First, what makes interest rates rise and fall?  Inflation?  Sure, but how about supply and demand.

Supply and demand was implied, in my opinion, but there is more to the story as I’ll point out now.

During the past financial crisis a shortage appeared and created a credit crisis.  In actuality, tons of cash were on hand, but because of economic and political events and uncertainty, the flow of money stopped – but was stockpiled.  Furthermore, an enormous amount of money was being printed by the Treasury (chartingstocks.net) thus further increasing the supply.  Supply up, rates down.  Borrowers were uncertain as well, thus the demand did decrease some.  (I realize there is always a demand for money – that’s why it’s the perfect product.)

The problem with the supply of money contains one big factor that most people cannot access and do not have…citizens can’t print money.  The government can keep printing money and increase the supply thus keeping interest rates low to fund their huge spending sprees instead of paying the market value for money like you and I would.  With the printing press in overdrive over the last couple of years, and if this becomes the way to combat high interest rates, we may never see high rates again.  Be careful what you wish for, high rates affect the yield on your money in the savings account!

So how can we as individuals do what the Big Dogs do?  The answer is the next point not mentioned in the Seeking Alpha article.

First of all, I do agree with the author about not owing more than you have to.  Debt is a double edged sword and can bite you hard, but it can be a great advantage too.  Here’s what I mean.  When the printing press gets cranking, more money is printing and this devalues the dollar.

(copyright 2010 Barking With The Big Dogs)

Stated differently, a $200,000 become worth much less than the balance.  With inflation, a item that costs $200,000 today would cost hundreds of thousands of dollars more in the future.

Inflation and devaluation are why I think the government is acting smart financially (as long as they don’t get so out of control and destroy the country).  The government, i.e. Big Dog, is devaluing the dollar and using inflation to create a spread over the amount of money they owe!

As the articles states….”presto, another killing for the rich.” However, the rich are not defined and could be individuals to governments.  Nonetheless, the article is good and why not do as the rich do?

Check out Seeking Alpha (and no I am not compensated by them), but also get a copy of Barking With The Big Dogs today!

#1.  Sell it…

Selling the house is a great way to get cash, but selling the house plays to the advantage of the realtor.  Actually the equity in the house may be more for realtor protection than the homeowners’.  Here’s what I mean.  First, some people don’t like to borrow money.  Fine.  Sell the house.  Second, and possibly more importantly, look at history.  Until the late 1990’s, Texas did not allow home equity lending.  The realtors lobbied against it.  Common myth says equity is for homeowner’s protection, but in reality, it protects the realtors market.  They need sales!

#2.  Rent it…

Renting property can take a house of brick and mortar with a ton of cash tied up into a business creating income.

#3.  Borrow it…

For homeowner’s who do not go with option #1 or #2, borrowing can be done.  However, home equity loans come in a couple of ways with vastly different approaches.  The first way is a HELOC (home equity line of credit).  A HELOC is simply an amount of money available against the house, but generally uses the house’s original value and does not need new appraisals, etc.  Simply put, homeowners are borrowing their own money.  The next way is a cash-out equity loan.  The cash-out is different than a HELOC, because it allows the current market value of the home to come into play.  Simply put, if the house has appreciated in value, owners can take the profits out of the house without selling the house.  (See why realtors don’t like the loans?)

4.  Reverse it…

Baby boomers are a big target market right now and a reverse mortgage is a hot topic.  One might be lured into the idea of getting money out without ever making a payment.  True, no payments required (with a couple of stipulations), but any money borrowed has to be repaid…by the heirs or estate for example.  If traditional thinking, meaning pay cash or get a loan and pay off the mortgage worked for past generations, why a reverse mortgage now?  Fact is it didn’t work for many people.  Therefore, if an owner needs money, or potentially will need money, why tie up an enormous amount of money into brick and mortar sitting idle for so many years?

The bottom line is how to get cash out of the home should by why put it there in the first place?

Owning a house may or may not be the American Dream we commonly hear and the answers can be broken down into areas.  Real estate decisions and financial decisions.  People spend quite a bit of time looking for a house, but what appears to be minutes in deciding about a loan or paying cash.  In reality, both are huge decision and they are separate, but equal and should be looked at independently of each other.

Read about it in Barking With The Big Dogs and see what is happening to your (and my) money every day.

Okay, so let’s look at risk.

Banks are not risk lenders, they are asset lenders meaning they want collateral to back the money they loan.

In reality, the government is the risk taker (putting tax payers on the hook) and can be seen with GSE’s.  GSE stands for Government Sponsored Entities.  Take FHA or the SBA.  These agencies will partially guarantee loans, allow for reduced requirements such as down payments, lower credit scores, reduced rates, etc. and actually encourage risky activities.

The SBA guarantees are to partially guarantee loans to banks so that borrowers have access to capital when they cannot seek funding elsewhere.  The SBA has been called the lender of last resort and is similar to an insurance policy for the bank.  I think the bank, by getting collateral and guarantees, is not acting risky, but smartly.

Let’s continue with risk.

Derivative.  What an ugly word in the financial section of the newspaper, written by  a writer and editor that doesn’t even know the Treasury is the one who prints money.

A derivative is simply a contract between two or more parties based upon an underlying asset.  It allows for leveraging.  Let me explain…

Take a stock option.  Let’s say you want to buy GM at $30 per share (trading at $32.33 right now).  You could buy a call option allowing you to purchase GM at $30 and pay a person $3.38 per for that right to do so.  If the price goes to $35 by June 18th for example, your cost is actually $33.38 and you would have made $1.62 per share.  If the stock price goes down, the most you would lose is $3.38 per share per contract, meaning 1 contract is 100 shares or $338.  If the price of the stock goes to $0 like GM did in the past, the option holder is out $338; whereas, the owner of the stock loses $3,233 for those 100 shares.  Therefore, derivatives are not always risky, but don’t take my advice…look at the Treasury….

I wrote an article about how the Treasury makes money and you can too.  Read about it here (it’s short and sweet).

Sure there are investment parts to the bank as well.  Banks buy and sell money and yes some action is risky and can be greedy.  In order to earn higher returns, more risks have to be taken.  (True for banks and business owners, etc.)  I’m not here to defend the bank, but a quick news clip or article doesn’t tell the story, and I’m not going to put 460 pages of Barking With The Big Dogs in this little article either.  Just don’t always buy the hype in a 30 second slot or the talk at the water fountain or break area.

To continue on with the Yahoo article, let them fail, in the Fed’s opinion as I see it.  Why?

Someone else will buy the assets and the government has a huge stake in the assets too.  You don’t think your loan is going away do you if you bank fails?

Take Citibank.  The government had warrants (options) to buy the company!  The sold the warrants and made money.  Of course I haven’t seen my check and wonder if I will have to pay income taxes on the gains.  The government may have sold any ownership they had in some banks, but they didn’t in GM.

Too big to fail hurts the average Joe, in my opinion, and some groups get very wealthy in the process.

Finally, take the Frank / Dodd finance reform bill; it can actually limit competition disguised as consumer protection and plays in to the hands of the big institutions or players.

It is interesting that the last line in the Yahoo article mentions the government should consider getting out of subsidizing.  Maybe that should include more than just housing.

From the title of this article, if interest rates are not the importance of the loan, what is?

Let me start by saying interest rates are important, I do understand this. Obviously, rates set the payment and determine how much interest is paid. However, on a calculator (mortgage or other loan), the rate is changed. What this means is that the rate is secondary to the loan calculation, a.k.a. amortization schedule. That’s right the amortization is more important than the rate. This is just one key factor to understanding the bank that I discuss in Barking With The Big Dogs so people can understand the inner workings of the bank. But rather than go into the real meaning behind the amortization right now, which is not to simply just show numbers with payments and interest like everyone else does, let me continue with a question…

If rates were the importance of a loan, then why do banks and credit unions build new buildings when rates are at their lowest?

(You can get the answers in Barking With The Big Dogs…but only for a limited time while it’s still available. Get a copy today before the copies are gone.)

Why is all of this important to you? It’s your money, that’s why!

Yesterday, the U.S. Treasury was at it again.  (Read here from Yahoo)  During the financial crisis they bailed out the banks by giving them money in exchange for ownership or the rights to ownership; but they did something else as well. With the financial crisis, the government bought low (troubled assets in a distressed market) and sold high as the mortgage backed securities business is more “robust” now, thus netting a profit.  So what is the key – cash is king.

Individuals can take the same approach as the Big Dogs (I mean the Treasury). Increasing cash flow allows people to build up more cash reserves. Cash allows people to take advantage of opportunities.