.

Know-it-alls.
“I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.”
Few things have made as much of a difference in my life as systemically removing (and when that’s not possible, reducing the importance of) people who think they know the answer to everything.

Stoic Resolve.
“There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.”
While we all make mistakes, it’s how we respond to failure that defines us.

Thinking.
“We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”
“It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.”
Thinking is a lot of work. “My first thought,” William Deresiewicz said in one of my favorite speeches, “is never my best thought. My first thought is always someone else’s; it’s always what I’ve already heard about the subject, always the conventional wisdom.”

Choose Your Associates Wisely.
“Oh, it’s just so useful dealing with people you can trust and getting all the others the hell out of your life. It ought to be taught as a catechism. … [W]ise people want to avoid other people who are just total rat poison, and there are a lot of them.”

August 07, 2020

Everything You Need to Know About Finance and Investing in Under an Hour

Uses a lemonade stand example to provide an overview of the financial aspects of a business (revenue, profits, valuation, growth, pricing, balance sheet, income statements).
Concentrates on investing, including the following key points
In the example, the owner starts with $750, with $250 of that coming from a loan.
Here's an income statement tracking the healthy growth of the lemonade business. By year five, the company has seven stands, supported by an increased margin on products, and makes a profit of $2,311 (earnings before tax).
With some compound interest examples, he highlights the importance of starting early so your money can grow early over time).
He tweaks return assumptions to show how long-term outcomes are impacted by changes in how much your investments return.
Save $10,000 and earn 10% each year, you would have $602,000 after 43 years.
Earn 15% per year, you would have over $4 million after 43 years.
Importance of not losing money as drawdowns can have significant negative effects on returns.

A business owner can take money from a lender, who profits from interest on his loan, or an equity investor, who buys shares in the company. An equity investor stands to make much more money than a lender due to the level of risk involved — if the company doesn't make money, neither does the investor.

What are keys to successful investing?

Invest in companies that are listed on the stock market (liquid, well-known).
Avoid investing in start-up businesses where prospects are not well known.
Invest in businesses that you understand.
Invest at a reasonable price.
Invest in company that could last forever.
For instance, an investor makes a small amount of interest from government bonds because the risk is low — the US government is more secure than any corporation. An investor makes a large amount of interest from loans to business owners because the risk is high.
What kind of businesses last forever? (Examples: Coca-Cola, McDonalds, candy business).

Equity is a "residual claim" because debt must be paid off before investors can profit. Shareholders may make money from company profits called "dividends."

When a company has grown significantly, its owner can sell it for a typically large sum of money, in exchange for control of the business and a shot at future profits.
Sell a product that people need.
Sell a unique product (not a commodity).
Elicit brand loyalty that consumers are willing to.
Find a company with limited debt.
High barriers to entry.
Immune to extrinsic factors.
Has low reinvestment costs.
Generate high amounts of cash flow.
Avoid businesses with controlling shareholders (one shareholder holds majority of company stock).
Instead of growing a business further, an owner can pay himself dividends to put cash in his pocket rather than in the company.
At a moment of strong growth, the business owner can either share profits with a private investor or go public.
When a business files for an initial public offering (IPO), its owners offer a portion of it to the general public, which raises cash, and the company gets listed on an exchange. It requires being transparent and, in the US, reporting to the Securities and Exchange Commission.

When are you ready to start investing?

When you have money you won’t need for 5-10 years.
After paying off credit card debt and student loan debt.
Have 6-12 months of emergency funds set aside.

Psychology of investing.

How to withstand volatility.
Be financially secure.
Don’t get spooked by short-term fluctuations.
Do your own research.
Invest at a reasonable price.

If you don't have the time or desire to invest in individual stocks, you can invest in mutual funds, large pools of funds managed by a professional investor.
Mutual fund companies.
Pros.
Portfolio diversity, even for small investment amounts.
Managed by professional investor.
Cons.
Choice: Over 10,000 to choose from.
Research is required to pick a good manager.

You can also outsource your investing to a money manager.
Reputation for integrity.
Easily explain investment strategy (“the two minute test”).
Has a value approach.
Long-term track record.
Consistent approach.
Invests own money in the fun.

July 11, 2020

how to calculate an amount to be financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.

Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.

Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]

Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.

Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.

Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 2020