Author Archive - Ryan M


Adventures in Home Buying

Apparently what needs two six-hour classes on the first two Saturdays of spring can be summed up within a couple paragraphs (at least in a couple installments) on a slightly successful somewhat humor associated blog. I am, of course, referring to the first time home buyer class my lender has required me to attend in order to obtain a state subsidized mortgage. I’m not knocking the program as it is meant for first time home buyers. But the elementary view and information this class provides these hopeful and somewhat naive homebuyers is almost worthless. At first I assumed the audience was somewhat knowledgeable in regards to personal finance. I mean, this is a class for people ready to make the biggest purchase of their lives. However, I was seriously surprised when more than a few hands raised to notify the teacher that they didn’t know what a “Credit Score� was. As I sat in the freezing room filled with plastic folding chairs listening to a real estate professional, a home inspector, and a real estate lawyer try to drum up business for themselves instead of educate home buyers, I decided to put down on paper the important lessons and intricacies that may be useful to a somewhat more educated, or simply alive, first time home buyer that I’ve discovered not only during the home buying process but also through my experience as a former loan officer and what I’ve learned while preparing to sit for the Real Estate Licensing exam in Ohio. Today’s topic – Preparing your financials for a Mortgage Preparing for a loan is, I think, the most important part of the process. Hopefully you’ve made some decisions as far as where you’re going to live and what type of house you’re looking for. A little bit of research around these assumptions will help you determine how much of a loan and down payment you’re going to need. Preparing yourself, or more importantly your finances for a loan, may take months or years depending on how far off plan you are. The two most important things that the bank will look at will be your debt-to-income ratio and your credit score (hopefully you know what that is). Your debt-to-income ratio simply is your month debt payments divided your gross income divided. Now for the most part you want to pay off debt in order of the highest interest rate, by the way, if you’re carrying credit card balances, you’re not even ready to begin thinking about buying a home. Work on a budget to get your credit cards closed and make yourself debit-dependent instead of credit-dependent. When evaluating your debt-to-income your bank will mainly look at monthly required payments and then debt balances, but the two measures that matter most are your debt-to-income ratio using only your new house payment, taxes, insurance, and possibly condo fee, and your total debt-to-income ratio including all monthly debt payments and your new house payment, taxes etc… These two ratios should be under or close to 28% and 36% respectively. Now this is where some creative financing takes place. The two determinates you can effect in these equations are your income, which is not as controllable as most of us like, and your current monthly debt payments. Like I said before, normally it’s prudent to pay off your highest interest loans and debts first, but when trying to improve your debt-to-income ratio by reducing your monthly debt payments this may not be true. Consider two student loans, one at 8% and one at 4%. Most people’s first instinct is to payoff the first loan with the 8% interest because the interest is higher. However let’s also assume that the 8% interest loan is amortized over 5 years with a balance of $5,000, and the 4% loan is amortized over two years with a balance of $5,000. The payment on the 8% loan is $101.38 and the 4% loan is 217.12. The lower interest rate loan has a higher payment due to the amortization time. After you’ve decided how much money you’ll need for down payment, closing costs, reserve funds, etc… any extra funds should be applied to your highest monthly payment to balance ratio. In other words, the 8% loans ratio is 101.38/5000, or 2% while the 4% loan is about 4.3%. This will lower your debt-to-income ratio. This theory should be applied to all your debt balances and monthly payments that have the same tax advantages. Notice how I compared two student loans instead of a student loan and a car loan. Normally the student loan will have tax advantages over the auto loan, because you can deduct the student loan interest you pay. This theory may also have negative effects in the future. Essentially in the scenario above you’re sacrificing a loan with a lower rate to afford a better home. If you had paid off the 8% loan instead, you’d pay less interest over time. These are all things that should be considered on an individual basis and they unfortunately don’t fit easily into a widely flexible calculation. Paying off any debt will also improve your credit score. The calculations that determine your FICO score are very complicated and outside of the scope of this writing. What I can tell you is that if your FICO score isn’t above 700 you can expect to pay a higher interest rate or points on your loan than what the market is advertising. Also, with all the problems with the sub-prime market if you’re FICO score is below 600 you may not have a prayer finding financing. Based only on my experience alone, the most diligent efforts to improve a bad credit score can only rise a score by 50 points a year at best. Based on that and your own knowledge of you credit history you should be better able to determine what your timeframe is before you apply for a mortgage. And like everyone says but almost no one ever does, you should check your credit score at least once a year and with all three major reporting agencies. Maybe the most helpful thing to do when you want to start preparing for a mortgage is to play with the numbers. Using something like Excel, list all of your debt balances, payments, terms, etc.. along with your income. Make some quick formulas to automatically calculate your debt-to-income ratio and then run through a few scenarios. Playing with the numbers will give you a better idea of what you need to do to improve your debt-to-income ratio and provide you with a better timeline of when it'll be proper to apply for a loan.

Dunkin donuts will rot your teeth and America

Dunkin Donuts, for those of you who don't know, serves more cups of coffee a day than any other retailer in the US, including Starbucks. The chain, which is more prevalent in Boston than any other and maybe all other food franchises together, boasts the slogan "America runs on Dunkin." This clever ad campaign uses a lot of catchy "They Might be Giants" songs, which have nothing to do with coffee or America, but never the less draws attention to the TV or Radio and more importantly to Dunkin Donuts. When I first moved to Boston in January I didn't get caught up in the hype too much. I wasn't a coffee drinker, rarely ate breakfast, and couldn't even tell you where the closest Dunkin' was to my house. Soon though, I became sucked in. After a few months of heavy drinking in my new city, I decided I needed a new cheaper vice. First, I contemplated cocaine, but decided that wouldn't be much cheaper or very convenient. Second I tried self-asphyxiation; it provided a nice buzz, but several times I blacked out and/or broke blood vessels in my eyes. Then in a moment of weakness to mass marketing, I stopped at Dunkin Donuts and bought my first Iced Coffee or "The Ice" as I've come to call it. Oh the joy! The sweet cold elixir ran easier down my throat then up the oversized straw they provide. The sudden infusion of caffeine to an otherwise caffeine desolate body created a huge rush. I could work faster and longer with better concentration than before. The Ice even provided the shakes that I was beginning to miss from my days as a functioning alcoholic. I was hooked. I couldn't start my day without Dunkin or The Ice. First it started as only a small cup every morning, but as my body built a tolerance to caffeine I had to increase my dosage of The Ice. Soon it was a medium Ice, then a large Ice. I'd grab a cup before I got on the subway and then again when I got to work. The Indian guy (dots not feathers) at my local Dunkins knew I was hooked and began pushing the extra shot of espresso on me. "Large Ice, cream and melted sugar" rang in my head as I slept. I frequented the Dunkins close to my house and work so much that the employees who didn't even speak English had memorized my debit card number. I was hooked on Dunkins and I loved it. But, like all love affairs this one must come to an end. Yesterday I had a root canal; a very painful and expensive procedure. Basically, they fill your cheek with Novocain. Then they begin to drill. If you are not numb enough, they will give you a second shot of Novocaine, but this time in the nerve of the tooth itself. Once you are so thoroughly numbed that your eye on that side won't focus, they begin the removal of the nerve pulp in the center of your tooth. All-in-all it wasn't the worst procedure I've been through. The Endodontist who performed the procedure was very nice, although he was a little surprised that I had brought my own dental dam. In fact, the most painful part was the bill at the end. For 45 minutes of agony I was presented a bill for $1050.00. Holy Shit! For that much money I should be allowed to kick the Dr. in the nuts or at least be allowed to give him a blow job. Where does this fit in with Dunkin Donuts you're asking? Well obviously, it's not my fault I needed a root canal. So it must be the food item that I consume the most; Dunkin Donuts and "The Ice". That sweet sweet goodness must be responsible for my pain and agony. It couldn't have been the years of not brushing and flossing properly, or the fact that I let a bad filling go for over 6 months. Just the idea that this problem wasn't anyone's fault but mine is ridiculous. It's my tooth and my money so I should decide to where to place the blame, right? Not only that, but pointing the finger and placing blame is probably America's favorite past time. If our president and politicians and business leaders can obviously redirect blame and fault from their own laps onto others', why can't I? It's not like I'm telling the world that Dunkin Donuts is responsible for the deaths of thousands because they didn't prepare for a hurricane (not that I can prove anyway), or that Dunkin Donuts started a war because it thought that Iraq (A country that does not have any Dunkin Donuts) was harboring weapons of mass destruction. I'm just saying that my addiction to their Iced Coffee has caused my tooth problems. So does America really run on Dunkin like the ads say? If America runs on Dunkin by drinking its caffeine laced drinks and eating its fat filled breakfast sandwiches, then I don’t know. There are only 3 Dunkin Donuts in Cleveland that I can think of compared to the 4 I walk by just on my way to work in Boston. Or does the slogan "America runs on Dunkin" a metaphor for how Americans are so proficient at placing blame and redirecting fault? America runs on Dunkins because it sleeps better at night knowing that nothing is ever their fault? America runs on Dunkins because it knows most of the time it will not be held responsible for its actions? America runs on Dunkins because our government has established a history of using scapegoats for very serious crimes? This question is one of debate and importance that may never be answered. All I can say for sure is that I need to run out to grab some Tylenol for my tooth, and some of "The Ice" for my conscious. Š