Thursday, April 26, 2007

Wire Transfers

I'm breathing a bit easier this evening, as Bank of America has informed me that I have a pending wire transfer. My funds should be available at least by Monday, and that's what matters. Incidentally, I have made about 3.87% since the beginning of the year on that money. In contrast, the money I have with Merrill Lynch has made about 6.41%. Both of these numbers are before advising fees. In contrast with both of those, I have a realized gain of 9.63% plus an unrealized gain of 1.02%, totaling a 7.55% gain in my E*TRADE account, not including excess cash that earns 5% per year. So, the account I closed would appear to be my poorest performing. A good decision.

And on Monday, I will officially buy a house. Hopefully also a good decision.

Monday, April 23, 2007

Financial Advisers

When talking to your financial adviser about closing an account in order to make a down payment on the house you are about to buy, where does responsibility lie? In our conversation a couple weeks ago, he asked when the closing date was. I said my closing date was May 3rd. He then commented on how it should be OK, then, to not overnight the request to close the account. I agreed. He wrote down that the account needs to be closed sometime before May 3rd.

This is so far from what we agreed on. There was a choice on whether to use fast or slow mail, not on when to send the request to close the account. Admittedly, the stock market has gone up quite a bit this month, so by waiting I have made an extra 1-2 thousand dollars, probably, but that doesn't make his actions right. I said I wanted my money, and he kept it from me, telling me one thing and doing another. I'm not happy.

AMD Options Assigned

As I discussed in an earlier post, I bought 300 shares of AMD at $13.00 each, and wrote 3 options contracts to sell at $14.00 with a $0.30 premium. Well, on Friday AMD closed at $14.16, which is more than $0.05 in the money (the most common automatic exercise threshold). Not surprisingly, then, my contracts were assigned.

So, I automatically sold 300 shares of AMD at $14.00 with a $20.06 commission. I'm not sure how the commission is computed, honestly. But, I made $300 - $20.06 in the sale, plus $90 - $15.24, minus the original purchase commission of $12.99. All together this is a profit of $341.77, which is an 8.76% profit on my initial $3900 investment under a month ago. Not too bad.

Even better, I really do think AMD will go down in price again, and I don't think I would have sold my shares otherwise. So, I'm locking in some profit that would otherwise have been likely to disappear in the near future. This is a short term capital gain, however. Also, I'm more impressed with the rate of return than the actual dollar value of the profit. Still, $350 is most of a washing machine.


On Saturday, I went to Nebraska Furniture Mart with Carrie. We started by looking at washers and dryers, but were pushed into refrigerators by an annoying old salesman. So, we looked around at fridges for a bit. Eventually, a less annoying younger salesman asked us what we were looking for. Carrie had some sort of concern over having the freezer on top, and I had practical concerns over having the freezer along the side. So, we ended up with a freezer on the bottom (honestly, what's the difference between this and on the top?) with split refrigerator doors.

My brother said I should get stainless steel for the resale value, but all my other appliances are currently black. I also don't think this will be the same fridge I'll have when I sell the house, so I went with black and saved a few hundred dollars. The fridge was regularly priced at $1,419 or thereabouts, but I got it for $1,163.88. I opted for the extended warranty, so I may have wasted $70. But, it's probably a better investment then the lottery tickets I buy.

Shipping is $44.00, and taxes were $81.78. This gives me a final price of $1359.65, which is lower than the regular starting price. Still a bit more than I was originally planning, but I'm content.

We briefly looked at washers and dryers again until the old guy said hello again and we left. I later looked online, but prices were much higher there. This makes it very difficult to intelligently pick a washer. But, I think I will get the set for about $499 each, putting my total cost of all appliances at around $3000, which is what I had originally budgeted. I'll also need a big TV eventually. $$$.

Sunday, April 22, 2007

Prepaying Mortgage vs Investing

I've been debating on whether or not to buy points on my mortgage, and then whether I should pay extra on the principal or not.

Let's tackle the second question first. There are many issues that disappear when you properly phrase the question. So, we'll have the goal of maximizing net worth at the end of the mortgage term.

House Appreciation: No matter how much of the house you own, it will appreciate at the same rate. Paying down the principal does not affect the value of your house. The only time paying down the principal helps with regards to house appreciation is if you sell it earlier or refinance the loan. You will then get more money from the sale or have to finance less. In my case, where I'd be more likely to keep the house and rent it out after I move, this is completely irrelevant to my final net worth.

Rate of Return: The rate of return on an investment makes all the difference. If the interest rate on the loan is 6% (as mine is likely to be), then paying down principal is effectively a 6% investment. This beats CDs and high-yield savings accounts, and is a guaranteed rate of return. However, the stock market in general tends to beat an 8% rate of return. For instance, last year I made about 14%. Currently, my E*TRADE account has earned 8.88% for the year (which is not a balanced account, and so fluctuates wildly).

Tax Considerations: Money invested is subject to income tax or capital gains tax. Assuming a 25% effective tax rate, my investments must earn a (.06/.75) = 8% rate of return. Well, my investments usually do earn 8% or greater! Plus, paying down principal reduces the amount of interest you pay, which increases your tax burden (interest being deductible).

Points: Buying points is an investment in a lower interest rate and a lower monthly payment. What is its rate of return? The value of a point varies over time and over the interest rate scale. For instance, currently moving from 6.125% to 6% costs .375 points, while moving from 5.875% to 5.75% costs .75 points. At 6%, my $232,000 loan has a monthly payment of $1,390. At 6.125%, it goes up to $1,410. 0.375 points costs me $870, and saves me $20/month, or $240/year. This is effectively a 25% return on investment. Given this new outlook on the value of points, I will need to talk to my mortgage guy again and figure out what is going on in more detail. Not every company has the same point scale, so it may just be that right now E*TRADE happens to have a favorable points system.

The other issue with points is that it also reduces the interest paid, and therefore increases your tax burden. Even still, the numbers above make it seem to be a solid investment.

Psychology: Even though paying down principal is logically a fairly conservative investment, there are a number of psychological advantages. First and most importantly, it feels good to not have so much debt, and to not have so many years left on the mortgage. Second, the more equity built, the more you feel like you have flexibility to sell or refinance. We'll see what I end up doing after my cash flow stabilizes (i.e., after I finish buying appliances, televisions, and furniture).

Monday, April 16, 2007

File server fixed!

I'm almost positive that my file server is fixed! I am very excited. I can now fill up the remaining 600GB (of 2048GB).

What was the problem, you ask? Well, it would appear that the voltage applied to the DIMM sockets was set at 1.9V instead of 2.1V. I'm not sure if I should blame the RAM's SPD data, or the BIOS for ignoring said data. I'm betting it's bad data on the RAM, because the Corsair Memory website listed both 1.9 and 2.1 as the tested voltage in two different places. They appear to be confused.

Either way, manually setting the DIMM voltage to 2.1 allowed memtest86 to run for a full 24 hours, which is hasn't been able to do for a long time. It's time to plug my hard drives back in, boot up, and transfer some very large files!

Saturday, April 14, 2007

Mortgage options

I had a meeting with my mortgage representative on Thursday evening. It was a pretty standard meeting where he went over what he could offer, what all these papers in the loan application were for, and what I could expect in the next couple weeks. It looks like my closing costs will be slightly higher than what I can get online, but my interest rate will be on the lower end of the spectrum.

I don't feel too bad about paying a bit extra though, for a few reasons. One, and least importantly, he's my dad's friend and they have a group lunch every third Thursday. Two, I will have someone to work with in person. Three, he told me about closing at the end of the month instead of the beginning to avoid what would effectively be an interest-only payment on the first month. Four, he claims to be keeping an eye on the rates and corresponding market, and that he'll call me and tell me when he thinks is the best time to lock in the rate.

So, I've moved up my closing date to April 30th instead of May 3rd. I've officially applied for the loan. I should be getting 6% or less. It's one of those situations where I hate how the market only adjusts in 1/8% increments. I'm not paying for any extra points, as it would take me 8-10 years of saving the monthly payment reduction to break even on the cost. Given inflation and the like, I think I'm better off keeping the cost of the points where it is - invested in various things.

I'm hoping to do an analysis soon of whether or not you should pay extra every month in order to pay down the mortgage faster. So, look forward to that.

Tuesday, April 10, 2007

AMD and Call Options

Today, AMD spiked up as high as 13.61, from a previous close of 12.86. This spike prompted me to go ahead and write 3 April $14.00 call options. Since no one else knows what I'm talking about, I'll explain a bit. A call option allows the holder to buy shares of a stock at a given price (the strike price). Option contracts are typically for 100 shares. The writer of a call option owns these 100 shares, but promises to sell them whenever the option holder asks for them. For this right to buy stock at a set price, the option holder pays the option writer a premium (quoted per share).

A little while ago I bought 300 shares of AMD at $13.00. Thus, I can cover 3 contracts worth of call options. That is precisely what I did. April's expiration date is the 21st. This means I sold the option to buy 300 shares of AMD at $14.00 at any time before the 21st of April. Someone paid me $0.30 per share for this honor. So, I made $90 today, minus $15.24 of commission ($12.99 + $0.75/contract). So, $74.76 in profit. Since I paid $3912.99 (including commission again), I made 74.76/3912.99 = 1.91%. This is also immediately available cash - not just a paper gain.

When these options expire, I will either have sold my shares of AMD for a 7.7% profit (in about 3 weeks), or I will have the shares and be able to write more call options for May. I see the latter as far more likely. AMD got a boost today by saying they won't lose as much money as everyone feared, and that they'll be restructuring the company to cut costs. I don't see this as a lasting price increase, yet. This month is a risky month for options writers, though. AMD releases their 1Q results on the 17th. If they did better than people expected, the price could spike, and I may have to sell. Still, 7.7% (plus the 1.9% made today!) is very acceptable.

Offer accepted

One thing I forgot to mention last post was that the house sale was being handled by a relocation company. Being on the market for 132+ days meant they really wanted to get rid of it. They countered my offer of $280,000 with $292,500 at about 10:30 this morning. I countered back at $290,000, which they accepted.

I've been hopping up and down all day (on the inside, at any rate). I called up one of my financial advisers to close out an account to cover the down payment. That should be a pleasant check to get in the mail.

Now begins the search for a mortgage. Quite a few people have people I should talk to. IBMers get several discounts, so I need to look into those. Then I need to shop for a refrigerator and a washer/dryer set. I also need to do all the appraising, inspecting, and whatever else. Not a terribly fun-sounding set of activities, but definitely very exciting.

You know what else is really exciting? I'll be having a housewarming party! If you want to make sure you are invited, leave a comment!


Sunday, April 8, 2007

Made an Offer

Last Sunday, I went to open houses, as usual. I found [1386311 - 20981 W 116th St - $310,000], which has an amazing backyard. It's got a two-story deck with a screened in sun room (which they filled with a hot tub that wouldn't stay). The yard continued on into a park with sand volleyball, community pool, and a basketball court and playground. The location is fairly ideal, and it's got a lot of cool things about it. My mom found the kitchen to be a bit small, and I found the basement to be a bit smaller than I'd like.

We also found [1376482 - 14557 S Greenwood St - $289,000], which was better than [1375753 - 14116 W 53rd Tr - $288,500] from last time, and in a better location. I still wasn't in love with it for any reason, but it had a decent yard, and was surrounded by nicer houses (which can help resale, apparently).

On Friday, JD and I went to 7 houses, including [1385690 - 15969 Clairborne St - $299,950]. It's a very open house, has a large basement (in two main sections), and large bedrooms. While walking through it, I kept asking, "Where are the negatives?" The only two we could find were the small backyard and the tandem garage. But, the backyard doesn't have a fence to the right, so it opens into the neighbor's yard, which is nice for now. A three-car garage would help while having roommates, but it's not necessary, really. If you go look at the listing for this house, don't worry about the two bedrooms in the basement - they're actually on the top floor with the rest.

Yesterday (Saturday), JD, Carrie, my brother Brian and his girlfriend Aimee, and my parents all joined me in visiting these top three houses. We saw them in reverse order. Everyone liked the Clairborne house and found the Greenwood house lacking. As much as we liked the 116th St house a week ago, it just didn't compare to the Clairborne house. It's considerably smaller, a bit more expensive, and more cut up into actual rooms, instead of areas. The greenspace was the main selling feature, we felt. But, you can't add openness to a house, or much size. For the price difference, I could add a pretty nice deck to the Clairborne house, if I really wanted to. The basement wasn't as nicely finished in the Clairborne house, but it was much bigger, should I ever want to upgrade it.

So, I went back to my parents' house and watched some tennis until JD showed up with some paperwork. He talked about how the comparable houses in the neighborhood have been selling for more, often, and how the subdivision is ending its new construction, which means houses in the area should start to appreciate more. Basically, that this appears to be a pretty good deal. So, we drafted up the paperwork and I signed an offer for $280,000. This includes a home warranty, but little else. Being vacant, there is no washer, dryer, or refrigerator to negotiate over. Once we agree on a price, we can add in closing costs so I can finance those as well. The owners bought the house for $265,000, though, so at $280,000, minus 6% in agent commissions, they'd only be taking in $263,000. The $299,950 asking price is after coming down from about $330,000, so I'm not sure how much lower they can go. We'll find out, though!

I'm pretty excited about the house. It's over 4200 finished square feet for under $300,000. It's located right around 159th and Ridgeview, so it's close to at least one friend from work. The basement has a little exercise room or den, which would be perfect for our LEGO room. At 151st and Ridgeview is Garmin, so it's possible my brother can keep me with a supply of roommates. So, my brother can come over and play ping pong or darts after work, and it's got fairly ready access to I-35.

So, probably a $290,000 house, $230,000 in debt, an extra little bit in monthly income, and lots of maintenance. But, I'll have a house of my own, and I'm pretty happy about that.