3Ma.  I actually currently work in support of the part of our bank that makes modifications for customers, and they can be ones that are backed by the federal government, or can be ones that the banks do on their own. One of the criteria for people to qualify for these modifications is for there to have been some event in their lives, such as a job loss, divorce, or medical hardship, that has caused them financial difficulties.


To qualify for a modification, customers submit paperwork like they did when they originally applied for their mortgage. Based on the rules that are in place, a reduced payment is set up for them. The customers need to make three timely monthly payments of the new amount in order to complete the trial period. If they are successful in doing this, they will be considered for a permanent modification, which is essentially a new loan with the payment amount they were paying during the trial period.


As long as a customer has applied for a modification, the lender cannot foreclose on the home. If for some reason the customer does not qualify for a modification, there are other options possibly available to them such as a waiver from making payments for a few months. Banks are indeed willing to work with customers, since foreclosing on a house is one of the least beneficial options to the bank (but it's better than letting someone live in a house for which they are making no effort to pay on).


Has anyone heard of loan modifications before this? Has anyone gotten one, or known someone else that has?


3Mb. I think that getting a retirement check from the military is a great advantage to many people.  My family has benefited from this, especially just recently.

As you know, my father passed away recently, yet he is still taking care of my mother as a result of smart decisions made during his life.  He was in the Air Force for twenty years, and worked an additional fifteen or so years as a Civil Servant.  He combined his years of service to get a decent retirement check every month.  Now that he has passed, my mother will receive this check, as well as his Social Security check, for the rest of her life.

In addition to this, he had a couple of insurance policies that will allow my mother to pay off their house and car, and to have a good lump sum in the bank "just in case".  Since the house and car will be paid off, her only expenses will be her living expenses - groceries, utilities, etc.  She will have plenty of money to meet those expenses, and will not have to stress out about whether or not she has enough money to pay her bills.  She has enough to think about right now, and knowing that she has no money worries is a real blessing.

I know that defined benefit retirement plans like this are not common these days, and that even the military has made it harder to retire with benefits (I think the years of service has been raised from the 20 years that it was when he retired).

Does anyone know of any companies or organizations that still offer these?

What other types of plans would anyone suggest for taking care of their loved ones?


3Mc. I understand where you are coming from when you say to make extra principal payments when interest rates are low.  However, I don't think that it is as simple as that.  The person's total financial situation needs to considered.

For example, suppose that person had credit card debt at 10%, while the ARM was at 4%?  If this person had any extra money to pay on debt, they should apply it to the debt with the higher interest rate, which would be the credit card in this example.  There are actually two reasons in this example why the credit card debt should be paid down first.  First, the interest rate is higher, so the person would save interest expense when reducing the principal of the higher interest rate loan.  In addition, mortgage interest is tax deductible, so if that client itemizes deductions, there would be an after-tax benefit of carrying the ARM.

Having said that, it should be noted that if there was not any other debt, they should indeed consider paying extra principal payments on the ARM.  Doing this, or possibly just socking cash away in the bank, might be good ideas.  Nothing beats having cash available at a moment's notice!

What does everyone think?  Are there some other finance tips that should be shared?


3Md. Adjustable Rate Mortgages (ARMS) are definitely not for everyone.  If someone knows that they will be in their house for only a few years, then an ARM might be a good option.  This is because they will be out of the house before the interest rates rise to what the fixed rate would have been had a fixed rate mortgage been taken.  However, one never knows where life will take them.  We bought our house back in 2000, and decided to get a fixed rate mortgage, even though an ARM would have been cheaper.  With a fixed rate mortgage, you KNOW what your payment will be for the life of the loan, no matter what.  With an ARM, you might end up staying in the house longer than expected, and end up having a higher interest rate (and payment) than you can afford.

We were certain that we would be in our house for seven or eight years, but it has now been fourteen years.  I know that this is because of the mortgage crisis over the last few years (that ate away our equity), as well as the uncertainty in the job market.  Hopefully things are getting better, but you never know what will happen in the next few years.  Perhaps even a worse situation will arise, and we will long for the days of this last crisis.  :-)

What are other thoughts about ARMs, economic uncertainty, or other mortgage financing options? 


3D1a.  Credit risk is an interesting subject, especially as it relates to personal credit scores.  Most people would assume that if someone has little to no debt (and never did), they would actually be a good risk for a lender, since there would no other lenders competing for the borrower's payments.  However, a situation like this is a little tricky for a lender, since they really have no "track record" of how the borrower pays on money that they have borrowed.  Sure, they may have no debt, but if they have never really learned how to borrow and make payments, they may not be a reliable borrower.

Situations like this are reflected in credit scores, as someone with little credit history may actually have a lower credit score than someone with a lot of debt that always pays back their loans.  It almost seems as if there is some "sweet spot" of borrowing and paying back loans that results in the highest credit scores.  Borrowing too little hurts the credit scores, as does borrowing too much.

There are several other factors that can impact a person's credit score.  Can anyone name some other factors?  Does anyone have any credit score experiences that they care to share with the class? 


3D1b.  When you mentioned that it is sometimes mandated that troops take financial classes, it reminded me of when I have heard many people state that high school students be taught financial common sense.  

I don't suppose that it really is, unless you specifically elect to take something like bookkeeping/accounting. While I do tend to agree with these sentiments, I have become painfully aware that high school students don't quite understand the importance of such information, and as a result, will not pay as much attention to the subject matter as they should.


Then, they go off to college and have to learn these things while also learning what it is like to be in college. I remember when I was in college (I started college 30 years ago - yikes!), ATM's were just starting to really get used. Unfortunately, many students didn't understand the concept of items that may not have cleared yet, and assumed that the balance reflected on their ATM receipt was the amount of cash available to them. Needless to say, when those outstanding items started to clear, the students quickly learned the meaning of "NSF Fee"!


We are trying to teach our 10-year-old about how to manage money. She doesn't get an allowance, but occasionally has an opportunity to earn money by doing extra chores around the house. Whenever she does earn money (or is given money by grandparents), the first thing we have her do is set aside 10% to give to church. With the remainder of her money, she is allowed to occasionally shop at her school's store, buying a pencil sharpener or something else that she wants. We also will let her buy items for herself from Target and/or Wal-Mart. What is funny is that sometimes she has more cash than we do, and we have to borrow a dollar or two from her. I have used this opportunity to teach her about interest. So, when we borrow a dollar, she charges us $1.10 to pay her back. I guess we have taught her well!


Can others in class share how they have taught, or been taught, how to handle money?


4#9a. Clearly going back to the old formula was a smart move.   I liked the New Coke Better---- and I think it would have taken market share from Pepsi.

Do you think it was a mistake to sell both Coke and Coke Classic?????

I have heard that it was a marketing ploy, that the entire time their plan was to bring back the original formula.   Thoughts on that?

I was in grocery store today,   The Coke guy was stocking shelves down the aisle from the Pepsi guy-------  I waited for a brawl----- but nothing happened.


4#10a. As I have stated--- I like to keep things simple.  To that end I offer and simple explanation of Capital Budgetting.   It is not Perfect,  it is not as good as some others that are posted.  However, I think it 

is in simple enough terms that everyone can understand it,  then use that understanding to modify the my explanation for a given circumstance as appropriate.  

I think of Capital bugetting as planning for and budgetting for an Asset that is large enough that you will put it on your balance sheet and depreciate it.    Large equipment, a building, a renovation, a new software systems and things like that.   This involves how you are going to pay for it---- can you just write a check for a $100,000 or do you finance it.   Can you make those payments?    How will this impact cash flow, income statement and balance sheet.
In a Billion $ company, it is likely that a $100K machine is not even a blip on the screen, write the check, put in on the books and depreciate it.  In a $1Million company---- it is likely to be a big deal.

If you transfer this back to your personal lives,  it would be planning for things like a new car, a home,  a Boat.   It could also be a college education, retirement savings, a remodelling in your home.



411a.  The cost of capital is the price it cost to finance a business.  It can also determine the cost to fund a businesses project.  It can greatly affect a long term financial decision because the cost will have to paid back or made up with the project that was financed.  I would believe that a low cost of capital would be preferred.  This is because cost of capital would either come from debt or equity.  If it is debt than it must be paid back, so the smaller the debt would be ideal.  Same goes for equity, the smaller the amount need to be pulled from a company's equity the better.  

Since I have no previous knowledge of finance or my company's financial decisions I'm not to sure as to the affect cost of capital has had on the hospital I work at.  However, I would imagine it greatly affects them.  For example, the hospital is currently expanding their operating room to twice its current size.  The cost to finance the construction and new equipment is a long term investment that I believe was financed through debt and equity.  I would assume they used both financing means because of how great the cost will be.  


411b.  The cost of capital is how much extra is paid for the use of funding. Using Huffman Trucking as an example, the purchase of a new semi would likely be completed using financing. A new truck can easily cost upwards of $100K; a new trailer would add another $20K. The assets being purchased would be used as collateral, but interest expenses will be incurred. The interest paid, along with the loss of any cash being used as a ‘down payment’ are included in the cost of capital. Funds that are used to purchase assets are not available for other purposes.

Interest rates vary for businesses in the same fashion as they do for individuals; credit worthiness may result in a lowered rate. Businesses just starting out will not have a credit history and would likely have higher interest rates applied to any loans.

Some businesses would have higher capital costs than others. Huffman Trucking relies on equipment to make money. My employer is a consulting firm and therefore deals primarily in human resources. The cost of capital between these industries is not comparative, and is more like ‘apples and oranges’.

Long-term financing is assumed for purchases such as buildings. There may be potential for tax deductions with regard to interest, and depreciation may represent a financial benefit. Most companies would not have assets on hand to pay for these types of items; even if they did, it would likely be a wiser choice to finance the purchase so that liquidity can be maintained.



411c. The concept of cost of capital is simple; it is basically the overall costs of financing a business.  The concept of cost of capital is also used by companies to project if they should continue with certain projects.  The cost of capital is significantly different in every company.  Cost of capital can affect long term financial decisions tremendously because a company may have to cut certain projects or add certain projects based on the funds.  A company would prefer a low cost of capital because that could be that they are not netting a whole lot of profit and a company wants to be as efficient as possible.  The effect of cost capital on long-term financial decisions on my company is pretty significant because we are a benchmark company who tests cell phone service all throughout the world for big companies such as: T Mobile and ATT.  So if ATT decides to take a project away from us it would have a pretty significant impact on the company as a whole because people would not have work to do and we might have to down size.  


412a.  Some major areas of risk in financial management are misuse of funds, tax liabilities, and even general management controls.  Since the hospital I work at is a non profit organization I imagine that misuse of funds, tax liabilities and investments would all be major areas of financial risk.  The hospital receives a lot of gifts and funds for specific reasons.  For example, another organization or family might want to donate funds for a new waiting room, and if these funds are not managed properly or misused than the funds can be withdrawn or the hospital could face legal issues.  So misuse of funds is a very important area of financial management for the non profit hospital I work at.



412b.  The major areas of financial risk in my organization are the impact of health care reform, Medicare reimbursement, and patient co-pays. These areas contribute to the uncertainty of reimbursements. For these reasons, senior management must identify, measure, monitor, and review all services that we provide to ensure that they are cost effective and we incur no loss. Revenue cycle and quality care are the focus to help eliminating or mitigating risks.

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