Common Sense Personal Finance
When you have an adjustable mortgage (not a fixed mortgage), there's five things that you need to keep track of:
* The first thing is obvious. You have to keep track of the interest rate. Not really the Fed's fund rate, but mortgage interest rates. I usually look at Today's Average Mortgage Rates on finance.yahoo.com
* Second thing to keep track of is when will my mortgage adjusts. I have three more years to go, and so that's a long time. So I don't worry that much about it. But in the back of my mind, I'm always thinking, when do I need to refinance out of my existing mortgage.
* Third thing to think about is my credit score. I think about the financial decisions that I make that might potentially cause my score to go down. Because when I need to refinance, the credit score will determine whether I get a good rate or not. When you need to refinance is always unpredictable, so you have to be prepared to refinance at any time.
* The fourth think to think about is the equity in your house. If the housing values are dropping, would you still be able to refinance. If you have only 20% down, and the housing value dropped by 20%, then you basically need another 20% down in order to refinance. Banks generally won't lend you 100% of the value. Your rate might be going up at the same time that the values of the house is going down. You can't refinance out because your loan to value ratio is too high.
* The fifth thing that I think about my monthly payment relative to my income. Basically if my income is going down, and my monthly payment is going up, I would be squeezed doubly hard. I make sure my income is secured. As you take on more debt, you will reach a point where your monthly payment is too high and you can't service the debt. And we always normally think about reduction in income because of decrease in pay, but there are other factors that reduces your income. Higher inflation reduces your amount of consumable money from your paycheck. Your income can't keep up with inflation. Or your income can be reduced by contributing more to your 401k. Or increasing your withholding for your taxes on your W4. And of course, your debt is increasing and so your monthly payment is higher. Changes in your taxes can cause your taxes to jump. For example, your pay raise moved you into a higher tax bracket. Or you reached phase out limits for passive activity loss or for itemized deductions. Or you got hit with the AMT. You have to be aware that those things reduces your comsumable money because you have to withhold more because your tax is higher.
So those are the five things that I keep running in my head at all times.
The mortgage is my largest payment so I worry the most about that. If you have other debt that is larger than your mortgage, then you should apply the same mentality to those kinds of debt.
