With the Federal Reserve busy raising interest rates, Doug in Minnesota is steamed that banks get a better deal when they borrow from the Fed than he does when he borrows from a bank. Meanwhile, in Wisconsin, Kimberly and her husband are wrestling with one of the toughest but most basic personal finance questions: just how do we go about making a will?
BANKING BOONDOGGLE?
It doesn't seem fair that the (Federal Reserve) member banks can borrow money at the so-called discount rate and lend it out at whatever higher rate they want. If only all businesses and individuals could get the same deal. Seems like they can't lose. Am I oversimplifying?
-- Doug G., Rochester, Minn.
That’s why they call it the “discount” rate. Think of it as the wholesale price for short-term money. Usually, if you buy in volume, you get a good price. So maybe if you routinely borrowed billions of dollars overnight, you could get the same deal.
But the Fed's "discount window" is only one place to raise money. Banks and other finance companies can, and do, borrow directly from the capital markets by selling what’s called commercial paper. (At this writing, there's sloshing around in the system.) When General Motors lends money to car buyers, for example, it sells billions of dollars worth of debt to finance those loans. It's the same process the U.S. Treasury Department uses to raise the cash to pay for the federal budget deficits that Congress can’t seem to get under control.
In each case, the market -– not the Fed -- decides how much it’s going to pay for this long-term debt. When GM wants to borrow, the market takes a look at its credit rating. Riskier borrowers pay more -- in the form of higher rates. The process is not a whole lot different than a lender looking at the “FICO” score assigned to you by the credit agencies. (But GM gets a better deal by borrowing billions than you do when you borrow $50 to fill up your gas tank with a credit card.)
In much the same way, a lot of the money you borrow originates with sources other than that “discount window” at the Fed. When you look for a mortgage, the money you get to buy your house likely comes directly from the capital markets, not a bank vault. Your mortgage gets bundled up with lots of others that are packaged together, chopped up into pieces and then sold to investors as “mortgage-backed securities.” The process frees up more money to lend to the next borrower, but it also means the market sets the rate charged for the money you borrow. That’s why the Fed has little or no control over long-term interest rates.
The same market forces drive savings rates. In the old days, the only way most consumers could get paid interest on their money was by depositing it in a bank. That savings rate was also set by regulators -– giving the bank another way to mark up money. They’d pay you one rate for savings and lend the money out at a higher rate to borrowers.
Today, you can buy certificates of deposit, Treasuries, or shares of money-market mutual funds that invest in a variety of savings instruments in volume. As a result, banks pay very little interest on (and to) savings accounts these days. There are much better ways to make money. Like charging you a fee every opportunity they can find.
PROPERTY POLL
Why not ask for a vote among your MSNBC.COM readers whether they think "eminent domain" actually is viable in their eyes? I suspect a majority are like me -- thinking it SUCKS !
-- Norman A., Arlington, Texas
We did. And you’re right.
Of the nearly 120,000 MSNBC.COM readers who voted, something like . We can’t say whether or not that’s a record negative response, but it’s got to be pretty close.
WILL POWER
My husband and I have been talking for ages to get a will but are having a hard time trying to figure out the best route to go. Should we do it on our own, something quick and simple over the Internet or work with a lawyer? And what to include to take care of our two daughters (7 months and 11 years old) in our absence?
-- Kimberly, Pewaukee, Wisc.
Unless you have a solid understanding of the process and the laws in your state, you really should see a lawyer. There are a few basic questions to think about before you get the ball rolling. The more time you spend coming up with the answers, the easier (and cheaper) it will be when you get to the lawyer’s office.
The most important, with respect to your kids, is the naming of a guardian -– a friend or relative who would be legally responsible for them if you and your husband both died before they become adults. You’ll also need to name an executor -– the person who would attend to the details of making sure your will is followed: signing papers, making all the little decisions that are not spelled out in your will, etc. So take the time to discuss this with your husband, and check with the people you choose to see if they’re comfortable acting in these roles.
Depending on how much money you have, you may also want to set up a trust for your kids until they reach a certain age. (This can also ensure that your money goes to their care.) You don’t have to be rich to consider this: if you own a home, you’ll have substantial assets building up as you pay down your mortgage. If you decide to set up a trust, you’ll need to name a trustee to manage those assets.
You may also want to designate the bequest of specific property to specific individuals, but it’s often better to leave that up to the executor. If there are certain charities you’d like to leave money to, this is where you can name them. Some people also like to include details about their funeral or burial, but that’s also not necessary.
And you may want to consider what’s called a “living will” –- which spells out what kind of medical treatment you and your husband want to be given in the event that you are incapacitated or too sick to provide the doctor with those instructions. You can also spell out under what circumstances one spouse transfers “power of attorney” -– essentially, legal control over your personal and financial affairs -– if the other one becomes incapacitated.
It’s a lot to think about. Once you’ve come up with the answers, the preparation of the will is pretty straightforward.
And keep in mind that state probate laws governing the process differ somewhat. So if you move to a new state, you should update your will to make sure it conforms to that state’s laws.
FIVE-YEAR MORTGAGE
Is there a five year mortgage? If yes what is the rate? I am thinking about paying off my loan as soon as possible
-- George, Atlanta, Ga.
We don’t know of a lender that offers home mortgage with a 5-year term. But if you can’t find one either, you can just make your own.
Just find a lender that doesn’t demand a “pre-payment penalty” (most don’t) and then pay off the loan in five years. If you’re sure you want to do this, you may want to go for what’s called a 5/1 Adjustable Rate Mortgage (ARM). It’s fixed for the first 5 years, and then floats depending on the ups and downs of market interest rates. So you get the advantage of knowing what you’re monthly payments will be for the first five years, but you’ll get a better rate with an adjustable long-term rate than with a fixed rate.
According to www.bankrate.com, the average 5/1 ARM rate this week is 4.65 percent. Check out the site for rates in your area. They also have a that will let you figure the payments for a five year term.
--R.A.K., Salt Lake City, Utah