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[jiesen]

Ok for over a month one every one was afraid and hoping the feds would not raised rates but we all knew that they would. So the market took a nose drive. This I understand.

When a rate increase was announced as expected, the market took off like bat out of hell. I don’t understand? Are they looking at the future of a no rate increase?

Can someone help me out in a nut shell explain in 9th grade English? Thanks

Ok, well it looks like you got a lot of people pointing you in the right direction, but still nobody willing to tackle your whole post point by point yet, so I'll give it my best shot... but you are asking some very good, and tough questions, so I'm relying on the rest of you out there to stop and correct me when I start spewing the bs.

First of all, yes the market is looking forward, as it always does. News tends to be priced in, and when a particular news item's been expected for awhile, there's about as good a chance that the price of the security/bond/commodity in question will move in the opposite direction you'd have thought it would in response to the news being announced as it would in the "correct" direction.

Interest rates, though fixed at certain points, are really just a guide. Bonds trade by the laws of supply and demand, just like anything else that can be traded on an open exchange. And the current rate is a reflection of that equilibrium of trade of whatever bond is in question. And the rates can and will move in anticipation of future market forces, like the fed hiking, stopping, or in-out flows of money.

Ok Ok before the increased to day of a quarter point, the interest rate was 5%. I saw bank advisements of home loans at 6.29 to 7%. I called a few banks and no one wanted to explain to me because I sound young many service people told me. Those stupid people thought I was pranking calls or maybe they didn’t know themselves.

Rates for different types of loans are different based on a number of factors, including risk. The bank will not loan money to you at the same rate it borrows (usually) because it's taking on the risk that you won't pay it back, and needs the spread as profit to keep it in business. The riskier the loan is, the higher the rate is likely to be. Pretty logical there.

So I walked the credit union by my house and I had a nice lady who spent her lunch time trying to explain to me. I understand the process of getting a home or car loan. But she didn’t explain why the rates are higher then what the fed sets it at.

I guess she has a hard time figuring out where her paycheck comes from, eh?

Since I’m on the subject of home loan, how come a person buying a house if they do not have 20% for a down payment must have a second for PMI or PIM (I forget)?

When you get a loan, it should be for less than the bank could sell your collateral in case you default. Otherwise the bank would be taking the risk of losing some principal. That's not a wise move for the bank. Ususally to account for the possibility that real estate prices may fall, or your house could actually be worth a bit less than you thought it was, they insist you have at least 20% equity in the home (meaning you can only borrow 80%). If you want to borrow more than that, it's fine, as long as you pay for the risk, and the bank doesn't. They make you do this by forcing you to buy PMI, (Private Mortgage Insurance), which will pay the bank that difference in principal if you default and they are unable to get the 100% of their principal back on the foreclosure. Usually, when people go in on a loan with PMI, they believe that they'll be able to quit paying it in a few years, either by paying down that 20% of principal quickly, or getting another appraisal after property values have gone up. Betting on the direction of a market with money you don't have, though, usually turns out to be a bad idea.

Why is the second loan much higher than the first loan and the amount are smaller?

Again, the risk is low that a bank will lose out on a loan that's only 80% of the value of a home, since prices tend not to drop 20% very often. The second loan, though, is likely to use up much of that 20% buffer and greatly increase the risk to the bank. Ergo, higher rates.

So after a person gets the two loans after a year or how long it takes combine those two loans into one at a lower rate?

Depends on how well he keeps up his credit rating, and how quickly his equity grows. And it depends on the market in home loans. Sometimes it's easy to find people willing to make a better loan (when rates are low) and sometimes it's really tough (when rates are high). Every time the Fed increases rates, people/banks hold on tighter to their cash to get that higher risk-free return, and money gets tougher to borrow.

Is this the best time to buy a house? I notice the new homes in my area have lower their prices. I think that since the price of a home is low (fixed) but interest rate is high it’s a better deal then buying a house at a higher price with low interest rates. My thinking is that if you buy a house when the price is low and can’t be changed but the interest rate can always go lower at some point. But with a price is higher is fixed and you can’t change it.

The best time to buy a house is
1) when you can afford it AND
2) when you need it

I know you don't need a house yet, so don't worry about the real estate market. But it's never too early to start saving up for a downpayment on one. And yes, the prices and interest rates fluctuate inversely, somewhat dampening the effects of each other on the homebuyer's total cash outlay.

If the interest is was 5% then how come home loans, car loans, especially credit card rates are higher up to 22%?

Credit cards are unsecured, so if you don't pay it, there's really nothing the bank can do to get the money from you other than put you on a do-not-lend list. Generally, these are the riskiest loans out there that the banks will make, and so charge the highest rates. Car loans are almost as bad, since on a repo they only can get back maybe half of what they lent, if they're lucky.

I hope I was able to explain a few things to you that you didn't already know. I think it's great you're learning about these things so early. It takes most people learning these lessons the hard and costly way.

Now go and read all those books everyone else was talking about.

[diogenes]

First of all, yes the market is looking forward, as it always does. News tends to be priced in, and when a particular news item's been expected for awhile, there's about as good a chance that the price of the security/bond/commodity in question will move in the opposite direction you'd have thought it would in response to the news being announced as it would in the "correct" direction.

I would add that there are at least three ways of looking at how the news etc is priced into the market:

http://en.wikipedia.org/wiki/Efficient_market_hypothesis

[diogenes]

Ok before the increased to day of a quarter point, the interest rate was 5%. I saw bank advisements of home loans at 6.29 to 7%. I called a few banks and no one wanted to explain to me because I sound young many service people told me.

Interesting story:

The Federal Reserve charges banks, say, 5% to borrow money from them to help them make loans.

Now, the bank could charge 5%, but would not get anything back to cover expenses, like the guy who calls people who do not pay back loans.

So, the bank needs a way to get money, which it does by charging more than what it pays to loan the money to other people.

Small link:

http://www.fool.com/foolu/askfoolu/2002/askfoolu020319.htm

[IIC]

Just to clarify a couple of things and I'm being real basic about this:

In the event of default on a mortgage or trust deed the holder of the first mortgage is paid off first...If there are any proceeds left over after the home is sold then the holder of the 2nd gets paid...If there is any left then the holder of the 3rd and in some cases the holder of the 4th. However, there is a possibility that there may be nothing left after the 1st is paid or not enough left...So there is more risk to each holder in descending order...hence the higher rates.

Fed Funds Rate...I believe that many think this is the rate that the Feds charge banks...But this is not true...The Feds charge banks the Discount Rate which currently sits at 6.25%. The Fed Funds rate is explained here:

http://en.wikipedia.org/wiki/Federal_Funds_Rate

If you read this you will notice that Banks are required to have a certain amount of cash on hand or deposited with the Feds. Remember when there were a lot of banks in trouble leading to many mergers?...One of the problems was that many of these banks could not sustain the amount of cash required...Doug(IIC)

[JohnHenry]

Thanks for the replies

Hi everyone. Yes Jiesen you and everyone did a great job explaining and Thanks for the great advices. Where did you all learn this, from each other?

I was able to find what the 5% was, I think it’s called the prime rate and the other percentage added to it is either index or marginal rate. Some of this I found on www.answers.com but I’m sure everyone here must know this site.

I will buy the book that Dsteckler recommended as soon as I’m done paying my brother back for the IBD he ordered for me on his credit card.

Hey I took Lye advice and read IBD from front to back but I don’t understand 80% of what I read. I love the “leaders and success” page.

Thanks again everyone.

[IIC]

Hi everyone. Yes Jiesen you and everyone did a great job explaining and Thanks for the great advices. Where did you all learn this, from each other?

I was able to find what the 5% was, I think it’s called the prime rate and the other percentage added to it is either index or marginal rate. Some of this I found on www.answers.com but I’m sure everyone here must know this site.

I will buy the book that Dsteckler recommended as soon as I’m done paying my brother back for the IBD he ordered for me on his credit card.

Hey I took Lye advice and read IBD from front to back but I don’t understand 80% of what I read. I love the “leaders and success” page.

The reason IBD as a business is a total failure is because nobody...Well...Mostly nobody...Has any idea what they are trying to present...They have a really bad business model ...I have publically offered my assistance...But the phone ain't ringin'...Too bad for them...IIC

[JohnHenry]

Well, a Roth IRA is an excellent way to avoid being taxed out of your investment gains, in the long run. I highly recommend opening one, as soon as you're able to. If that means waiting a year or two, so be it. It also means you'll need to get a job, if just part time. The great thing about the Roth is the government can't touch your investment gains, since the money you put in has already been taxed when you earned it. So if you are able to grow your $4000 to $400,000 over 40 years, it's all yours.

I did some more research on Roth IRAs and my thinking is that a mutual fund IRA would be best for me when I reach the legal working age to start contributing. Like you said time is on my side because even if the price of the fund increase or decrease during the time of purchase, it averages out linear over time.

I told my older sibling who has been contributing to there traditional IRA and Roth IRA about the mutual fund IRA accounts and they don’t listen.

For example, my sister put away $200 a month toward her Roth IRA at the credit union and it pays 0.85% in interest. Wow, that’s not even one percent. She said she has a saving Roth IRA. To me this is not good deal because the return is not very low. Any feedback?

[JohnHenry]

Electric Field question for jiesen or anyone?

Hi

I don't understand this statement "The electric field due to a positive charge points away from the charge, whereas E due to a negative charge points toward that charge".

Are they trying to say the positive test charge repels from the E field and a negative test charge attracts?

I have a positive q, the Force and electric field points in the same direction. but if q is positive, the Force and elctric field points the opposite direction. Does this follows Coulomb's Law? Thanks

[jiesen]

Hi

I don't understand this statement "The electric field due to a positive charge points away from the charge, whereas E due to a negative charge points toward that charge".

Are they trying to say the positive test charge repels from the E field and a negative test charge attracts?

I have a positive q, the Force and electric field points in the same direction. but if q is positive, the Force and elctric field points the opposite direction. Does this follows Coulomb's Law? Thanks

what they're saying in the statement is merely a description of the vector for the E field. of course you're going to have like charges repel and opposites attract, and the field equations reduce in a linear fashion to Coulomb's law, which is fairly intuitive.

but you need to know, for other calculations, which direction the E field points, so when the charge moves through it, for instance, you can put the B vector (magnetic field) in the right direction perpendicular to it. don't worry too much about it yet, just try to soak it in, and when you get the rest of the equations (look up Maxwell's equations)

http://hyperphysics.phy-astr.gsu.edu/Hbase/electric/maxeq.html

hopefully it will start making some sense. If not, that's ok, it didn't for me either at first.

[jiesen]

http://www.glenbrook.k12.il.us/GBSSCI/PHYS/Class/estatics/u8l4c.html

oh, and here's a good one to read about what the electric field lines mean. the direction of going from one sign to another (positive to negative) is just a convention, so that's just the way it is. get used to it.

one more thing to hopefully clarify it a bit for you:

http://hyperphysics.phy-astr.gsu.edu/Hbase/electric/elesph.html#c1

since a positive charge has E pointing away from it, and the force is just E*q (where q is the second charge) you see that if the second charge is also positive the force direction is also away from the original positive charge, but if it's negative the force is towards it, and the charges are attracted. hopefully at least that part makes sense to you. trying to explain this in a post is making my head hurt... read those links a few times, they do a much better job of explaining it than I do!

[JohnHenry]

http://www.glenbrook.k12.il.us/GBSSC...ics/u8l4c.html

oh, and here's a good one to read about what the electric field lines mean. the direction of going from one sign to another (positive to negative) is just a convention, so that's just the way it is. get used to it.

one more thing to hopefully clarify it a bit for you:

http://hyperphysics.phy-astr.gsu.edu/Hbase/electric/elesph.html#c1

since a positive charge has E pointing away from it, and the force is just E*q (where q is the second charge) you see that if the second charge is also positive the force direction is also away from the original positive charge, but if it's negative the force is towards it, and the charges are attracted. hopefully at least that part makes sense to you. trying to explain this in a post is making my head hurt... read those links a few times, they do a much better job of explaining it than I do!

Hi Jiesen

Sorry that your head hurts. You are doing a great job of explaining. I understand what you are saying. Thanks again and for the great links. Are you a phy. teacher? If not, have you thought about becoming one?

[jiesen]

Hi Jiesen

Sorry that your head hurts. You are doing a great job of explaining. I understand what you are saying. Thanks again and for the great links. Are you a phy. teacher? If not, have you thought about becoming one?

I was one in a former life (about 10 years ago I taught a few physics labs). But I haven't touched physics since getting a job in chemistry. I sorta miss it (but not really).

[JohnHenry]

Ibd

Ok yeah, I have a few billion questions on articles that were printed in IBD on Wednesday.

The article about Wal-Mart wanting to by a bank to reduce their credit card fees to pass on the saving to its customers. The article says there is a “loop hole that a truck can drive through it”. I have read it three times but I can’t seem to find where the loop hole is. Am I over looking something?

As for the Japan not raising interest rate is the pass six years and now raising it 0.25% (this is the rate at where the banks borrow at?). So not raising interest rate for six years means that their economy is good and they want to slow it down with this 0.25 hike?

How can we (me and you) borrow money from Japan at that rate and put it in a CD or saving in the US earning 5.25%? Are there restrictions?

Ok Ok I don’t understand or know anything about war but with what’s happening in Israel. The fear of oil production being disturbed has cause the price of oil to rocket to $78 a barrel. Isn’t this a little too extreme?

From my research the US get our oil from the following countries.

Middle East (7-8%)
Nigeria (7-8%)
Venezuela (7%)
Mexico (7.5)
Canada (47%)

These number could be a little off a bit.

I don’t understand why the price of oil is high due to the mess with Iran? Isn’t just a small percent reduction? Can’t we buy a little bit more else where to make up for the lost?

Does anyone have a clear mean of “Same store”?

I have to get going my mom is yelling at me to go to bed or she will take my computer away. bye

[diogenes]

Ok Ok I don’t understand or know anything about war but with what’s happening in Israel. The fear of oil production being disturbed has cause the price of oil to rocket to $78 a barrel. Isn’t this a little too extreme?

Well, the idea that the current affairs of Iran are the cause of higher oil prices might be a bit tricky to prove.
You might want to read the article below:

http://en.wikipedia.org/wiki/Correla...ogical_fallacy)

Also, have you thought about oil prices and futures?

As for the Japan not raising interest rate is the pass six years and now raising it 0.25% (this is the rate at where the banks borrow at?). So not raising interest rate for six years means that their economy is good and they want to slow it down with this 0.25 hike?

While I have not looked at the data, that would be a fair assumption.
However, Japan has been stagnating for some time now and thus this could me something different.
Yet, looking at last weeks Economist shows that core consumer prices have been raising, which tends to bump up inflation.

[diogenes]

I was one in a former life (about 10 years ago I taught a few physics labs). But I haven't touched physics since getting a job in chemistry. I sorta miss it (but not really).

Hmmm… is that the song of a former slave, um…grad student?