Archive for the 'Credit Cards' Category
In the original post on this subject, I outlined the almost comical amount of difficulties I faced in trying to move approximately $44,000 out of our Money Market fund at Vanguard and into our checking account so that we could pay the balance on our Chase Freedom card. You may also recall that the reason why our balance was so high is that we were exploiting a 0% interest rate on purchases for one year — otherwise known as a form of arbitrage.
Picking up where I left off, the plot gets thicker before finally thinning out for good:
The good news is that the payment from the Vanguard check arrived at EverBank on September 8th. The bad news is that I didn’t even consider the fact that it could take days before the check cleared. Because of the very large amount of the check, the bank cleared it in increments: I got a $100 credit on day 1, a $5000 credit on day 4, and the total was credited on day 7. Each day, starting on September 10th, I had to move my online bill payment from that day to the day after the final schedule payment in hopes that the check would clear the next day.
After doing this for 3 days straight, I discovered that the Chase website has an option for making payments online. This option requires you to enter your bank’s routing number and the account number from a check. “Great!”, I thought. But there must be a catch to this also. I emailed customer service and asked what the fee was for this, what the maximum amount I could pay at any time was, and how long it took to post to my account. I was told that there was no fee, the only limit to the amount I could pay was the total of my credit card balance (in other words, I could not overpay my account), and that the payment posted on the same day as long as it was made before 4pm.
At this point, I canceled all of the scheduled billpay payments and went about setting up the payment on the Chase website. Wouldn’t you know that I discovered another catch? The website, contrary to the information from customer service, limited me to a payment of $25,000. Additionally, I could not set up another payment until 3 days after the first payment. Luckily, I still had time. The first payment was set up for the 13th of September and the second payment was set up for the 16th. Both payments executed properly, and I met the September 17th deadline to get the entire balance paid off by the due date.
Whew! In total, I paid a lot for this in stress, as well as the $20.71 FedEx overnight fee to get the check from Vanguard as soon as possible.
Lessons learned and next actions:
- We are going to fill out the form that would have allowed us to transfer the money directly from Vanguard to EverBank.
- Never trust what a customer service person tells you — even if you get it in writing.
- Plan ahead!
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In Part I one this story, I told the story of how we came to own our current home, how we financed it, and how we found ourselves upside-down on our mortgage.
The original loan on our house had a clause that said that we could not refinance or pay off the loan for at least 6 months. Recognizing that we got a rather lousy interest rate because of our lack of documentation, as well as the fact that we would have to refinance anyway, we went ahead and refinanced as soon as we could. Just about 6 months and a day after we signed our original home loans, we signed two more loans — one for 80% of the value, our first mortgage, and one for 10% of the value, our 2nd mortgage. Because it was only 6 months into the original mortgage, the appraised value of the house did not change. Both of these mortgages are 30 year fixed loans with decent interest rates.
In the time since we refinanced, rates came down considerably, and we tried to refinance again into a lower rate. The appraisal that we got in the process was the first strong clue for us that trouble was brewing: the appraised value was about 10% lower than what we paid, despite the fact that we had undertaken substantial exterior cosmetic improvements (curb appeal). We were unable to finance into the very low rates that we available a little over a year ago since we now owe more than the property is worth.
Having unknowingly saved ourselves from the current mortgage crisis, we also did the smart thing and consolidated the 3 credit cards that I talked about in Part I into one card. Every few months or so, I get a set of checks from my Chase Platinum card with offers for 0% interest for a year, 3.99% for 2 years, or 4.99% for the life of the balance. We opted for the 4.99% deal. Since half of the improvements made with the money on this card are for a legitimate business expense, we can deduct half of the interest payments on our taxes, which further reduces the effective interest rate. In the time since we completed this balance transfer, we have paid down 3/4 of the original balance. Because the interest rate is so low at this point, and half tax deductible, we have slowed our aggressive pay down of this account in favor of building up some savings.
So while we are not in any trouble with respect to continuing to make our mortgage payments or servicing the debt or our improvements, we are still in a pickle. We are looking down the road at the needs we have for housing, especially in light of our growing family, and are not all that pleased with the options we have available:
- We can sell our house, but we would have to come up with between $30,000 and $40,000 to cover the difference between what we owe and what the house is worth. This would wipe out our savings, and we would be just about starting over financially. We would have to find a place to rent as well while we save money towards the down payment on a new house.
- We can buy a single family house now, and keep our two family, renting both units. The trouble with this option is that it would also wipe out our savings, putting us in a precarious situation if any emergencies come up. Another problem with this plan is that the market rents for our two units is less than the combined mortgage, insurance, and utility rates we would have to pay out each month. This is what makes the property an Alligator. Each month we will have to feed it hundreds of dollars to keep it afloat. This could actually be seen as a really great investment, a forced savings plan of sorts, since we will eventually get this money back when we sell the house.
- The default option here is to keep doing what we’re doing. That’s fine for now, but we live in a 2 bedroom apartment, and depending on the gender of our next child, may only work out for a short period of time. The real downside to this plan is that we may miss out on some great real estate deals as the market bottoms out. Under this plan, we can save for a new house over the next several years. However, there is still the issue of the 2nd option above. With any luck, rents will rise over the next several years to offset the continuous payments we will have to make into the house, but we can’t bank on that.
We made two major mistakes along the way with the purchase of this house. We bought an over-valued asset at the height of a market bubble. We failed to adequately assess the income versus expenses for a rental property. In our defense, we bought the house for the reason stated in Part I: to be able to afford to live in the area we wanted, close to other family and in a decent neighborhood. But in retrospect it was an investment that will not provide the returns that we could have achieved using other investment vehicles.
What would you do? Do you see options that I haven’t seen? Are you feeding an alligator? Let me know what you think in the Comments section below, or click here if you’re reading via an RSS reader or by email.
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I have written before about our experiment with credit card arbitrage. This is where you borrow money at a very low rate (preferably 0%) and stash it in a high interest savings account. Since we have come to the end of the 1 year period on our Chase Freedom card, I got set up to make a large payment to pay off the card — $44,061.30 to be exact.
I know that the payment is due on September 17, so I decided to play it safe and get all my ducks in a row in plenty of time. Last Friday, August 29th, I logged into my money market fund account at Vanguard to make the transfer to my checking and billpay account at Everbank. I got the Sell order all set up only to find that “electronic transfer” to my checking account was not one of the options for cashing out our money. The next day, I called Vanguard to find out why. It turns out that since this is a joint account, Vanguard needs to have a signature card on file for ScrapperMom before it can let me transfer money from a joint account. It didn’t matter that the checking account is also a joint account.
The only option available to me was a check. I started doing the math in my head — the market doesn’t reopen until Tuesday, September 2, they can’t sell the money market funds on my behalf until the end of trading, the earliest they could cut a check would be the 3rd. First class mail would likely get the check to me by September 7, then I have to turn that around and mail it to Everbank, which is another 3-5 days until it hits our account. Now we’re up to Sept. 12. A payment sent on that day should arrive at Chase on time.
After explaining the situation to Vanguard, and not wanting to cut it too close, they offered to overnight the check to us. This will incur some fee, of course, and I don’t know what that is yet. I’m assuming that it will be in the $20 to $30 range, but the representative could not tell me when I set up the order.
Fast forward to last night: I logged into Everbank to set up the bill payment. I entered the full amount in the payment box, set the payment date for Sept. 10, and clicked PAY. The bank came back with an error saying that I could only pay $15,000 in a single payment. Okay, I thought, I’ll just set up 3 payments to take care of it — no problem. So I reduced payment number one to $15,000. Then I set up payment 2. The bank thought it was smarter than me, and decided that this was a mistake — a duplicate of a payment that I already set up. So I tried $14,999 instead. Then the bank told me that the daily limit on bill payments in total is $15,000.
This was starting to get frustrating! Eventually I ended up setting up 2nd and 3rd payments for the total amount due on the 11th and 12th. According to the bank, a payment made on the 12th will arrive by the 16th. How’s that for calling it close? Usually the payment gets sent on the 10th, and usually gets credited to my account on the 13th. So this should still work out.
Today I received the check from Vanguard and we immediately turned it around and mailed it off to Everbank. There is the off chance that the check will arrive at Everbank and be credited to our account earlier than the 10th. That will give us a little more breathing room if true. Another option we now have through the billpay service with Everbank is to expedite a payment by sending it electronically or by overnight check. As you might expect, these options are not without cost: $4.95 for the expedited payment, and $14.95 for the overnight check.
What are the consequences of a late payment? I’m not really sure, but my expectation is that since the interest rate for purchases is 14.99%, the interest for one month at that balance would likely be about $500. So it certainly behooves us to do everything possible to make sure the payment gets made on time. It’s not as bad as it seems, since I estimate that we made over $700 on the arbitrage over the last year.
Lessons learned: If you have to move large sums of money from one bank to another, make sure you know in advance what the limitations of the system are. It’s also a good idea to understand what the limits of your bank’s billpay system is also. We’re not sure yet what this means for future credit card arbitrage… but we’ll be sure to let you know soon how the whole thing turns out!
Have you ever experienced a close call with a payment or a problem moving money from bank to bank?
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Nearly 7 months into starting this blog, I have finally gotten around to a post concerning the name of this website. ScrapperMom and I have an alligator on our hands, and here’s the story of how we got into this situation and our options for getting out. I have avoided this topic for some time because, as you will see, it is a particularly painful story for us, but one that has taught us many important lessons.
Three and a half years ago I left my job as a nuclear plant operator in search of more (or less, depending on point of view) exciting opportunities. Our previous house was bought because of its close proximity to the power plant, which is, like most nuclear power plants, in the middle of nowhere. We started a search for a new house, and laid out a set of criteria. When our search revealed that we could not afford to buy what we wanted, where we wanted, we turned to a more creative solution: we would look for a multi-family home so that rent from one unit could help to offset the mortgage on the property as a whole.
To be clear, we were not looking for anything extravagant. In early 2005, home prices in our market were just reaching their peak (unbeknownest to us, of course) and even a modest home was beyond our financial reach. We considered renting, as well as purchasing a condominium, but decided that this would be exceptionally difficult with our two Great Danes. Since multi-family homes usually cost less per unit than a single family home, or even a condo, it seemed to be a good compromise for us — one that might eventually even develop into a nice investment down the line.
In the Spring of 2005 we found a nice house in a nice community, one with walking access to a number of different services. The house is close to the local commuter rail, hospital, community swimming pool, conservation area, etc. The previous owner of the home had completed a number of major updates to the 1920 structure, including wiring, roofing, the conversion of the attic into a bedroom, etc. The house was in need of a number of cosmetic updates, mostly relating to the exterior. Compared with the other homes on the market that we had seen, this home was a bargain.
We plunked down 10% of the purchase price from the proceeds of our previous home sale. We financed the rest of the cost through a 3/1 ARM and a home equity line of credit. I was actually still between jobs at the time, but our excellent credit allowed us to obtain a no-documentation loan, which meant that the bank took our word for it that we made enough income to cover all the costs of the home and then some.
Many readers here are probably cringing after having read the last paragraph. After all, this story so far is very similar to that of thousands of people who are presently losing their homes, and has all the danger signs: bought an overpriced home at the height of a market bubble, took out a variable rate mortgage, did not have full income, easy credit was available without documentation. The only saving grace in this scenario was a decent size down payment.
Within a few months of moving in, we had found a great tenant who was willing to look past the cosmetic issues of the house in favor of its inner beauty, as well as the other attributes I mentioned above. Since I had secured a stable job, it was important to us to remedy the blemishes to be sure that we would not have difficulty renting in the future. We got a couple of quotes for vinyl siding, new energy efficient windows on the 1st floor, and two new porches. The most reasonable bill was about 8% of the value of our home. We financed these capital improvements on a combination of 3 different credit cards. (I know you’re cringing now.)
Around this time, the bottom started to fall out of the over-inflated market. Since we bought this house, we have added approximately 8% to the value, while at the same time the market has plummeted. My best estimate at this point is that home’s value has fallen almost 20% from the sale price, meaning that on paper we have lost almost 30% of its value in just 3 years. This leaves us upside-down on our mortgage — meaning that we owe more on our mortgage than our home is worth (see picture above), in credit card debt, and feeding an alligator month after month.
If you haven’t already, consider subscribing so that you are among the first to know how this sad tale ends up. Do you see redemption ahead, or bankruptcy? Have you ever had to deal with a similar situation? Please share your thoughts in the Comments section below or by clicking on Comments.
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One of the keys to spending less than you earn and staying out of debt is having an emergency fund. Personal finance gurus like Dave Ramsey suggest that your very first step down the path to financial freedom is to put $1000 into a designated emergency fund. This should be done before beginning any kind of aggressive debt pay down.
We created our first official emergency fund just a couple of years ago. Before that we just tried to keep some amount of extra money available in our money market account. I don’t remember specifically how we created the emergency fund, aside from just diverting some debt reduction money towards this purpose.
To separate the emergency fund from our everyday money, I created a CD ladder by dividing the money in the fund into 5 equal parts and buying 1, 2, 3, 4, and 5 year CDs. Since then, every time a CD matures, I roll it into a new 5 year CD. This generally allows us to enjoy the highest interest rates available while still frequently providing us with liquidity to some portion of our money. I like using CDs in this way because it places a penalty on the withdrawal of the money, which makes it far less likely that we will raid this fund for anything less than a true emergency. The penalty that we would have to pay to access the money is small compared to the security that the fund provides.
So what’s the problem? When we created the emergency fund, we did so by contributing the minimum amount allowed by our bank to each CD. Since that time, we have added some additional money to each CD when it matured and rolled over, but the overall amount of money currently available for an emergency amounts to only 2.3 times our basic monthly expenses.
On the one hand, we’ve got more than the recommended amount while still paying down debts. On the other hand, we don’t have the recommended minimum of 3 months of expense for a true emergency fund, and nowhere near the 6+ months that’s really advisable, especially in a soft economy. We’re not as worried as others might be, however, since ScrapperMom is working part time, and in the event I lost or left my job, she could go to full time immediately and her salary alone would cover our needs. Nonetheless, it may not always be possible for her to work given that her first job is that of stay-at-home mommy. It’s time for us to get serious again about an emergency fund.
So where do we go from here? Well, since our Roth IRAs are fully funded for the year, that is one possible source of funding for a larger emergency fund. We would like to save more towards retirement this year, however. Another source is the extra money that we have been devoting to the aggressive reduction of the balance on our car loan. I believe that this is one of the real tricks to effective personal finance: attempting to meet several goals simultaneously. In this case, we want to increase our available emergency funds, save as much as possible for retirement, and pay off our car loan and existing business credit card. The bottom line is that we will have to compromise something to meet all of these goals, and it’s not clear to me what that should be yet.
How is your emergency fund doing? What would you sacrifice in our case — retirement savings or debt reduction? Perhaps a little of both? Or would you be comfortable for now if you were in our shoes? We’d love to hear your comments below!
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photo figure credit: booleansplit
