To Refinance or Not to Refinance?

Ray’s Take: According to The American Mortgage in Historical Context, 30-year mortgages are a relatively new thing. In the time before the Great Depression, mortgages had short maturity times and usually required a very high down payment. Pre-Depression mortgages featured variable interest rates and were usually renegotiated on a yearly basis. Boy, have times changed!


I always get the question from clients and friends about when and if they should consider refinancing their home. There are many reasons people decide to refinance their mortgage. It could be to shorten the term of the loan, get cash out of the equity for a large purchase, to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice-versa, or to consolidate debt.


The most common scenario for refinancing is when interest rates drop considerably from the time when you bought your home. A lower interest rate helps you build equity in your home faster and it decreases the size of your monthly payment. I have heard lenders say you should refinance if you can reduce your interest by 2 percent, but now I’m hearing that even a 1 percent savings is an incentive to do it.


Refinancing typically costs 3 to 6 percent of the loan’s principal. So it will take years to get that money back from the savings generated by a lower interest rate or shorter term. It’s important to ask yourself how long you plan on staying in your home before considering refinancing. If you aren’t planning on staying in your home long-term, the cost of refinancing could negate any of the potential savings.


But don’t get too caught up trying to pay off your home early if you do not have retirement savings, need to pay-off high interest debt or start an emergency fund. It’s important to consider the big picture of your overall financial plan. And always consult with your financial adviser before refinancing.


Dana’s Take: Ray’s late father, E. Denby Brandon Jr., shared a lot of wisdom with us. One of his favorite topics was distinguishing an asset from a liability. He said that an asset should pay you money, while a liability costs money. By that definition, a house is a liability rather than an asset.


If any of us kept careful records of how much we spent on the upkeep of our homes, including interest, property taxes and repairs, we would realize that the purchase price is only a small part of the cost of homeownership.


Can you afford to keep investing so much in an asset that’s costing you tons of money? Would renting free up money to save and invest? These are tough and emotional choices. Home is where the heart is and it’s often where your money is, too.


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Improving Your Credit Score

Ray’s Take: We all have memories of preparing to take a really hard test. Up all night studying, lots of caffeine, stressing up until that very moment you sit down with the paper and pencil knowing that everything you worked so hard for depends on the answers you mark on that one piece of paper. And then you have to wait for the results. The waiting may be harder than the test itself. I think this is how many people feel about getting their credit score.


Unfortunately, your credit score doesn’t depend on one test. It is determined over time and takes many years to build a good one. If you’ve had overdue student loans, carried high credit card balances over a long period of time or had a foreclosure, your credit score may not be good, but it can be repaired.


If your score is good, there’s always room for improvement. According to FICO, only 1.4 percent of U.S. consumers have a perfect credit score of 850. And the average national FICO score is a 700.


So how can you improve your credit score if it’s not even close to 700 or 850? Here are some simple ways to start:


Pay off all your bills on time going forward. Late or missed payments are the single most detrimental thing you can do to your credit.


Don’t close credit cards as a short-term strategy; instead pay down the balance and don’t open up any new cards.


Keep your balances low on the credit cards you already have and pay them off completely if you have the financial means to do so instead of making ongoing payments.


I think concern over one’s score isn’t such a good use of time. It only matters if you want to borrow more money, and you only need to borrow money if you want to buy something before you have saved for it. I would rather spend my time and energy figuring out how to earn a bit more or spend less. If you do that, you won’t need to borrow as much money and your score really doesn’t matter!


Dana’s Take: A credit score measures how well one has borrowed money and repaid it. Too bad we don’t have a saving and investing score. Perhaps we do – it’s called net worth.


Is your family creating a culture of financial success? What kind of stories do your kids hear around the dinner table? Do they hear you envy those who are spending or do they hear tales of those building savings and investing?


Look for opportunities to create a family culture where stories of hard work and success are celebrated. Encourage children and teens to ask adults and elders about their paths to success. Change your family’s narrative from big spenders to big savers and investors.


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How Much House?

Ray’s Take: One of my greatest joys is helping someone plan and reach his or her goal of buying a new home. Whether it’s a first home, a vacation home, a fixer-upper, new construction or an empty nesting home, buying a new home is exciting.


Homeownership is a milestone that took careful planning, preparation, saving and dreaming. I love seeing these dreams become reality for my clients.


Recently, there was an article in the Wall Street Journal that said U.S. homeownership climbed for the first time in 13 years. One reason for this increase could be that our millennial generation is now seeing the benefit of long-term investment in homeownership as opposed to renting or leasing.


So the question becomes, “How much ‘home’ can I truly afford?” Forget all the online tools and calculators that make claims based on your income or how much the bank “says” they will lend you.


When purchasing a new home, the conversation needs to start with the “B” word – budget. Add up all the extra fees, taxes, insurance, required maintenance and homeowners’ association fees in addition to just the monthly mortgage payment. Does your plan demand that your financial lives go perfectly as planned? If so, stop. “Perfectly planned” is not realistic.


It’s important to keep in mind that the transaction costs of buying and selling a home can quickly negate any appreciation on the property and all of the expenses associated with “more” home can slow down achieving other financial goals.


Ultimately, the amount of house you can afford will depend on your personal needs, desires and financial capabilities. Start by writing up a household budget for five years. This should give you an honest picture of how much you have available for housing expenses.


But most of all, have fun. Having a place to call home and making new memories is a part of living the American dream.


Dana’s Take: Wedding vows say to accept a mate “for better or worse,” but does that mean agreeing to move into his or her house? This is sometimes an issue when people tie the knot later in life.


When Ray and I married, he already owned a house, so I moved into his bachelor pad. This was probably a mistake, both emotionally and financially. I renovated that house for 10 years and it still never felt “right.” I learned a valuable lesson.


My friend recently married a man who has worked on his house for decades and would rather not move. The new bride is planning all kinds of additions and renovations. My guess is it will never feel quite right.


Consider starting fresh when building a nest together.


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Smart Travel Planning

Ray’s Take: It’s been a long, cold, rainy winter here in the Bluff City, and everyone is looking forward to Spring Break, sunshine, warmer weather and possibly making plans for a summer vacation.


When thinking about a trip, it’s always a good idea to start with your budget before you make any plans. I’ve seen many clients splurge on large, expensive vacations they simply cannot afford. They end up paying them off for years, long after the memories have faded.


If you are a frequent traveler or would like to take a big trip with your family, look for credit cards that offer travel rewards when you make purchases. There are so many credit cards to choose from depending on what kind of traveling you want to do.


Some offer airline miles, others offer discounted hotel stays, domestic and international travel deals, no foreign transaction fees and even customized travel portals to help you plan your trip through their website. But don’t be fooled. Always be sure to read the fine print when signing up for one of these reward credit cards. Many have blackout dates throughout the year and some offer miles that are non-transferable.


When planning a large trip, make a list of the big-ticket items you will be spending money on, such as ski lift tickets, Disney World passes or seats at a Broadway show. Then work your remaining budget around those items. Sometimes it’s fun to live like a local and sample local fare in exchange for a fancy, expensive dinner. But if you have the money, then splurge and don’t feel guilty!


Last year, U.S. News and World Report ranked Memphis No. 6 on the list of the “Top Most Affordable Destinations.” So if an expensive trip is not in your family’s budget this year, visit the Memphis Convention and Visitors Bureau website at for things to do in Memphis that are “off the beaten path.”


Dana’s Take: Everybody splurges on something, whether it’s a golf trip, season tickets to a Grizzlies basketball game or a designer wardrobe. In relationships, trouble emerges when one or both members hide their splurges. The intent of hiding a splurge is to avoid the blame game, but the unfortunate result is usually a loss of trust.


To avoid splurge wars, start a savings fund. If you both agree to splurge on travel, save for a blowout trip. If you have individual whims, establish a fund for each of you. It can be used to splurge without judgment from the partner.


Two people can love each other without sharing the same priorities for spending money. Communicate and allocate money for each of your passions and watch the love grow.


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No Luck Investing

Ray’s Take: A rabbit’s foot on a string. A silver dollar. A four-leaf clover. A lucky penny. These are all lyrics from a 1961 song by our very own Memphis legend, Elvis Presley, titled “Good Luck Charm.”


But the truth is, when it comes to successful investing, it isn’t about good luck or any luck at all. Creating a successful investment plan requires a sound strategy, time, research and, in most cases, guidance from a financial services professional. Investing is not a one-time event.


The key to making wise investment choices starts with matching risk and allocation with your time horizon. For example, if you are 45 and want to retire at age 65, you have 20 years to get there. How much money will you need when that time comes? If the risk required is too high, reduce the goal or extend the working period.


You also need to learn the market and select an investment path. If you are new to investing, start small. A sudden swoon or spike is always possible. It’s not “bad luck” or investment genius. But it can imprint on you for the rest of your investing life.


Always diversify and review performance, but not too often. Quarterly at most. Watch your investments and learn what’s working and what isn’t. If you have more time, risk is your friend. If you have less time, don’t tempt fate. Most asset classes will regress to their mean. Your own greed and fear are your enemies.


Be careful not to get sucked into the latest market craze or seek short-term profits that may be short-lived. Committing to a long-term investment strategy is best.


Warren Buffet, one of the most successful investors ever, once said, “If I cannot understand it, I won’t invest in it.” This may seem simple, but it is sound and effective investment advice.


In the end, making wise investment choices isn’t about luck. And I think even Elvis would agree with me on that.


Dana’s Take: Can luck apply to money or just to love? I was lucky in love when I met Ray, but with money? Not so much. Now that I’ve seen how a financial planner handles money, I realize that it’s more about good habits and financial realities, than luck.


When I was single, I lived in financial denial. I paid all my bills and didn’t run up credit cards, but I wasn’t accumulating for my financial future. Even saving 10 percent of my earnings would have been a good start.


Visit your company’s human resources department and make sure you’re maximizing savings plans and any company matching. Also, visit with a financial planner to plan for a wedding, children, college or retirement. Odds are your financial “luck” will improve.

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