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Five Awesome Questions From You: Mortgage, Credit Cards and Retirement

We haven’t done a five questions episode for awhile. Here are five awesome questions from you about mortgages, credit cards, and retirement.

Your questions about mortgage rates, side hustles, rental properties, and analyzing individual stocks.

Question One

Hey guys,

It’s your long time Canadian fan Tina. I know most of your stuff is based out of the States (last time I emailed about an alternative to betterment for Canadians) but what are your thoughts on fixed vs.variable mortgage rates in Canada? My boyfriend and I have just secured a purchase on our first home. The bank has offered us a 1.97% variable rate for a 5 year term. Our mortgage would be for $400,000.

I keep reading that the prime rates are expected to go up and so it might be a better idea to go with a fixed rate while the rates are still relatively low but haven’t this been the word on the street for like ever? I mean, for the next 5 years at least, do you think we should keep with the variable or should we go ahead with a fixed rate now?

Kinda sucks that the fixed mortgage rates have now already gone up but if we’re looking at the big picture would it still be more favorable to go with a fixed rate? Any thoughts and/or insight you could share with me would be much appreciated :)

There are a few options. If you are buying rental property, fixed rate is best because you base your purchasing decision on your predicted returns and having a variable rate mortgage makes it impossible to calculate that number since you don’t know what the variable rate will change to.

If you plan to stay in the home for less than five years, a variable rate is better. You can pay the low “teaser rate” for whatever period of time it’s set for, usually between one to five years, and then sell the house before the rate is set to rise.

You can also do a mix of the two; start with a variable rate mortgage and then if the rate goes higher than you want to pay, you can refinance to a fixed rate mortgage.

Question Two

YOU GUYS ROCK MY SOCKS OFF EVERYDAY!

I’m 26 with no credit card debt, no credit, and no school debt. I live with my boyfriend and together we make a decent amount of money for podunk Mississippi but, we are spending almost as much as we make each month.

My boyfriend has okay credit, but he isn’t building it in any way. We have payments we make on a computer and a car, but they are just paid out of his bank account. I know I could switch those to a credit card if he got one. I’m not sure what cards to go for tho. I’m really liking USAA’s cards. Do you guys have any experience with those? What are other cards great for beginners?

He wants to buy a house and I’ve talked him into waiting for about a year so we can both build credit and save up a down payment. What would strategies for that you guys recommend? I will be signing us both up for Betterment very soon.

Thanks!
Kat

We have more experience with Capital One cards for those trying to build credit. Those with limited, average, or fair credit can qualify for their Platinum card. If you can’t qualify for that, they have a secured card. You pay a deposit and that deposit is your credit limit. Once you have built or improved your score, you can transition to a traditional, non-secured card.

The biggest factor in your credit score is on-time payments so the best way to improve your score is to make lots of on-time payments. You can do that by charging small, recurring charges like your Netflix or gym membership payments over a few cards. More on-time payments will ramp up your score faster than anything else.

There was quite a debate about fee vs no fee cards. Amazon has a no fee card that has good rewards. If you want a good travel card, check these out. They have fees but if you use the rewards and perks, they can outweigh the annual fee. And most rewards cards will waive the annual fee for the first year.

Be patient on the house buying front. It may take longer than a year to get your score up to 760 which is the minimum score you need to get the best rate on a mortgage and even a small difference in interest rates can save thousands of dollars over the life of the loan.

If you have less than a 20% deposit, you will have to pay for PMI. It’s an extra cost that you can avoid if you just wait until you can scrape up that 20%.

Money that you will need in five years or less shouldn’t be invested. Yes, over time you will make an average of 7% in the market but in a short time frame, you may lose money.

Question Three

I’m a little concerned about buying my first rental property out of my area (I live in SW Washington State), but properties are pretty expensive where I live. I guess I’m concerned about tenants calling for bullshit reasons (like to change a lightbulb or something) and having to pay out the ass for someone to go take care of it, or having to pay the property manager to get it rent ready again after someone moves out. Should I be worried about buying out of my area, or am I overthinking it?

Thanks for any info you can give me! Oh, and love the show! I listen to every episode. Keep up the good work!

Cheers!
Phil 

Andrew faced the same dilemma. He wanted to start buying rental property but where he lives, Hoboken, was out of his price range. He got around this by buying through Roofstock. It allowed him to buy property in much more affordable markets.

It also take away the hassle of being a hands on landlord. The key to that is a good property management company. You’re going to pay for the expenses of owning property one way or another, with your time if you’re doing things like changing light bulbs yourself and with money if you’re paying a property manager.

You don’t have to go through Roofstock, you can just use a property management company that they have vetted.

Question Four

Hey Guys,

Can you devote a show to teaching amateur investors how to thoroughly and confidently analyze individual stocks? You could identify and explain all of the publicly available metrics that should be considered before an investor decides to purchase a stock.

I currently have about 80% of my retirement savings in a Schwab Target 2055 fund and the rest is spread across a couple more mutual funds. The target date fund has done well, but I am interested in taking out some flyers on individual stocks in the future.

Mike

We have indeed done a show on this! We interviewed Al Bentley, the CEO and founder of Simply Wall Street. Simply Wall Street is a tool that analyzes individual stocks. We also did one on Google Finance which does the same.

When picking stocks, don’t focus solely on price ups and downs. What matters more are things like the fundamentals of the company and if they are well positioned for the future or part of a dying industry.

You also need to have realistic expectations. When your money is in a mutual fund, your risk is spread out. When you are buying individual stocks, your eggs are in fewer baskets and sometimes you’re going to get it wrong.

That’s not to say you shouldn’t own any individual stocks but they shouldn’t be a big chunk of your portfolio.

Question Five

The idea of early retirement, or at least financial independence, sounds kind of badass. To get there, I want to start investing the right way as soon as possible. I am thinking Betterment and cheap Vanguard funds until eventually, we can get into the high end Vanguard funds. What would you suggest we start investing in besides our company 401 k plans? I have Fidelity, which is OK in terms of fees. I want to try and do better.

Tim

You’re on the right track. Betterment, Vanguard’s Total Stock Index Fund, Admiral Fund, and Wealthfront all have low fees.

Vanguard’s Admiral Fund has a fee of just .05% but there is a $10,000 minimum to invest. If you diversify across this handful of funds, you will be in good shape. As for your 401k, we recommend only contributing up to the match. 401k’s tend to have high fees and you don’t have a lot of choice.

A fee of 1% doesn’t sound like much but over 30 years, it will eat up an astonishing 28% of your gains. You can use Personal Capital’s fee analyzer to see just how much you’re paying. You should never pay a fee over .3%

Show Notes

Ashes to Mashes, Nuts to Butts: An American amber/Red ale style beer.

Simple Wealth: Make your life easier as a real estate investor.

Tool Box: All the best stuff to manage your money.

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