If you are in the market for a mortgage, you’ll soon realize that there are several different types available.  The question is which one is right for you.  Some of the most common mortgages are as follows:

Fixed-rate mortgages are the most popular because it protects homeowners from increased payments and is very straightforward.  With this mortgage our monthly payment and interest rate stays the same for the entire term of the loan which makes it easier to budget.  Most loans are taken for 30 or 15 years, however, other fix terms are available.

FHA mortgage loans are fixed-rate mortgages back by the Federal Housing Administration (FHA), which is government agency.  FHA loans maybe a good option for first-time buyers.  FHA loans allow lenders to offer lower down payment options, however, with the lower down payments require mortgage insurance.  Additionally, lower the lower the down payment, the higher your monthly payment will be.  So be careful to review the extra costs when considering a FHA loan.

Adjustable-rate mortgages (ARM) have an interest rate that adjusts periodically, usually every 6 or 12 months. When the loan adjusts, the payment will adjust with market interest rate movement. Most lenders also offer a “hybrid ARM,” also known as a “fixed-period ARM”.  This is a mortgage with an initial fixed period of 1, 3, 5, 7, or 10 years, and has an adjustable rate and payment after the fixed period. Fixed-period ARMs are often named by the length of time the interest rate remains fixed.  

A 3/1 ARM, means the “3″ is for a three-year introductory period, during which the interest rate remains fixed. The “1″ means the interest rate will adjusts once per year after the introductory period.

Introductory period rates are lower during the introductory period, which can mean a lower starting monthly payment. However, when the introductory period ends, your rate will go up or down depending on the market rate. When considering an ARM, you should carefully consider your ability to handle potential increases to your rate, and consequently, your monthly payment.

ARMs caps are available in 2 options. Adjustment caps limit how much your rate can go up or down in any single adjustment period, which limits how much your loan payment can change when it adjusts. Lifetime caps have a maximum interest rate over the entire life of a loan. You should find out what the caps if you’re considering an ARM, and then determine to see if you can handle rate increases.

Interest-only mortgages (I/O) are mortgages that contain an interest-only payment option during a set period in first years of the loan, often the first ten years. Interest-only mortgage payment options can be available on ARMs or fixed rate loans.  During the I/O period, borrowers can delay making principal payments and make monthly payments that include only the loan’s interest. After the interest-only period ends, however, if interest-only payments were made (you can choose to make regular principal + interest payments during the I/O period) your monthly payments will significantly increase when your required monthly payments start to include principal, plus interest.

Adding any unpaid principal from the first 10 years to the principal due on the remaining years of the loan plus interest due on the remaining portion of the loan can result in what is commonly referred to as “payment shock.” You should carefully consider payment shock when considering an I/O payment option. Interest-only mortgages start with monthly payments that include only the loan’s interest.

After this initial interest-only period ends, however, the monthly payments can significantly increase when these payments then start to include the principal. This is called amortization. When an interest-only loan starts amortizing, the monthly payment amount increases, as you begin repaying principal in addition to interest.

A good measure to determine if your debt is getting out of control is determining what your debt-to-income (DTI) ratio is.  If your DTI ratio is close to or higher than 36% then you should be working to reduce it.  Lenders use DTI to determine if a potential customer can afford to take on extra debt.  The preferred maximum DTI varies among lenders, however, 36% is often used as the maximum.

So how do you determine your debt-to-income ratio?  You first have to determine what your monthly payments are to service your debt.  For example, let’s assume your monthly debt is as follows:

Car loan = $300
Mortgage = $1,100
Credit cards = $500
Other debts = $400
=============
Total debts = $2,300

Now let’s assume you earn $60,000 per year, which equates to $5,000 per month.  You debt-to-income ratio is $2,300 divided by $5,500 which equals 0.46 or 46%.  This is very high and a person in this situation needs to take quick action to reduce their debt.

So what can you do to reduce your DTI ratio?  You can take the following steps:

• Increase your monthly payments to service your debts. Applying extra payments to the principle will lower your overall debt faster.
• Stop taking on additional debt.  The more debt you take on, the higher your DTI ratio.
• Delay large purchases until you have more savings. The larger your down payment, the lower your monthly cost, thus decreasing your DTI ratio.
• Calculate your DTI ratio monthly to determine if you are making progress.
• Earn extra income by finding a new job or additional work (part time) to pay down your debt faster.

Keeping your DTI ratio at a manageable level is one of the foundations of good financial health.  A manageable DTI ratio also gives you peace of mind that you can handle your financial responsibilities and will help you qualify for credit to purchase things your really want like a new home.

How knowledgeable are you about insurance?  You can test your knowledge via The Insurance Intelligence Quiz.  It’s a fast quiz; however, the majority of Americans who took the quiz only answered 40% of the questions correctly.   The questions test your basic knowledge of auto and health insurance. I took the test and scored a 70%.  How did you do?  Leave a comment below.

The foreign exchange market, or forex, FX, currency market is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world act as anchors of trading between a wide range of different types of buyers and sellers 24 hours per day except weekends.  The foreign exchange market assists international trade and investment by allowing businesses to convert one currency to another foreign currency.  As an example, a European company can import U.S. goods and pay dollars, even though the business’s income is in Euros.  The foreign exchange market is the largest and most liquid financial market in the world where traders include currency speculators, corporations, governments, large banks, central banks and other financial institutions.

Forex trading, or foreign currency trading, is when a trader will pair 2 types of currency (i.e., British Pound and U.S. Dollar) that requires more of one currency to purchase another that loses value.  Traders from all around the world monitor currency fluctuation to accumulate currency when it weakens in hopes of selling it when it increases in value.  Forex trading isn’t much different from stock trading where traders try to buy low and sell high.

Traders on the forex market exchange acquires currency by giving a bid/ask quote which states he/she is will to buy for example 2 marks per dollar and sell them at 2.125 per dollar.  Most people who are traders buy the currency via a bank that is paid a commission which has to be taken into consideration to calculate their spread or profit margin when they sell.

Anyone with a computer and some training can become a forex trader.  However, forex trading isn’t an easy way to get rich.  Many people have lost a considerable amount of money miscalculating the market.  There are many training classes and software (or robot trading) promising to help you make money!

Forex trading has increased in popularity over the years and on some days the forex market exchange witness more than one trillion dollars exchanged.

If you are starting a business the U.S. Small Business Administration (SBA) can help you get a mentor, write a business plan, finance start-up, buy a business or franchise, lease equipment, protect your ideas, and a whole host of other services.

If you own a business the SBA can help you to make decisions, manage employees, market and sell, pay taxes, get insurance, forecast, finance growth, etc.  The SBA can even help you to eventually sell your business, transfer ownership, liquidate assets, and file bankruptcy.

Some of the most requested items from the SBA are getting a business loan, business grant, business license, tax identification number, business certified as woman or minority owned, etc.

Many existing large companies started out with help from the SBA which include Stapes, Sun Microsystems, Apple, Jenny Craig, outback Steakhouse, Cray Research, Calloway Golf, Intel, Costco, Ben and Jerry’s, Nike, America Online and FedEx. (See video of the SBA Introduction above).

The SBA started in 1953 by the federal government as an independent agency help, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation. The SBA helps Americans start, build and grow businesses via an extensive network of field offices and partnerships with public and private organizations, SBA delivers its services to people throughout the United States, Puerto Rico, the U. S. Virgin Islands and Guam.

For more information visit SBA.gov.

The main two types of life insurance are term life and whole life, however, there is also universal and variable which are variations of whole life insurance.

Term Life

The difference between term and whole life is that term insurance covers you only during the life of the policy while you pay the premiums.  If you have a 30 year term life insurance policy, pay your premiums for 25 years but stop paying and then die, the policy will not pay.

There are three types of term life insurance:

Level Term allows you to pay a fixed premium up to 20 years.  This is a good deal because your premium will not change if your health changes for the worst and it protects you against the effects of inflation.

Annual Renewable Term gives you the option of renewing your policy regularly, however, at increasing premium rates.

Decreasing Term steadily decreases your death benefit.  This may make sense for people who have a family when they are younger and are the breadwinner. As they grow older into retirement with adult children and a nest egg, they don’t need a large death benefit.

Whole Life

Whole life insurance is designed to cover people for their entire life.  Whole life charges a fixed premium each year and is typically higher than term life.  The advantage sold by many insurance companies is that part of the premium resides in an account that pays interest and accumulates a cash value.  The remainder of the premium covers term insurance. As the accumulation of cash grows in a whole policy the premiums can decrease and can eventually pays the premiums.

Unfortunately, whole life insurance tends to pay low interest rates to policyholders, while the insurance companies earn a much higher return because they invest the money in stocks and bonds.  As an investment whole life insurance isn’t desirable to most.

Universal Life

Universal life is a form of whole life insurance that combines term insurance with a savings feature which is invested in a tax-differed account.  In years when the insurer earns more on policyholders’ accumulation accounts than promised, they pass along the extra gain to policyholders.  This may sound good, however, in some situations, customers can end up paying more than they expected because of overly optimistic assumptions insurance companies make about customers returns.  

Variable Life

Variable life is also a form of whole life insurance that has a cash value that is invested in equity or debt securities.  Policyholders can change and select different investment instruments.  The insurance company guarantees a minimum death benefit amount, however, policyholders bears the risk of the securities investment.

Below is a chart comparing term, whole, universal and variable life insurance policies.

The 10 largest insurance companies are listed below:

American International Group
Berkshire Hathaway
UnitedHealth Group
WellPoint
MetLife
Allstate
Prudential Financial
St. Paul Travelers
Aetna
Hartford Financial Services

Relevant Post: Get quotes for life insurance policies

Below is a video of How to Calculate Debt to Equity Ratio, compliments of Investopedia.