All posts by Jacob A Irwin
Should I Get Pre-Qualified or Pre-Approved for a Home Mortgage Loan?
In a posting from last week (see link below), I mentioned that my application for a mortgage loan pre-approval was recently rejected. I also mentioned that it was fairly surprising when the rejection decision came back to me.
My Money Blog – Can Graduate Students Get Approved for a Home Mortgage Loan?
However, what I did not mention was that the reason that I was so surprised was due to the fact that the same lender had pre-qualified me for a loan several weeks prior.
From this experience, I learned that there obviously must be a big difference between getting pre-approved for a loan and getting pre-qualified. But – just what is that difference exactly? The answer to this question and the decision of which to pursue will be the subject of today’s post.
“Mortgages for Dummies” by Eric Tyson does a wonderful job exposing the differences between these two related, but significantly different, processes. If you are interested in learning more about the details of mortgages, I would highly recommend clicking the link below and picking up a cheap, used copy of this useful book on Amazon.com.
Mortgages For Dummies, 3rd Edition – Amazon.com
What does it mean to get pre-qualified for a home mortgage loan?
In Tyson’s book, he describes mortgage pre-qualification as, “potentially a waste of your time and money and may even be grossly misleading.” Well, he definitely seemed to hit the nail right on the head with this description, at least as far as I experienced this process.
Loan pre-qualification is essentially a “casual” agreement with the loan officer about approximately how much money they might be able to lend you, after quickly reviewing your financial situation. It is very fast and cheap. It usually only takes 15 minutes or less.
In the pre-qualification process, since the lender does not verify the facts about your financial situation, he/she/it is not bound by any contracts to loan you any of the money for which you get pre-qualified.
This sounds like a waste of time to me…
And, what’s more – the mortgage broker told me that in this day and age, pre-qualification is just as good as pre-approval. Talk about a trustworthy, knowledgeable professional!
What does it mean to get pre-approved for a home mortgage loan?
On the other hand, mortgage pre-approval is a much more serious process. In my mind, it is ALWAYS going to be the way to go in the future. The process involves the following steps be taken by the mortgage lender:
- Review your credit history/credit report/credit score
- Analyze your past, present, and future income and expenses
- Amount of cash, investments, and debt you have
- Analyze your prospects for future employment.
- This is where the mortgage lender got stuck with my pre-approval application. They were wanting a note from the university I will be attending this fall to guarantee my continued employment for at least 3 years. I think this is a little ridiculous, but it is what they were wanting.
Keep on learning!
Jacob
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Index ETFs vs. Index Mutual Funds – Which Are Better?
In the majority of the posts to date, I have limited the analysis of the different investment instruments that can be used to satisfy the different asset allocation components to index mutual funds. Please see link below for more details.
My Money Blog – Mutual Fund Posts
However, in one post back in January of this year, I introduced the idea of using ETFs (Exchange Traded Funds) to invest if you are just starting out and only have a relatively low amount of money ($100-$3000).
My Money Blog – Use ETFs to Begin Investing with $100
Not included in this article was an explanation of what an ETF exactly is and how they stack up against regular index mutual funds. These topics will be the subjects of today’s post.
Note: Even though there are both ETFs and mutual funds that are actively managed, we are going to only focus on the index version of each of these, since we have learned previously that actively managed funds do not outperform the market.
What exactly is an ETF?
According to Investopedia.com (see link below for more information), an ETF, or Exchange Traded Fund, is an investment instrument that is very similar to a mutual fund, but is traded like an individual stock.
When you purchase a share of an ETF, your money is pooled with other investors’ funds, which are then used to buy shares of numerous individuals stocks, in order to be representative of an index (such as the S&P500) of which the ETF seeks to track. In this way, an ETF is very similar to a mutual fund.
Investopedia.com – ETF Definition
However, the pricing of an ETF is set throughout the day by the market demand/supply (not based on Net Asset Value at the end of the day like a mutual fund price is calculated)
Comparison of Historical Performance
Before delving in to the detailed comparison of the characteristics of mutual funds and ETFs, let’s take a look at how an ETF and mutual fund that track the same index faired during the last year.
For this comparision, we will look at the two Vanguard.com instruments shown below:
- Vanguard Total Stock Market ETF – Symbol VTI
- Expense ratio = 0.07%, minimum to purchase = 1 share = $59
- 1 year return = +41.3%
- 3 year return = – 4.14%
- 5 year return = + 3.64%
- After tax returns still ~0.1% higher than index fund from Vanguard below.
- Vanguard Total Stock Market Mutual Fund – Symbol VTSMX
- Expense ratio = 0.18%, minimum to purchase = $3000
- 1 year return = + 41.2%
- 3 year return = – 4.23%
- 5 year return = + 3.52%
As can be seen from this comparison, the only difference in return between the two instruments appears to be the 0.1% advantage that the ETF carries over the index mutual fund due to having a 0.1% lower expense ratio. Otherwise, the returns appear to be otherwise equal.
Comparison of Characterisitics of ETFs and Mutual Funds (Indexed)
The table below shows a comparison of the different attributes of index ETFs and mutual funds
Note: this table comes to us from page 256 of Jeremy Siegel’s “Stocks for the Long Run” (my investing bible). I would definitely suggest that you click on the link below and pick up a cheap used copy of this very useful book from Amazon.com.
Management
Shares of both ETFs and mutual funds can be bought that are managed in an index fashion. However, ETFs can be bought and sold throughout the trading day, similar to an individual stock.
Fees/Espense Ratios
Generally, ETFs have slightly lower fees than the corresponding index mutual fund. This can be seen in the example above. However, both index mutual funds and ETFs offerred from Vanguard have fees that are much lower than the industry average.
Trading Costs/Commissions
Typically, trading ETFs has involved paying regular brokerage commissions for trading (trading mutual funds of the brand in which you hold your account is free of commissions). However, according to a recent article and the Vanguard fee schedule link below, Vanguard has begun offering commision free ETF trading in-house. Definitely use this to your advantage!
Vanguard.com – ETF Commission Fees
Dividend Reinvestment
In Siegel’s book, he mentioned that ETFs do not offer dividend reinvestment. However, when I just opened a brokerage/ETF account with Vanguard.com this morning, there was an option that stated that they were now offering dividend reinvestment. Excellent! This is generally preffered for long term investing!
Tax Efficiency
Overall, both index mutual funds and ETFs are very tax efficient. However, ETFs are slightly better in the realm of taxes due to the fact that they generate fewer capital gains than mutual funds (mutual funds generate capital gains when the fund must sell holdings when individual fund investors sell/redeem their shares).
Note: this slightly advantage seen in tax efficiency for ETFs only applies to funds held in taxable accounts.
Price/Pricing Fluctuations
Before investigating this topic for this post, I tended to shy away from index ETFs because I expected that the ETF would not track its respective index as effectively as an index mutual fund. This was due to my belief that since an ETF can be traded all day long, it would therefore be subject to emotional overreactions (selling and buyin) of investors.
However, in reading more of Siegel’s book on the subject of ETFs, I discovered that ETFs actually track their respective indices very closely because insitutional/large investors can turn in shares of an index for the corresponding ETFs or exchange ETFs for their respective shares. In other words, arbitragers (investors taking advantage of price differentials) cause any price differential to disappear quickly. Thank goodness that those folks on Wall Street take care of that so I don’t have to worry about it!
Purchase Minimums
As I mentioned in the link about beginning to invest with ETFs, ETFs are much better for beginning investors because you only have to buy 1 share in order to get full diversification to the index that the ETF represents.
On the other hand, index mutual funds usually require a minimum investment of $3,000-$10,000 to buy a particular fund. One good thing though is that you do not have to maintain a balance minimum of $3000 in order to keep the fund.
Bottom Line
The key takeaway for me is that because Vanguard has started offering 1) dividend reinvestment and 2) commission free ETF trading, I am going to now use both Vanguard ETFs and mutual funds (index, of course). ETFs will fit well in my taxable Vanguard account in situations when I cannot afford the $3000 minimum to purchase a new mutual fund, but still want exposure to a certain asset class in order to balance out my asset allocation %’s.
So, bottom line is that you should probably use both ETFs and mutual funds, keeping the caveats shown below in mind.
You should only use mutual funds (stay away from ETFs) if you know you are subject to easy emotional reactions when the market either goes up or down. Since mutual funds do not fluctuate in price throughout the entire day, you will be less likely to over-react and sell/buy at inappropriate times.
You should only use ETFs (stay away from mutual funds) if you like to use leverage/margins, hedge your investments by selling ETFs short, and enjoy moving quickly in and out of your investments (I do not recommend this approach).
Keep on learning!
Jacob
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Can Graduate Students Obtain a Mortgage?
As many of you all know, I am currently saving up money for a down payment and attempting to obtain a home mortgage loan in preparation for closing on the purchase of a condo/townhouse/house this fall when I begin graduate school.
Why do I want to buy a house/condo/townhouse instead of renting?
Since I will be in graduate school for 4-5 years, I would like to be building up some kind of equity during this time period, instead of just wasting money with rent payments. Additionally, I want to try to follow the rule of thumb that it is better to buy your housing if you plan to be in the property for 3-5 years or longer.
Note: in a future post, I am planning to create a rent vs. buy calculator spreadsheet for everyone to use.
From a previous post (see link below), I was able to calculate that the loan amount I can afford is ~$95,000.
My Money Blog – How Much of a Mortgage Loan Can I Afford?
While I am certain that with my income right now, I can get approved for a home loan, I was not really sure if I would be able to gain approval for a home loan this fall, given that my income will be drastically less ($23,000 per year) during graduate school.
However, approximately 1 month ago, I went ahead and applied for pre-approval of a home mortgage loan, using a mortgage broker that was recommended by both the real estate agent and a friend who is also in graduate school.
I filled out all of the forms, provided tax statements, proof of income, proof of 2 years of employment, total net worth calculations, and account statements from where my various investment instruments are located.
Everything seemed to be going well, and the mortgage broker calculated that he should attempt to pre-approve me for a $125,000 FHA home loan (3.5% down payment minimum). However, when my application was submitted, the mortgage underwriter could not approve it due to the following reasons:
- The letter of employment from the university in which I will be attending graduate school this fall did not show a guarantee of employment for 3 years. Personally, I think this is a little ridiculous because even normal jobs are never guaranteed (if you don’t perform well).
- The letter did not mention if I would be liable for any tuition payments in my schooling.
Interestingly enough, it was never mentioned that my application was denied due to the normal reasons you hear about, such as insufficient credit or lack of income or liquidity.
He said that I would need a non-occupant to cosign the mortgage loan with me in order to get approved.
Conclusion
While it may be possible for a graduate student to obtain a home mortgage loan as the sole borrower, I definitely was not able to, given the income I will be receiving. It really seemed to throw off the mortgage lenders that I was going to be a paid student, as I am guessing they don’t receive too many of those applications.
In order to qualify for a home mortgage, you will most likely have to have a co-signer/co-borrower, even with great credit and a sizable net worth.
Keep on learning!
Jacob
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog:
5000 Site Visitors
Jacob
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My Current Asset Allocation and Net Worth Growth – May 2010
From April 7th (when the last portfolio update was published – see link below for more information) to May 4th, the S&P 500 index went down 1.33%.
My Money Blog – April 2010 Portfolio and Net Worth
During that time period, my net worth increased 5.24%. I have now achieved the following financial goals in 2010:
- Achieved my short term target net worth for this year
- Contributed the maximum contribution level of $5000 allowed for my Roth IRA for the year 2010 (and 2009 as well)
- Eliminated all significant holdings in individual stocks from my portfolios
- Have accumulated 82% of the cash towards my down payment target for a condo purchase this fall
Currently, 31% of my net worth is invested in fixed income instruments (cash or bond funds), and 69% is invested in equity. This is undoubtedly off of my targets of 25% and 75%, respectively, for these categories. The cash portion of my net worth has increased significantly since I am building up funds for a down payment for the condo I want to purchase this fall.
While the overall percentages for these categories are not ideal, a detailed look (table below) at the allocation breakdown reveals the real story and provides for better analysis of the current state.
Remember: a red flag goes off if your current % allocation in a category is greater than +/- 5% off of the target allocation.
% Cash (money market target 5%) 15%
% non-inflat Bond Funds (target 15%) 15%
% TIPS Bonds (target 5%) 0%
% International Equity (Target 11%) 12%
% International Emerging Markets (Target 11%) 7%
% Domestic Large Cap (Target 8%) 20%
% Domestic Small Cap (Target 9%) 10%
% Domestic Small Cap Value (Target 13%) 8%
% Domestic Large Cap Value (Target 13%) 6%
% REIT (target 10%) 6%
The components of my portfolio highlighted in red above are outside of the 5% safety band, and therefore, need to be analyzed for reallocation. Unfortunately, due to my current situation of saving up money for a mortgage down payment, it may just not be possible to satisfy all requirements at this time.
- Cash – As I have mentioned several times, I expected that this would be high due to accumulating funds for a down payment. No action can be taken.
- TIPS Bonds – Since I have no extra cash right now (due to cash accumulation above), I cannot purchase this fund due to the fact that you have to have $3000 to purchase it with Vanguard.
- Domestic Large Cap – Unfortunately, this is being held in my 401k account, and therefore, has a greatly reduced selection of index funds from which to choose. Because of this, no further action can be taken.
- Domestic Large Cap Value – Since this is held in a taxable account, I cannot sell my holdings to contribute funds to it. I will have to wait until new funds can be added to increase the allocation %.
Note: as mentioned before, I currently have a VERY large percentage of my portfolio in Domestic Large Cap stocks. This is due to the fact that I was contributing 100% of my 401k contributions purchase S&P500 index fund shares for 1.5 years.
Towards the end of March, I began moving money from the S&P500 fund to a domestic small cap fund in my 401k. This progress can be seen by the fact that the domestic small cap funds now make up 10% of my net worth, up from 6% at the beginning of March. Since the proportion has now passed my domestic small cap allocation target of 9%, I will stop this transfer activity.
My next moves for the May/June time frame will be to do the following:
- Since I am looking at buying a condo/townhouse in the summer/fall time frame, I will be trying to build up cash reserves in my high yield savings account for the down payment. I have already accumulated approximately 82% of the cash I am targeting for my down payment.
- Get pre-approved for a home mortgage loan
- Wish List (since most of my extra cash this month is being used to save for down payment, I will not have as much extra to play around with as normal – so these may or may not happen)
- Purchase an inflation adjusted bond mutual fund (TIPS)
- Begin contributing to the large-cap value funds in my taxable Vanguard mutual fund account.
- At some point, purchase the Vanguard Total Stock Mkt Idx (MUTF:VTSMX) to replace S&P 500 index fund. This gives better, broader diversification to the US stock market.
Jacob
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eBay vs. Amazon – Part 2 – Comparison of Buying
- Searching
- Searching on eBay is very easy. You can enter the product you are searching for on the main page, hit enter, and it takes you to where you can filter the search results by price, category, etc.
- Item Pricing / Listing Format
- Items are priced in either an auction listing format or a fixed/Buy It Now listing format. There is also a feature that allows you to filter by these listing formats.
- Personally, I only buy items on eBay that are in the Buy it Now format because I don’t want to wait around for the 7 day auction term to end to know if I won the item.
- Payment
- For all practical purposes, payment is only accepted on eBay through Paypal.com.
- Paypal is a payment processing/services company, that is owned by eBay. It is a very secure way to link bank accounts and credit cards to make online payments. Payments are also guaranteed to be refunded if you get ripped off by a seller that doesn’t deliver their product.
- Shipment
- Personally, I have found that the shipment of items I have bought on eBay have been very reliable. I have never not received an item that I bought on eBay.
- Fees
- You pay no fees when buying an item on eBay or paying for it using Paypal (provided that you don’t pay for any of the extra features that are offerred during checkout). They are all paid by the seller. Lucky you!
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Searching
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Searching for products on Amazon is one of my favorite things to do! It is very easy and intuitive. Additionally, one of my favorite features of Amazon is the way that it brings up related products that I have never ever heard of before that really suit my interests well. It does this by analyzing your searches/search history, your buying history, and current item you are viewing to find related products. It’s almost like the Pandora.com music DNA matching project expanded to the realm of shopping online!
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To continue with the Avatar DVD (one of my favorite movies right now) example I have been using, the following page appears as a search result when you query Avatar DVD on Amazon – Amazon.com – Avatar DVD. If you click on the page and scroll down, it lists several other movies such as Iron Man, The Blind Side, and Sherlock Holmes. Wow! All of these are products that I like! I am inclined to buy more. See how that works?
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Item Pricing / Listing Format
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All products sold on Amazon.com are fixed price listings.
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However, you have the choice on the main search screen to immediately select whether you want to a) purchase the product new from Amazon, b) purchase the product new from an independent seller, or c) purchase the product used from an independent seller.
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For each situation, the lowest price listing is shown on the main search page, allowing you to immediately screen based on lowest price! Very nice!
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Payment
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Amazon.com has made paying extremely easy. And, in fact, maybe even too easy! Your credit card information is stored on Amazon along with your address, so that you can order items in less than 30 sec with maybe 3 clicks total. They have also added a 1 click ordering system, making things even faster.
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Payments are made directly to Amazon.com, who then remits payment to independent sellers if needed.
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Shipment
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Amazon.com has your best interests in mind, as a buyer, when it comes to shipping. Amazon restricts the amount that sellers can charge for shipping/handling for a specific item or type of item. As a seller, I can say that often, this results in your seller losing money. Bad for the seller, good for you as a buyer!
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Amazon even requires that sellers enter the shipping tracking number before they are paid, thus allowing you to receive your item quicker by providing more encouragement for the seller to get rid of the item quickly!
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Fees
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You pay no fees when purchasing something on Amazon.com. They are all paid by the seller. See Part 1 of this series for more information on fee structures of both sites.
FREE 1 Month Netflix Trials
Good evening everyone!
As I have stated in previous posts (and as you can see by the advertisement in the website sidebar), I am an avid believer is using Netflix for receiving/viewing movies as opposed to paying for cable tv. See the link below for more details.
When I came home tonight from work, by a stroke of luck, Netflix sent me 4 one month FREE trial memberships that I can share with people, so I figured I would post them on the site!
How do you get your free Netflix trial?
- Go to Netflix.com – Tell a Friend.
- Enter one of the Priority Codes below, then proceed through the sign up process.
- M783752024815
- M723732024475
- M773712024415
- M713702024805
What is included in the free trial?
- Everything that is included in a regular Netflix subscription!
- Watch moves instantly
- Get 1 DVD at a time delivered to your house.
- No due dates or late fees for returns
- Free shipping both ways for DVDs.
Keep on learning!
Jacob
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog:
eBay vs. Amazon – Part 1 – Comparison of Selling
In previous posts (shown at the links below), I briefly talked about how one of the small businesses I have started over the years was an eBay resale business, and that I think eBay is a very effective medium for people to make extra money around the house by selling their unused belongings.
How to Start Your Own Business
Sell Your Unused Items on eBay
However, in these posts, what I did not address was the fact that internet sellers definitely have a choice for where they want to sell their items. Since I have had a significant amount of experience selling on eBay and Amazon, I figured I would devote a series of postings to seeing how eBay and Amazon stack up against each other.
Executive Summary
In short, my experiences have shown that overall, eBay.com is a much more profitable way to sell your items than Amazon, due to Amazon’s high fees. Additionally, Amazon has structured itself to seemingly put buyers first, instead of eBay who you can tell really makes every effort to keep sellers happy.
So, that is the overall message I am wanting to deliver to you all. Now for the more detailed look at the way Amazon and eBay work, and the cost structure for each. First, let’s take a look at eBay.com.
eBay.com
- Overall structure
- On eBay, items are listed by default in an auction format. This means that you set a minimum price, and then, depending on the number of bidders you receive, the price can go up (until the listing ends).
- The auction format has the added advantage of introducing the human urge to buy in to the bidding process. Often, people will bid the price higher just because they “want” the item very badly.
- eBay also offers a “Buy It Now” feature, which is a fixed price listing, for an extra fee. Generally, I prefer to buy items listed with Buy It Now and sell items in the normal auction format.
- On eBay, items are listed by default in an auction format. This means that you set a minimum price, and then, depending on the number of bidders you receive, the price can go up (until the listing ends).
- Listing term
- Default listing term is 7 days. You can pay extra for a 10 day listing.
- Pricing
- Pricing can either be determined using the auction format or Buy It Now format (both discussed above).
- You are allowed to have more control of shipping/handling prices that you charge as well so don’t lose money on that front.
- What fees do you pay?
- There are really 3 categories of fees when listing an item on eBay. See the following link for detailed information from eBay.com – eBay.com – Fees
- Listing fee – Charged at the time when you list your auction for your item. Charges can range from $0 to $2, depending on the value of your item.
- Final-value fee – 9% of the sale price – Dang!!!!
- Paypal (payment processing fee – this fee is incurred when you use Paypal.com to accept payment for your item that you sell. It is pretty much obligatory to use Paypal, since every one else does.) – 3% to $0.30 – see the following link for more details – Paypal.com – Receiving Payment Fees
- There are really 3 categories of fees when listing an item on eBay. See the following link for detailed information from eBay.com – eBay.com – Fees
Amazon.com
**See the link below for a summary of selling fees and format on Amazon.com
Amazon.com – Selling on Amazon
- Overall structure
- When selling on Amazon, you simply enter which product you want to sell, set the fixed price, record the condition, and click “Yes,” and your product is listed on Amazon.com
- This is actually one of the best things about Amazon – the fact that it takes almost no time at all to list an item. On the other hand, with eBay, new listings can be very time consuming to create.
- When selling on Amazon, you simply enter which product you want to sell, set the fixed price, record the condition, and click “Yes,” and your product is listed on Amazon.com
- Listing term
- Your item will be listed on Amazon until it sells, up to a 60 day maximum period.
- Pricing
- Prices on Amazon are fixed by the seller. This is one thing that is very tough on Amazon because if your product is not the lowest price, you will most likely not make the sale.
- Additionally, Amazon does not allow any wiggle room when it comes to setting prices for shipping. In other words, if you sell a book on Amazon, the maximum allowable for you to charge the buyer is $4, irregardless of weight. (I guess you better forget that Priority Mail!)
- Another pain point I have about Amazon is that it doesn’t credit you with your money from an item sale until after you actually enter the shipment tracking code in to a field. So, again, this is very good if you want to be super buyer friendly. But, not the best for pleasing sellers.
- What fees do you pay?
- Since payments are received directly from Amazon.com (no Paypal involved) and Amazon does not charge listing fees, there is only 1 type of fee involved with Amazon selling.
- Closing fees
- You will be charged $0.99 on each sale that closes, irregardless of price. This means that you MUST make at least $1 of profit on each sale in order to make it worth your while.
- Additionally, you will be charged ~15% closing fee of the final sale price. On top of that, many of the most common categories (such as books, software, video games, and DVDs) involve ANOTHER $1.35 fee. Highway robbery if you ask me!
- Closing fees
- Since payments are received directly from Amazon.com (no Paypal involved) and Amazon does not charge listing fees, there is only 1 type of fee involved with Amazon selling.
Selling Example
Now that I’ve walked you all through the various differences between selling items on Amazon and eBay, let’s go through an example to see how the fees compare for a hypothetical sale of a used Avatar movie DVD.
On Amazon, in order to sell your DVD, you would have to price it at $12.15 + $2.98 shipping in order to have the lowest price. Let’s now calculate what fees you would pay for selling this, and how your profit shakes out (we’ll assume that shipping costs exactly what you received from the seller):
$12.15 sale price
-$0.99 closing fee
-$0.80 additional DVD/Video closing fee
-$1.83 15% value closing fee
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= $8.53 remaining profit – you paid 29.7% of the sale price in fees
On eBay, the last used Avatar DVD sold for $13.99 + $3.00 shipping (can be seen using the completed listings feature). Let’s now calculate the total fees and resulting profit, assuming that shipping costs you exactly what your buyer paid you.
$13.99 sale price
-$0.50 listing fee
-$1.26 final value fee of 9% of sale price
-$0.81 Paypal fee
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= $11.42 remaining profit – you paid 18.4% of the sale price in fees.
So, as we can see by the previous example, you end up paying more than 10% more in fees with Amazon than eBay. This is mainly due to the fixed fees that Amazon applies, whereas eBay’s fees are mostly all % sale price/list price based.
Obviously, it would be much more profitable to sell your Avatar DVD on eBay!
When would it be better to sell your items on Amazon?
While we have seen that in general, it is better/more profitable to sell your items on eBay, there are several times when it would be a better idea to sell your items on Amazon. These situations are summarized below:
- When you don’t have much time to list items and just want them to be sold/moved out of the your house
- Since Amazon’s selling listing format is much less personal, it is also much quicker to list items. Feel free to take advantage of this!
- When you want to list item for a long time without paying any extra
- Since Amazon offers the 60 day listing period, this can sometimes work to your advantage.
- When your item on amazon is selling much higher
- Sometimes, you will find that an item you are wanting to sell is going for A LOT more on Amazon than eBay. Definitely take advantage of this price parody if you spot it!
- As a rule of thumb, I always check both Amazon and eBay’s going sale prices for a item, before committing to selling it on one site or the other.
Well, time for dinner for me! I hope this post helps you understand eBay, Amazon, and how the two compare. Please let me know if you have any questions.
To view Part 2 of this series, click the link below:
My Money Blog – eBay vs. Amazon – Part 2 – Comparison of Buying
Keep on learning!
Jacob
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog:
How Does Home Ownership Fit in to Your Overall Asset Allocation?
In previous posts, I have covered the following topics related to mortgage payments and asset allocation:
- My Money Blog – How Mortgage Payments Fit in to Account Payments Hierarchy
- My Money Blog – Target Asset Allocation
However, in these posts, I did not include exactly how the mortgage payments (and resulting home equity that is built) should fit in to your overall asset allocation target/strategy. This will be the subject of today’s posting.
To try to shed some light on this topic, let’s first see what the financial advisors do to handle this question. We will then see how we need to adapt their strategy since we have no restrictions with what we do.
How do financial professionals handle the asset allocation strategy with home equity?
Through an examination of the opinions of the financial press (see three links below), I discovered that there are basically three “camps” when it comes to opinions on how home equity should be treated when it comes to figuring out your overall asset allocation.
1) Not including home equity in the target asset allocation percentages at all.
This approach is generally taken because real estate values/equity are difficult to determine exactly and because most of the time, it is not possible to adjust your allocation %’s in real estate because you cannot simply leave a house for another one.
2) Not including home equity in asset allocation percentages unless it is an investment property (so not including including your primary residence).
This approach of excluding your primary residence from your asset allocation decision making is taken because of the fact that you NEED a place to live, and you cannot simply exchange your home for shares of a mutual fund if your allocation %’s change.
3) Include all residences, investment properties, and REIT investments as a “real estate” category in your asset allocation strategy.
This approach is generally taken to have a conservative strategy that ensures that all assets are captured. However, since it is a little harder to follow, it is generally the least popular strategy.
MyMoneyBlog – Home Equity in Asset Allocation
BusinessWeek.com – Home Equity in Asset Allocation?
Investment News – Including Home Equity in Asset Allocation
Which approach will I take?
I believe that for my needs, situation, and investment style, I am going to choose to follow Approach #1 – not including my future home equity in the property I am planning to purchase this fall – with a slight adjustment.
Why is this exactly?
In short, home equity in a single house cannot be considered exposure to real estate because it is not diversified enough.
A passage on pages 282-285 of one of my favorite asset allocation books titled, “What Wall Street Doesn’t Want You to Know,” by Larry Swedroe does a great job of breaking this down in to terms the layperson can understand.
In the book, Swedroe describes that your home is clearly real estate.
However, it is very undiversified real estate in the following ways:
- It is undiversified by type (aka office, warehouse, industrial, multifamily residential, single family residential, hotel, etc) and owning a single family home only gives you exposure to a small piece of the overall real estate sector.
- It is undiversified geographically (meaning that real estate prices in different areas of the country vary greatly due to what employers are present there and how well they are doing – just think of if you lived in a small town where 90% of the wealth comes from one manufacturing company, and that one company shuts down. Real estate prices will plummet).
So, because the home you live in is very undiversified and have trust deeds associated with it, counting it towards the real estate portion of your overall asset allocation would be as foolish as a Pfizer executive counting a large quantity of Pfizer stock as their sole exposure to large cap US asset class. They are really not diversified one bit.
Since owning even one share of an index real estate investment mutual fund, such as a REIT that Vanguard, gives you broad exposure to all types of real estate across many different regions, this should be the route that is chosen to represent the real estate portion of your asset allocation picture.
So, how will I treat/consider my home purchase since I am not including it in my asset allocation mix?
Just to recap – in my mind, I want to purchase a home vs. rent one for the following reasons:
- I am always going to need to live somewhere.
- To take advantage of the tax benefits associated with home ownership, such as tax deductions for property taxes and interest payments (see information at the following link – My Money Blog – Tax Benefits of Home Ownership)
- To gain some equity and increase my net worth while making my cost of living payments.
On a similar note, I would want to invest in additional real estate properties to take advantage of tax benefits of home ownership, such as being excluded from paying capital gains on profit from selling the property (described in previous post at link above).
Given the considerations above, here’s the way I will treat home equity:
- Shoot for getting as close as possible to paying a 20% downpayment, since this reduces cost by having to avoid Prive Mortgage Insurance.
- Sign up for a bi-weekly mortgage payment plan and pay off mortgage according to that schedule (see post at following link for more information My Money Blog – Biweekly Mortgage Payment Plan), according to the My Money Blog – Account Hierarchy.
- Track my home equity as part of my net worth, but not in my overall asset allocation targets.
- Continue to pay off my biweekly payments on my mortgage through graduate school, aspiring to obtain 40-45% of my net worth in property ownership, as recommended by the article from Business Week (see link above for more details).
- A number of years down the road, if it becomes apparent that the % of my net worth that is represented by property ownership dips too far below 40%, I would then use that % as a starting place to make a decision if I would want to invest in additional rental property.
So, I hope this investigation/discussion helps guide you through some of the tough decisions you will have to make regarding how you will treat home ownership. As always, please let me know if you have any questions.
Keep on learning!
Jacob
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Should I Enroll In a Biweekly Mortgage Payment Plan?
- As always, click on the link above, and download an Excel version copy to your Desktop by clicking File –> Download As –> Excel.
- On the Monthly Payments tab
- Enter your specific property purchase details – interest rate, loan term, home purchase price, and expected downpayment. The model will then automatically calculate the loan principal amount in Cell A2.
- Next, use Excel’s Solver function to solve for the monthly mortgage payment that makes the principal amount remaining in Column G a value of “0” after the number of payments to fit your situation (either 360 for a 30 year mortgage, or 180 for a 15 year mortgage), by changing cell D2 (the 1st monthly payment cell).
- This will then find the correct monthly payment amount that you should expect for your loan amount. Additionally, it will calculate the total home equity you will have after 1 year of monthly payments and the total cost for the mortgage over the specified loan term.
- On the Biweekly Payments tab
- The loan specifics you input in the Monthly Payments tab will automatically be carried over. A biweekly payment plan set up fee of $400 is also applied (see section below for more information).
- Additionally, as is the rule for biweekly payment plans, the monthly mortage payment you calculated using Excel’s Solver function will be divided in two and become the mortgage payment you will pay every 2 weeks (total of 26 period payments per year).
- The spreadsheet will automatically calculate your total home equity after 1 year, the total cost of the mortgage, and the amount you would save by switching to a biweekly payment plan.
- To find the time it takes to pay off the loan using the biweekly mortgage plan, just scroll down the page in Column G, and find the last positive principal amount remaining value. Once you have found that, record the corresponding period in which this occurs, and that will give you the period in which you will pay off your loan.
- To find the number of years this will take, simply divide by 26.
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I would accumulate $600 more equity in the first year of home ownership by using the biweekly mortgage plan, given the same downpayment.
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I would pay off the home loan in 25 years instead of the normal 30 years with the monthly payment plan.
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Using the monthly payment plan, the $95,000 loan would end up costing me a total of ~$194,000.
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Using the biweekly payment plan, the $95,000 loan would end up costing me a total of ~$174,000.
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This would result in a savings of ~$20,000 for only this small loan amount! The magnitude of savings would be even greater for larger loan amounts!
Are there any fees involved in setting up a biweekly payment plan?
Because of this added fee, you will want to analyze your situation to make sure biweekly payments are the best thing for you.
When would I not want to use the biweekly mortgage payment plan?
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Using the biweekly payment plan (including a $400 one time set up fee), over the 5 years, I would pay a total of $35,461 in biweekly payments, resulting in an additional $10,273 accumulation of equity (on top of initial downpayment).
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Using the monthly payment plan, over the 5 years, I would pay a total of $32,364 in monthly payments, resulting in an additional $7,162 accumulation of equity (on top of initial downpayment).
So, in my situation, since I am accumulating an additional $3,111 by using the biweekly payment plan, this definitely warrants the addtional $3,097 expenditure needed to make it happen.
I hope this post helps you understand the biweekly mortgage payment world a little bit better! Please let me know if you have any questions.
Keep on learning!
Jacob
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