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Where should you invest a down payment for a mortgage?

Where should you invest a down payment for a mortgage?

Purchasing a home is one of the most exciting things a family can do, but such a long-term commitment requires a long-term savings plan and a reasonably strict budget. It takes some discipline and patience for you to reach this goal, especially when you consider the significant amount of money you’ll have to come up with as a down payment.

When it comes to the amount for a down payment, the typical lender prefers about 20% of the total purchase price for your property. Anything less than 20% will make it more difficult for you to obtain the loan, or at the very least you’ll have to pay higher fees. This could include higher interest rates over the life of the loan, higher processing fees from the mortgage company, and a requirement that you purchase private mortgage insurance.

When you consider the amount of money involved, it’s obvious you will need to save money for some time before you will be able to afford a down payment. Unless you’re independently wealthy, you’ll probably have to follow a consistent savings plan from month to month so you can reach your down payment goals. But how should you invest this money? Should you use a simple savings account, or should you take a higher risk and go for higher returns?

It really depends on what length of time we’re talking about. If you’re investing this money for the long-term, you can afford to be a little bolder and choose investments that are more volatile but that also tend to be higher earners. On the other hand, if you need to access this money for a down payment within the next five years, you may want to consider a more stable approach.

Look at the stock market, for example. In the 1990s things were going great, and you could have been getting returns of 10%, 15% or 20% per year on your investment. On the other hand, if you placed your savings into the stock market during the mid-2000s, your money could have been wiped out during the financial crisis of 2007 and 2008.

Assuming you wish to buy a new home within the next five years, we would highly recommend a safer approach such as a money market mutual fund account. This kind of account will safeguard your principal (which is the original amount of money invested), and it will provide some interest along the way even though this interest rate tends to fluctuate.

Although the interest rates may not be very attractive at times depending on economic conditions and monetary policy, a money market funds account should at least beat a traditional savings account at your local bank.

The Vanguard’s Prime Money Market Account is one option you should consider when looking for a place to park your down payment money in the short term. At the time of this writing, this particular company only requires 00 to open an account. Another option is to use an online company with few branches like Etrade. The low number of branches helps reduce overhead and increase interest rates.

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Does the Computer Age Actually Bring Higher Productivity?

Does the Computer Age Actually Bring Higher Productivity?

On March 21, 2005, Germany’s prestigious Ifo Institute at the University of Munich published a research report according to which “More technology at school can have a detrimental effect on education and computers at home can harm learning”.

It is a prime demonstration of the Solow Paradox.

Named after the Nobel laureate in economics, it was stated by him thus: “You can see the computer age everywhere these days, except in the productivity statistics”. The venerable economic magazine, “The Economist” in its issue dated July 24th, 1999 quotes the no less venerable Professor Robert Gordon (“one of America’s leading authorities on productivity”) – p.20:

“…the productivity performance of the manufacturing sector of the United States economy since 1995 has been abysmal rather than admirable. Not only has productivity growth in non-durable manufacturing decelerated in 1995-9 compared to 1972-95, but productivity growth in durable manufacturing stripped of computers has decelerated even more.”

What should be held true – the hype or the dismal statistics? The answer to this question is of crucial importance to economies in transition. If investment in IT (information technology) actually RETARDS growth – then it should be avoided, at least until a functioning marketplace is in place to counter its growth suppressing effects.

The notion that IT retards growth is counter-intuitive. It would seem that, at the very least, computers allow us to do more of the same things only faster. Typing, order processing, inventory management, production processes, number crunching are all tackled more efficiently by computers. Added efficiency should translate into enhanced productivity. Put simply, the same number of people can do more, faster, and more cheaply with computers than without them. Yet reality begs to differ.

Two elements are often neglected in considering the beneficial effects of IT.

First, the concept of information technology comprises two very distinct economic entities: an all-purpose machine (the PC) plus its enabling applications and a medium (the internet). Capital assets are distinct from media assets and are governed by different economic principles. Thus, they should be managed and deployed differently.

Massive, double digit increases in productivity are feasible in the manufacturing of computer hardware. The inevitable outcome is an exponential explosion in computing and networking power. The dual rules which govern IT – Moore’s (a doubling of chip capacity and computing prowess every 18 months) and Metcalf’s (the exponential increase in a network’s processing ability as it encompasses additional computers) – also dictate a breathtaking pace of increased productivity in the hardware cum software aspect of IT. This has been duly detected by Robert Gordon in his “Has the ‘New Economy’ rendered the productivity slowdown obsolete?”

But for this increased productivity to trickle down to the rest of the economy a few conditions have to be met.

The transition from old technologies rendered obsolete by computing to new ones must not involve too much “creative destruction”. The costs of getting rid of old hardware, software, of altering management techniques or adopting new ones, of shedding redundant manpower, of searching for new employees to replace the unqualified or unqualifiable, of installing new hardware, software and of training new people in all levels of the corporation are enormous. They must never exceed the added benefits of the newly introduced technology in the long run.

Hence the crux of the debate. Is IT more expensive to introduce, run and maintain than the technologies that it so confidently aims to replace? Will new technologies emerge in a pace sufficient to compensate for the disappearance of old ones? As the technology matures, will it overcome its childhood maladies (lack of operational reliability, bad design, non-specificity, immaturity of the first generation of computer users, absence of user friendliness and so on)?

Moreover, is IT an evolution or a veritable revolution? Does it merely allow us to do more of the same only differently – or does it open up hitherto unheard of vistas for human imagination, entrepreneurship, and creativity? The signals are mixed.

Hitherto, IT did not succeed to do to human endeavour what electricity, the internal combustion engine or even the telegraph have done. It is also not clear at all that IT is a UNIVERSAL phenomenon suitable to all business climes and mentalities.

The penetration of both IT and the medium it gave rise to (the internet) is not globally uniform even when adjusting for purchasing power and even among the corporate class. Developing countries should take all this into consideration. Their economies may be too obsolete and hidebound, poor and badly managed to absorb yet another critical change in the form of an IT shock wave. The introduction of IT into an ill-prepared market or corporation can be and often is counter-productive and growth-retarding.

In hindsight, 20 years hence, we might come to understand that computers improved our capacity to do things differently and more productively. But one thing is fast becoming clear. The added benefits of IT are highly sensitive to and dependent upon historical, psychosocial and economic parameters outside the perimeter of the technology itself. When it is introduced, how it is introduced, for which purposes is it put to use and even by whom it is introduced. These largely determine the costs of its introduction and, therefore, its feasibility and contribution to the enhancement of productivity. Developing countries better take note.

Historical Note – The Evolutionary Cycle of New Media

The Internet is cast by its proponents as the great white hope of many a developing and poor country. It is, therefore, instructive to try to predict its future and describe the phases of its possible evolution.

The internet runs on computers but it is related to them in the same way that a TV show is related to a TV set. To bundle to two, as it is done today, obscures the true picture and can often be very misleading. For instance: it is close to impossible to measure productivity in the services sector, let alone is something as wildly informal and dynamic as the internet.

Moreover, different countries and regions are caught in different parts of the cycle. Central and Eastern Europe have just entered it while northern Europe, some parts of Asia, and North America are in the vanguard.

So, what should developing and poor countries expect to happen to the internet globally and, later, within their own territories? The issue here cannot be cast in terms of productivity. It is better to apply to it the imagery of the business cycle.

It is clear by now that the internet is a medium and, as such, is subject to the evolutionary cycle of its predecessors. Every medium of communications goes through the same evolutionary cycle.

The internet is simply the latest in a series of networks which revolutionized our lives. A century before the internet, the telegraph and the telephone have been similarly heralded as “global” and transforming. The power grid and railways were also greeted with universal enthusiasm and acclaim. But no other network resembled the Internet more than radio (and, later, television).

Every new medium starts with Anarchy – or The Public Phase.

At this stage, the medium and the resources attached to it are very cheap, accessible, and under no or little regulatory constraint. The public sector steps in: higher education institutions, religious institutions, government, not for profit organizations, non governmental organizations (NGOs), trade unions, etc. Bedeviled by limited financial resources, they regard the new medium as a cost effective way of disseminating their messages.

The Internet was not exempt from this phase which is at its death throes. It was born into utter anarchy in the form of ad hoc computer networks, local networks, and networks spun by organizations (mainly universities and organs of the government such as DARPA, a part of the defence establishment in the USA).

Non commercial entities jumped on the bandwagon and started sewing and patching these computer networks together (an activity fully subsidized with government funds). The result was a globe-spanning web of academic institutions. The American Pentagon stepped in and established the network of all networks, the ARPANET. Other government departments joined the fray, headed by the National Science Foundation (NSF) which withdrew only lately from the Internet.

The Internet (with a different name) became public property – but with access granted only to a select few.

Radio took precisely this course. Radio transmissions started in the USA in 1920. Those were anarchic broadcasts with no discernible regularity. Non commercial organizations and not for profit organizations began their own broadcasts and even created radio broadcasting infrastructure (albeit of the cheap and local kind) dedicated to their audiences. Trade unions, certain educational institutions and religious groups commenced “public radio” broadcasts.

The anarchic phase is followed by a commercial one.

When the users (e.g., listeners in the case of the radio, or owners of PCs and modems in the realm of the Internet) reach a critical mass – businesses become interested. In the name of capitalist ideology (another religion, really) they demand “privatization” of the medium.

In its attempt to take over the new medium, Big Business pull at the heartstrings of modern freemarketry. Deregulating and commercializing the medium would encourage the efficient allocation of resources, the inevitable outcome of untrammeled competition; they would keep in check corruption and inefficiency, naturally associated with the public sector (“Other People’s Money” – OPM); they would thwart the ulterior motives of the political class; and they would introduce variety and cater to the tastes and interests of diverse audiences. In short, private enterprise in control of the new medium means more affluence and more democracy.

The end result is the same: the private sector takes over the medium from “below” (makes offers to the owners or operators of the medium that they cannot possibly refuse) – or from “above” (successful lobbying in the corridors of power leads to the legislated privatization of the medium).

Every privatization – especially that of a medium – provokes public opposition. There are (usually founded) suspicions that the interests of the public were compromised and sacrificed on the altar of commercialization and rating. Fears of monopolization and cartelization of the medium are evoked – and proven correct, in the long run. Otherwise, the concentration of control of the medium in a few hands is criticized. All these things do happen – but the pace is so slow that the initial apprehension is forgotten and public attention reverts to fresher issues.

Again, consider the precedent of the public airwaves.

A new Communications Act was legislated in the USA in 1934. It was meant to transform radio frequencies into a national resource to be sold to the private sector which will use it to transmit radio signals to receivers. In other words: the radio was passed on to private and commercial hands. Public radio was doomed to be marginalized.

From the radio to the Internet:

The American administration withdrew from its last major involvement in the Internet in April 1995, when the NSF ceased to finance some of the networks and, thus, privatized its hitherto heavy involvement in the Net.

The Communications Act of 1996 envisaged a form of “organized anarchy”. It allowed media operators to invade each other’s turf.

Phone companies were allowed to transmit video and cable companies were allowed to transmit telephony, for instance. This is all phased over a long period of time – still, it is a revolution whose magnitude is difficult to gauge and whose consequences defy imagination. It carries an equally momentous price tag – official censorship.

Merely “voluntary censorship”, to be sure and coupled with toothless standardization and enforcement authorities – still, a censorship with its own institutions to boot. The private sector reacted by threatening litigation – but, beneath the surface it is caving in to pressure and temptation, constructing its own censorship codes both in the cable and in the internet media.

The third phase is Institutionalization.

It is characterized by enhanced legislation. Legislators, on all levels, discover the medium and lurch at it passionately. Resources which were considered “free”, suddenly are transformed to “national treasures not to be dispensed with cheaply, casually and with frivolity”.

It is conceivable that certain parts of the Internet will be “nationalized” (for instance, in the form of a licensing requirement) and tendered to the private sector. Legislation may be enacted which will deal with permitted and disallowed content (obscenity? incitement? racial or gender bias?).

No medium in the USA (or elsewhere) has eschewed such legislation. There are sure to be demands to allocate time (or space, or software, or content, or hardware, or bandwidth) to “minorities”, to “public affairs”, to “community business”. This is a tax that the business sector will have to pay to fend off the eager legislator and his nuisance value.

All this is bound to lead to a monopolization of hosts and servers. The important broadcast channels will diminish in number and be subjected to severe content restrictions. Sites which will not succumb to these requirements – will be deleted or neutralized. Content guidelines (euphemism for censorship) exist, even as we write, in all major content providers (AOL, Yahoo, Lycos).

The last, determining, phase is The Bloodbath.

This is the phase of consolidation. The number of players is severely reduced. The number of browser types is limited to 2-3 (Mozilla, Microsoft and which else?). Networks merge to form privately owned mega-networks. Servers merge to form hyper-servers run on supercomputers or computer farms. The number of ISPs is considerably diminished.

50 companies ruled the greater part of the media markets in the USA in 1983. The number in 1995 was 18. At the end of the century they numbered 6.

This is the stage when companies – fighting for financial survival – strive to acquire as many users/listeners/viewers as possible. The programming is dumbed down, aspiring to the lowest (and widest) common denominator. Shallow programming dominates as long as the bloodbath proceeds.

First-time Buyers – Why you Should Spend Less Than you Can Afford for your New House

First-time Buyers – Why you Should Spend Less Than you Can Afford for your New House

Almost all first-time home buyers find that their income will only allow them to qualify for a fixed-rate mortgage that will buy a house that is smaller or less desirable than the house they’ve been dreaming about. When they discover this limitation, many young couples start talking to their loan officer about an adjustable rate mortgage with a low starting interest rate. This may allow the buyers to qualify for a loan on a nicer house, but they’ll still struggle to make enough money to cover the low initial monthly payments. Most people assume they will be making more money by the time the interest rates begin to rise, but history has shown that this is quite often an unreasonable assumption.

In the last few years, many mortgage lenders and brokers have heavily marketed to people who aren’t truly able to afford the financial burden of their loans. Customers are lured in by low initial interest rates that last only for a few months – long enough for the buyers to qualify, but not long enough for them to find additional sources of income to cover the increasing monthly payments. These folks then find themselves part of the statistics in the sub-prime mortgage crisis, losing their dream homes to foreclosure.

The most rational alternative is to look for a loan first, long before you begin looking for a house. Shop around for the fixed-rate mortgage that has the lowest interest rate and closing costs. Then go looking for a house that actually costs less than the loan you’re prequalified for. This means you will be approaching the home buying process more like a true investment or business venture, instead of allowing your emotions and dreams to make unwise financial decisions for you.

Unfortunately, few people would agree with this advice. The difference between the money they are allowed to borrow and the house they’ve long dreamed of owning is already startling. If they begin to look at houses that are listed for less than the loan they qualify for, they may become so discouraged that they give up the idea of home ownership completely.

The housing market propped up the US economy for many months, and there is now deep concern that the slowdown in the housing market could cause significant slowdown in the economy as a whole. The fall in the value of the dollar against the Euro is thought to be caused, in part, to international worries about the subprime lending crisis in this country, which was caused by the excessive number of loans given to people who couldn’t really afford them. There has been a frenzy to buy overpriced homes on inadequate income, and many people can’t bear to consider the possibility of living in the kind of house they can actually afford.

An alternative philosophy is beginning to take hold in the small house movement. Some people are beginning to realize the full environmental costs of building, operating and maintaining large houses, and other people are beginning to realize that they are more comfortable in smaller rooms, which are also easier and less expensive to decorate and furnish. If a smaller home is an option, it’s almost always possible to find one that costs less than the amount you qualify for. The lower listing price will also reduce your down payment and closing costs, so you may have a bit left over in your bank account as a cushion in case something comes up. If your car needs repairs or you have a few medical bills, you’ll still be able to make those monthly mortgage payments.

If you cannot abide with the idea of finding a smaller house than you qualify for, another option is to purchase the larger house you want, but in a less desirable neighborhood. A house in a working class neighborhood may not impress your professional friends, but the lower mortgage payments may be worth the move – and you could be the vanguard of a ‘gentrification’ movement in the neighborhood.

You can also save on the initial price of a house by finding one in less than perfect condition. Many homes are sold for far less than they are truly worth simply because the seller failed to paint the walls before listing the house, or the home has been left empty without proper upkeep on the lawn. Perhaps a new carpet is needed, or the wood floors beneath the old, grungy carpet could be refinished. Perhaps you can see that the outdated fixtures in the bathroom could be replaced relatively cheaply, but the seller just didn’t want to bother doing it.

Although living in a house that is being remodeled could be an unwelcome strain on any couple’s relationship, most people can survive the few days it takes to paint a room or two. If you’re willing to do it, you could knock thousands of dollars off the loan you have to sign for, and that will result in many more thousands of dollars in interest payments that you never have to make.

It just doesn’t pay to set yourself up for the heartbreak of foreclosure. Try to ignore the positive, bubbling marketing efforts of your mortgage broker and real estate agent (who are both looking for a bigger commission), and find a house you can truly afford – even if you don’t get that raise next year.