Russell Bailyn's Financial Planning Blog

A common misconception is that all mortgage rates drop when the Fed cuts interest rates. The truth is that the exact opposite may be the case. When you hear that the “Fed cut rates today” the reference here is the Federal Funds Rate, the overnight lending rate that the Fed uses with other banks. The stock market often gets excited about the lowering of this rate because short-term borrowing becomes cheaper, generally increasing economic activity for businesses. However, homeowners with 15 and 30-year fixed mortgages shouldn’t be so sure that a lower federal funds rate will equal a refinancing opportunity.

When short-term rates are lower, the bond market often interprets that as higher long-term rates to come in the future. I held this misunderstanding last year when I closed on my apartment and got very frustrated when the Fed lowered rates and my 30-year fixed loan actually nudged up an 1/8th of a point. Inflation concerns can help nudge mortgage rates up as well following a reduction in interest rates. With food and oil prices at all time highs, the Fed is only willing to lower interest rates because the economy seems to be headed for a recession. Inflation concerns cause treasuries to sell off, pushing the yield higher--and generally the mortgage rates with it.

Remember, if you have one of those ARM loans which adjust in the short-run, the Jan 30th rate cut could be very helpful. It makes it less likely your payment is going to skyrocket in the short-term. It’s really the long-term, fixed-rate mortgage holders that need to look for other economic indicators. Right now, for example, the sub-prime mess is making it more difficult to obtain a loan. At the same time, the housing market has softened in many parts of the country. This has brought rates down almost a full point over the past 6 months.

Good luck with your mortgage shopping. If you are considering a refinance and want to throw around some ideas, feel free to send me an e-mail.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors
14 E. 60th St. #402
New York, NY 10022
212-752-4343 *31
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 04:11 PM | Permalink | Comments (1) | TrackBacks (0)

Not all corporate employees realize that Roth 401k deferrals have been allowed since January 1st of 2006. The Roth 401k, like a Roth IRA, allows accounts to grow tax-free and allows for tax-free withdrawal of contributions, earnings, and interest. Funds are eligible for withdrawal at age 59 1/2 assuming you’ve held the account for at least 5 years. The ‘drawback’ is that you can’t take a tax deduction at the time of deferral the way you can with a traditional 401k. Many financial advisors feel that Roth plans, if you qualify for them, are more valuable than traditional plans. Technically, it depends on a few different factors including your current tax bracket, your retirement tax bracket, and which direction marginal tax rates are headed for in the future.

The reason I mention qualifying is that many of my readers don’t realize that you can get ‘phased out’ of making a contribution. For an IRA, the phaseout is $156,000-$166,000 in adjusted gross income if you’re married. It’s $99,000-$114,000 if you’re single. For an IRA, the annual contribution limit is $5,000 in 2008, $6,000 if you’re age 50 & above.

For a Roth 401k the boundaries are non-existent. A taxpayer who is married will not be phased out of making these contributions at any level. The only question you need to ask is whether your 401k plan offers the Roth contribution. If it doesn’t, and you want to make Roth contributions, should speak to your employer or HR department.

The Roth 401k is particularly attractive to higher-earnings individuals, or those that would mostly likely be phased out of IRA contributions. Unlike the $5,000 max in the IRA, an employee could defer the full $15,500 for 2007, or $20,500 if they are over age 50. Do you see what I’m getting at here? The restrictions don’t apply if you’re contributing through the 401k plan. So if you have a Roth IRA but are making 401k deferrals, you may want to re-examine your options.

If an employee is split about whether a Roth IRA is more valuable than taking the tax deduction now, they can split contributions between the regular and Roth 401k plans. It really is the best of both worlds.

Money held in Roth accounts also avoids the Required Minimum Distribution (RMD) rules. In non-Roth 401k and IRA plans, you must begin taking distributions when you pass age 70 1/2. While that may seem insignificant to a 40 year-old now, you will complain about the taxes when you eventually get older--I promise  RMD is really the government’s way of saying “hope you’ve enjoyed your tax shelter--now start paying!” Roth money is not subject to RMD and thus continues the theme of tax-free growth forever! Avoiding RMD obviously helps beneficiaries as well, who may have a greater chance at getting the full value of your IRA if it’s in a Roth-ruled account.

Just some food for thought.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors
14 E. 60th St. #402
New York, NY 10022
212-752-4343 *31
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 02:01 PM | Permalink | Comments (0) | TrackBacks (0)

The Real Deal posted a front page article earlier this month on the growing popularity of mortgage contingency clauses found within buyers’ purchase contracts. For those who aren’t familiar, this is a provision in the purchase contract in which the buyer is only obligated to the sale if he/she is able to get a mortgage. Put another way, the buyer doesn’t risk losing their deposit--often 10% or more--if factors affecting the credit markets force them out of a deal.

Most sellers understand that outside factors which affect banks (such as a bank’s ability to resell their mortgages elsewhere) can cause the seller a delay or even a denial of financing. Because this could happen to a buyer with substantial income/assets and a high credit score, it would be unfair to cause them to lose a down payment because of market conditions. This is why buyer’s attorneys have been more conservative lately on the wording of these clauses.

On the other hand, the sellers often do not want this clause because in the past it has been used to provide protection for unqualified buyers who are trying to bite on a big purchase and hope the banks will offer them a loan. Sellers might also suspect that buyers are using the clause as an overall escape route from a purchase. It could be a way of buying time while they further examine the market and analyze other pending deals.

Some different or more detailed clauses might also cap the interest rate on the loan. This would give the buyer a right to exit if rates jump substantially between accepted offer and closing. When I bought my apartment six months ago the interest rates were very volatile. The rates for a 30-year fixed were swinging by almost a quarter of a point each week. Just before the closing the bank informed me that they could close on schedule but only with a rate that was 1/8th of a point above my expected rate. In my case I took the higher rate because it meant not extending the lease on my pricey rental. But as you can see, these clauses are added in for a reason, especially in a housing market like we’re seeing right now.

It should be noted, since many of my readers are in the New York area, that new condominium developments typically don’t allow mortgage contingency clauses and don’t negotiate on that point. This issue is more about existing home sales. Please feel free to e-mail me with questions or comments.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors
14 E. 60th St. #402
New York, NY 10022
212-752-4343 *31
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 02:01 PM | Permalink | Comments (0) | TrackBacks (0)