Debt Free

Yes, you can still consolidate mortgage debt, or get a mortgage to consolidate debt, even though the number of available lenders seems to be....well that seems to be consolidating too, as this lender and that either goes out of business, or rethinks their strategy altogether. Are we going to have any lenders left??

I was in a Bank of America branch the other day and overheard one of the bank managers explaining to a prospective mortgage refinance customer why Bank of America was in no danger of having the same sort of troubles as IndyMac or any of the other recently (or soon to be) departed. What was his reason for this revelation? He went on to explain that Bank of America was more selective when choosing their mortgage customers, and avoided those with credit problems that would go on to plague so many other lenders.

Upon hearing this bit of salesmanship, my first thought was “If that's the case, and it's worked out so well for you, why the hell did you buy Countrywide?” Seems like good old BofA would stick with what had worked so well in keeping them off the mortgage default express, rather than dumping $2 billion in cash and another $4 billion (at the time) in stock into the sick, California based, mortgage lender, Countrywide. Oh well, maybe the deal could still pay off for Bof A down the road. After all, greater minds than mine concocted it.

If you're looking for mortgage debt consolidation, you're after one of two things, depending upon your interpretation of the term. Either you have a first and a second mortgage and you want to combine them into a single loan, or you have high interest consumer debt, typically of the unsecured variety, and you'd like to roll it into a single, secured loan with a lower aggregate payment that all the little loans that preceded it. Either way, you'll be consolidating multiple loans into one (hence the term consolidation loan).

Here are some pitfalls you'll want to watch out for when getting one of these loans.

Mortgage Debt Consolidation Flag -

Using a small, unheard of mortgage company.
Don't do it. As we've recently seen, merely being a behemoth is no guarantee of safety, either. However, when you're consolidating loans, and anytime you're playing around with your mortgage in general, using a reputable company is of paramount importance. Make sure that their sterling reputation precedes them.

Mortgage Debt Consolidation Flag -

The “Pay Up Front” loan scam.
This loan scam is used for all sorts of personal loans, not just mortgages. It targets those with bad credit or folks with no equity in desperate need of a refinance; basically those debtors with no place else to turn. The legality of absolutely guaranteeing someone a loan never enters into the equation. The scam works like this. The lender claims they'll guarantee you'll be approved for the loan, but they require 2 or three months of payments in advance. Don't write the check!! You'll get no loan, and they'll be on a beach, earning 20% (on your money).

Mortgage Debt Consolidation Flag -

High, hidden, and inflated fees -
You could well be required to pay some fees when getting one of these loans, but in many cases the fees go far beyond reasonable. On many occasions you'll be asked to pay points, but also many other fees, most of which go directly to enriching the lender. If you're getting a loan from a broker, and your credit is decent, don't pay an origination fee.

You may not know this, but the broker is already getting a fee from the lender for your loan. Don't facilitate the broker's double dipping by paying origination fees on your consolidation loan.  If your credit's good, they didn't have to do all that much to get you the loan. On the other side of the coin, if your credit is shot, you could reasonably expect to pay a fee, because the broker probably had to work their tail off to get you financed with a decent interest rate.

Don't pay a separate application fee, credit report fee, and appraisal (don't forget to get a copy of the appraisal, they have to provide you one by law) fee. In most cases the application fee will contain the costs for the appraisal and the credit report. If you pay all three, you're just lining the lender's pockets (or sending their kids to Harvard). Another trick used by some lenders is marking up the fees that they're asking you to pay. You should pay fees such as wire transfer fees or title fees, but you should not allow the lender or broker to mark them up.

Mortgage Debt Consolidation Flag -

The Over Eager Lender –
If your lender seems too over the top, especially of you have bad credit, take a step back and look at all the details one more time. You may just have the employee of the year at your disposal, but you could also be headed for trouble. This type of lender or broker can often be leading you into a trap known as…

Mortgage Debt Consolidation Flag -

The Old Bait and Switch –
Mortgage lenders aren’t the only businesses to be guilty of this little scheme. One thing that could tip you off that your lender may be a bit sleazy is if they treat your loan papers as a “living, breathing document”. That’s to say that the loan you negotiated may not be the one they set in front of you on the closing table. Even though you agreed to certain terms verbally, or got an offer sheet, it is still incumbent upon you to be sure the loan documents you’re signing reflect the same loan you agreed to.

If you have really crunched the numbers (all of them), feel that a mortgage debt consolidation is the right financial move, and are comfortable putting your house on the line, than go for it. If you’re just consolidating more than one mortgage into a single mortgage, you house was already collateral any way. If you’re consolidating high interest, unsecured debt, think it through a few times before committing your house full of family memories (and possibly substantial equity) as collateral for a dent consolidation loan.

In any case, you should only get one of these loans if the financial situation that caused you to go into debt has been erased. If you had an extraordinary event, such as a auto accident or medical problem, that’s one thing. If you just can’t seem to stop hoppin’ in the Jag for trips to Westfarms or the Fair Oaks, spend a bit too much time at the casino, or think nothing of rolling in at 4:30 after dropping a wad at Marquee on a regular basis, that spending pattern’s got to stop. Unless you can reign in a pattern of excessive spending, you have absolutely no business getting a debt consolidation loan. You’ll just run up your debt level again and then where will you live?

Posted by debtblog at 06:23 AM | Permalink | Comments (0) | TrackBacks (0)

Effective debt management will minimize extraneous fees and other charges that chip away at your financial well being, and competently managing your debt will allow you to keep a high credit score. The importance of a high credit score cannot be understated, especially in the really ugly credit situation that has developed over the past couple of years. Don't get me started on that, please.

What is the right debt management solution for you? Determining that requires looking at your financial situation and taking stock of not only where you are, but how you got there. Debt management is one of the things that, to put it bluntly, many people screw up royally. Get it right and you could be living in fat (phat?)city. Get it wrong and bankruptcy could be a few short stops down the line.

One of the biggest problems is that too many people simply don't manage their debt at all. They don't look at what's causing them to be in debt, and they put little or no planning into getting in debt or getting out of it. They're not proactive, they just react to their next Visa bill with a mixture of fear and derision. You can avoid being part of that vicious cycle by actively planning what level of debt you'll take on, and why. Include a percentage for emergencies. How much emergency debt you'll provide for varies depending on your financial situation.

Here are some debt management rules that will help you develop a personal debt management solution -

Debt Management Rule 6
Avoid going into debt for depreciating assets. Unfortunately few people can manage this step as they use one of their largest depreciating assets to get them to work everyday. As the average price of a new car has gone above $25,000, few people can afford to purchase one without an attending rise in their debt level.

There are some ways to mitigate this. You can purchase a used car. Depending on the car, a large percentage of depreciation is gone after the first 2 years. Buying a car that is 2 to 3 years old will still get you a solid, reliable car, with years of trouble free service ahead, and much of the depreciation behind it. The wrench in this works is very low or zero percent financing. You can get low interest, incentive financing plans with some manufacturer's certified used car programs, and promotional financing offers change daily, so check into these before you take on more car debt.

Other depreciating assets are nearly anything besides your house or certain investments. That is where many people make a huge mistake. Not only do they go into debt purchasing depreciating assets, they also violate debt management rule number 5.

Debt Management Rule 5
Don't go into debt for non-essential items. Sadly, much of America (and the rest of the world) completely ignores this debt management rule, treating the next sale at Macy's or Bloomingdale's as a date not to be missed. In the majority of cases, this pilgrimage to the pillars of modern consumerism is financed entirely by debt. Not just any debt mind you, but the 17%, plus a hefty annual fee variety. Although many would argue vigorously the other way, that new sweater just doesn't qualify as an essential item.

Debt Management Rule 4
Time your debt correctly. Timing of debt is very important. Too many people put something on a credit card or other type of credit account when they could have waited one or two days and paid for the item with cash. This is poor debt management. You're increasing your debt levels unnecessarily, and in most cases it is magnified by simultaneously violating debt management rule 1 or 2 (possibly both).

Debt Management Rule 3
Make your debt payments automatic. This automates a good part of your debt management tasks. It will help prevent you from making your payments late or forgetting to make a payment; two of the sins of debt and credit that can follow you around for years. Not only that, but it's a heck of a lot easier than writing all those checks every month.

Debt Management Rule 2
Make money on your debt. Only go into debt when you will earn a higher return on your debt than it costs you. If you go into debt at 7%, you should earn at least 8% on the debt. If you can do this, you've won the debt management game and debt is your friend. You can go deep into debt and come out ahead; way ahead. Unfortunately the majority of people are never able to put this rule into effect, and suffer instead form years of oppressive credit card and other high interest consumer debt that costs, rather than pays, them money.

Debt Management Rule 1
The number one rule of debt management is spend less than you make. That will allow you to follow all the other rules, and use debt rather than having it use (and abuse) you.

You may not be able to effectively develop or implement a personal debt management solution. You may have to retain the services of a debt management professional. There are all sorts of pros, and like any other profession, some are very good, and others border on criminal. Due to the circumstances surrounding individuals seeking debt management services, the industry can attract more than its share of the latter, so be careful. There are definitely benefits to using a good firm. They can get you out of debt comparatively quickly and help increase your credit score.

Keep in mind that there are two definitions to debt management. Some debt management firms negotiate down your debt with the credit card companies or other creditors. After they've done this, they then put you on a strict payment plan through the debt management agency itself. While this can result in your getting out of debt much more quickly than you would otherwise, be prepared to take a fairly large credit score hit, and heaven forbid you should miss a payment or two. You could lose much or all of their fees or other money you've paid in.

Other debt management firms are more akin to credit counseling agencies. Here's what to look for if you're contemplating using a debt management solution company. Although this is not a hard and fast list, and there may be some excellent firms that do not meet some of the criteria, it's a great place to start.

Make sure the company is a member of the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Although it's not mandatory, look for non profit firms (Don't ever confuse non-profit with free). Make sure they show exactly what will be required of you and give you a list of their fee structure. Get from them exactly what services they provide and when they'll provide them. In most cases paying for all their services in advance is huge red flag and you should run like the wind should they ask you to do so.

One thing a good debt management firm can do for you is to get your account 're-aged' where it no longer appears as past due on your credit report. This takes some sweet talking to the creditor, but if they have a good relationship with said creditor, it is often done.

Debt management and a good debt management solution can often be the difference between coming out on top financially and slogging through years of huge Visa bills. It's up to you.

Posted by debtblog at 04:08 PM | Permalink | Comments (0) | TrackBacks (0)

When shopping for a house many people are payment shoppers, just as they are when shopping for cars. It's all about the monthly payment. That's why so many people are attracted to the adjustable rate mortgage loan; it keeps their monthly mortgage payment lower than a conventional, fixed rate mortgage product. The problem is that that's only true for a while. Eventually the mortgage payment will rise, and with it will go the home owner's blood pressure. This is because, as the name suggests, the ARM's interest rate adjusts. In case you had any illusions, it adjusts up, and so does the mortgage payment.

When looking at an ARM, you'll be confronted by a set of numbers used to describe the terms of the loan. They'll be stated in fractional looking terms, such as 3/1, 5/1 or 7/1. This is simply the number of years that the initial mortgage interest rate stays the same, and how often it will adjust after that. A 3/1 ARM will stay at the initial rate for 3 years. After that it will adjust every 1 year.

Just how does an ARM adjust? Do the lenders sit around the bar at the country club and pull interest rate numbers out of their....well, you get the picture. Actually the loan's interest rate is tied to an index, which is simply one of several reference interest rates used by major financial institutions. Depending upon the specific index, it is set by the federal government or the applicable financial institutions.

The most common indices used to compute the mortgage interest rate on an ARM are the London Interbank Offered Rate (LIBOR), the Prime Rate, the Cost Of Funds Index (COFI), and 1, 3 or 5 year U.S. Treasury note rates. Ah, but you won't just pay these rates, you'll pay the index rate plus what's called a margin. The margin is just a percentage over the index rate. So, if you have a 5/1 ARM that's tied to the 1 year LIBOR, and your margin is 3%, when your ARM adjusts, you'll pay the current 1 year LIBOR rate plus 3%. Currently the LIBOR is 3.29%, so you'd pay 6.29%. That rate would hold until the next adjustment period, when it would adjust again. In the case of the example 5/1 ARM, it would adjust in 1 year.

There are several other important things to look at in an ARM. One of these are the caps. An ARM cap is simply that, a cap on how much the interest rate can go up. Typically the loan will have lifetime caps and periodic caps. While caps can be beneficial, they can also work against the borrower if there is what's called a carryover provision in the terms of the loan. A carryover lets the lender carry over interest rate increases they couldn't apply because they exceeded the cap.

For example, if your ARM adjusted upwards but was capped at a 2% increase, your lender could only increase the interest rate upwards by 2% in any given period. If the index went up by more than that, say 3%, a carryover provision could let them carry over the extra 1% increase to future adjustment periods and apply it then. So if the index increased 3% this year, but only 1% next year, the lender could increase your mortgage interest rate 2% each year, because the 1% over the cap they couldn't apply in the first year would be carried over and applied the next. Got that??

People love ARMS, especially when they're starting out in their careers, because as they earn more money they can afford a larger payment. The other common strategy, in fact the one that many people counted on, is to refinance the ARM into a fixed rate mortgage loan before the dreaded adjustment occurs. If you have a 5/1 ARM you have a 5 year window to enjoy the low, introductory rate before the loan adjusts (also called resetting) to a higher rate. Most people thought it would be no problem to simply refinance their mortgage before they got caught with the higher rate, because as home values rose, they'd have enough equity in the home to qualify for a fixed rate mortgage with a low interest rate.

That's how so many people got into so much trouble with ARMs. They did two things that came back to bite them. They got too much house, and they thought real estate appreciation would continue unabated, or at least until they could refinance. The problem arose because in many areas the real estate markets were showing double digit annual appreciation for the better part of a decade. People forgot that that's not really how things work over the long term. Eventually the chickens will come home to roost; and they'll crap all over the coop when they do so.

Here's a common example that occurred in many areas. First of all, you'll note that this was a classic example of “the bigger they are, the harder they fall”. Most of the big problems happened in areas that saw the largest and fastest home value appreciation, such as Las Vegas, south Florida and Southern California. If a borrower got a 5/1 ARM tied to the LIBOR for $400,000 in 2003, in 2008 their ARM is due for a reset. If their initial interest rate was 4.75% their monthly P&I payment would be about $2,087 per month. Now, when their mortgage resets (if it was calculated today), they'll be paying $2,473 per month.

Now $390 a month isn't chicken feed (the price of chicken feed's going up, just like everything else), but it could have been even worse. Many people used special mortgage products, like interest only loans to buy their properties. That keeps the monthly payment low, because you're only paying the interest for the first part of the loan. As with the standard ARM however, the interest only loan will eventually reset, leaving you holding the bag for both the principal and the interest. The increase is compounded because the interest rate can also adjusts upwards at the same time, depending upon the terms of the loan. So, you could be hit with the added costs of repaying the principal, but also an increasing interest payment at the same time.

How the majority of people got into trouble with their ARMs, was they either neglected to refinance in time (very stupid financial decision) or their home's value dropped to the point where they couldn't refinance because they owe more on the house than it's worth (that also had it's roots in a stupid financial decision, although not nearly as poor a decision as neglecting to refinance before it was too late). When this happens, you can't get a new mortgage for enough to pay off the ARM because the value of the collateral used to secure the new loan (your house) isn't enough to cover the loan.

To compound matters, many lenders are skittish that home values will continue dropping in many regions, so they are requiring higher down payments than in the past. If they want a 20% down payment, you'll need 20% equity in your house in order to refinance it. This is something many people just don't have.

So, there you go. That's what an adjustable rate mortgage loan is, and that's how so many home owners got into so much trouble with them. Here's to helping you get debt free, and have a great weekend.

Posted by debtblog at 01:37 PM | Permalink | Comments (0) | TrackBacks (0)

Well, although you won’t get anywhere near the best interest rates on a mortgage, chances are you’ll still be able to get one, even with a foreclosure on your credit. You will pay between 1.5 to 4 percentage points in interest above what you’d pay if you had good credit. Often it pays to get your credit score up even a few points because it will put you in the next higher credit score range. For more on that, see a post I did a few months back on credit score ranges, and how only a single point in your credit score could save you thousands of dollars.

There are some things you can do to help yourself though. First of all, make sure your credit is only as bad as it needs to be. Clean up your credit report and get rid of any inaccuracies. The foreclosure is going to be the sore thumb on your report though, there’s no denying that. Concentrate on paying every single bill on time from this point forward. You want to rebuild your credit to minimize the interest rate on your next loan.

If you wait 2 years after your foreclosure, you should be able to get an FHA loan. You’ll only need 3% down for most FHA (technically FHA insured) mortgages, but starting in July you will pay more with lower credit scores even with FHA loans. There is an upfront risk mitigation fee and an annual fee for those with poor credit. This will go up as the credit score down. Even if you are backed by the FHA, your credit should be 580 – 600 before you go for an FHA mortgage. Many lenders are still skittish, even with the government’s blessing, ad some won’t even loan on credit scores under 580.

This shows the need to spend your 2 years wisely, rebuilding your credit and saving a down payment. Although you can get an FHA loan with 3% down, including buyer paid closing costs, you’ll want to know that the actual down payment must be only 2.25%, but 3% of the funds in the transaction must be contributed by the buyer. Unlike a conforming mortgage, FHA lenders don’t really care where you got the 3% because they’re not required to. There has been some discussion in congress about raising the down payment for FHA mortgages, possible to 3.5%.

So, if you’ve looked foreclosure in the face, smelled it’s wretched breath, and some out of the whole thing ready to start anew, there is hope for you. You can get a mortgage after you’ve had a foreclosure, and your best bet may be with an FHA backed mortgage.

Posted by debtblog at 07:56 AM | Permalink | Comments (0) | TrackBacks (0)

To decide weather or not you will keep your home or put it on the market, you have to look at the circumstances that caused your financial difficulties. If you have a very good chance to make your house payments in the future, you can aim toward keeping your house. To determine the likelihood of making your house payments, you'll need to make an honest and realistic budget. With a little luck and some skill, you may be able to make one of a few things happen that could make keeping your home easier.

To keep your home, you'll need to either get a refinance (if you have sufficient equity and good enough credit), or workout your foreclosure through one of the following methods; mortgage modification, forbearance, or a deferment. These will help you improve your financial situation and make it easier to make your monthly mortgage payment. A hardship letter is but one step in the process toward making this happen.

To write a hardship letter you need to remain honest, but give your lender a true picture of why you are in your current financial situation. You'll need to show them what caused your current financial problems and how they caused you to become delinquent on your mortgage payments. You'll need to do your best persuasion job in the letter, because the whole reason you're writing it is to convince the lender that you're worthy of a second chance. If you're in sales, now's your time to shine. Heck, maybe you can craft such a good letter that you can actually start a business writing them for others.

The thing to remember is that you want to be convincing, but honest. Remember that lenders see many such letters and they can smell the stench of BS for miles. Before you write your letter, you'll need to workup a complete household budget. Don't leave anything out. This will be used by your lender as the basis for a mortgage modification or payment plan. Be careful, because since you will be required to submit this to your lender, they will probably hold you to it and may not allow you to change it.

In the budget, you have to show them how your ability to pay their mortgage fits into the budget that you've submitted. It's very important that you actually can fit realistic payments into the budget, because if you can't, selling your home may be your best option. Hopefully you'll be able to get your mortgage modified so that you can get payments that you can afford from this point forward. Be realistic though. If you owe $200,000 on your home, you aren't going to get a 3%, 30 year fixed mortgage, so if those are the only payments you can afford, you may have to look at other options.

After you've completed your budget, you can write your hardship letter. Here are some of the key components you need to include. All the vital statistics, such as your name, property address and best contact phone numbers. Be very cordial and simply explain to the lender exactly what hardship circumstances you've experienced. Don't lie or tell any tall tales, because they will backfire on you. Explain the circumstances (example:death in the family, medical problems, injury, military service, divorce, etc.), tell them it was a temporary situation, and that you are now able to make the payments on your mortgage. A few paragraphs will be fine. Don't get too lengthy. You will want to include the dates of your hardship in the description. Also include a statement that you believe that the facts contained in the letter are true to the best of your knowledge.

Although you can do this on your own, it's not a bad idea to seek professional assistance in fighting foreclosure from experts (which I am not). The difference between losing your home and keeping it could be a slight one, and it would be a shame to lose your home when you could have saved it. Remember that ignoring it will not make it go away. That's the worst thing you can do when facing a foreclosure situation. You need to be proactive and contact your lender as soon as you think there may be a problem. If it gets that far, writing a hardship letter to stop foreclosure will be but one step in the process. Good luck.

Posted by debtblog at 01:10 PM | Permalink | Comments (0) | TrackBacks (0)

They are offering a way to roll all your outstanding high interest rate debts into a single loan, typically with a lower payment than the combined payments of all your debts before (obviously if you have debts that have a lower interest rate than the offered rate for the consolidation loan, you would just retain that existing loan(s) for it's(their) original purpose). A debt consolidation loan is usually just a cash out refinance, or home equity line of credit that you use to pay off all your other outstanding debts. Despite what some of the radio ads say, they don't eliminate your debt, they just move it, and possible allow you to eliminate it faster than you otherwise would have.

There's one thing to be aware of before you begin to solicit offers for a loan. There is a scam that's becoming much more prevalent with the rising tide of credit problems and foreclosures called the advance fee loan scam. You'll be asked to pay huge fees in order to secured a guaranteed loan. Here is the FTC warning on these scams -

“Advance fee loan scams prey on consumers who may be under financial duress and may be seeking quick and easy loan approval and funding. The scam typically involves the lender making false promises to arrange for a loan in return for fees paid upfront by the loan applicant. Scam artists may even design Web sites and online loan applications giving the appearance that the company is legitimate. “

Make sure that the company that you are dealing with is a bona fide financial services firm with a proven track record. There are hundreds of real lenders in the marketplace, so finding a good one should not be difficult, just be sure and do your due diligence's.

So, how do you go about separating the wheat from the chaff when you're looking for a consolidation loan? Can one of these loans really help you get debt free? Will you pay less in interest and fees with one of these loans than you will if you just paid for your credit cards (and other debts, but the majority of these loans go to pay off credit cards) and didn't get a loan? You'll certainly want to answer these questions before you get a loan.

First of all yes, typically you will pay a lower interest rate if you transfer your debt from credit cards, which are unsecured, to a debt consolidation loan, which is secured. The mere fact that the consolidation loan is secured, typically by the borrowers home or other real estate, means that the lender faces lower exposure to risk, which is reflected in a lower interest rate to the borrower. Many people get confused by the fact that they are paying a lower interest rate, however.

Just because you are paying a lower interest rate doesn't mean that you'll pay less in total interest. That is because the term of a debt consolidation loan is much longer than the term to pay off most credit cards. If you make the minimum payment and stretch out the payment schedule to the maximum allowable time, you could actually pay more in total interest. This is because, while each interest component of each payment is lower, you will make many more payments. So, one key to getting the best debt consolidation loan is to not only search for the best interest rate, but to make the payments in such a way that you really do pay less in total interest payments.

Carefully compare the fee structure of the loan offers you receive to help determine which are the top loans. There are many fees that you may be charged, such as origination fees, processing fees, appraisal fees, credit report fees, and other fees. Not all loans will charge the same fees and not all fees for the same thing will be at the same rate between the different loans. The only way to determine which loan has the best fee structure is go through the fee schedule with a fine toothed comb.

If you have outstanding credit you can get a personal loan you can use for anything you'd like, including debt consolidation. With a personal loan you will not have to put any security up for collateral, so you won't be in danger of losing your home should you run into unforeseen financial problems. You will usually pay more than you would for a secured loan, but less than you're paying on your credit cards this way. This solution is only available for borrowers with premium credit. Keep in mind that you will also not be able to receive any tax benefits with a personal loan, as you may be able to receive if you got a cash out refinance or home equity line of credit to use for debt consolidation.

One note here, and it is a very important one:

• Make sure that the circumstances which caused you to go into debt have been eliminated, because you'll rapidly get into serious financial trouble otherwise.

In short, here is how you can be sure you are getting a top loan when you're shopping for a debt consolidation loan:

• Compare interest rates, including the simple interest and the (APR), which takes into account interest , fees and other charges.

• Compare fees – Look at the total amount of loan and service fees you'll be charged, and when you'll be required to pay them. Remember that any fees that you roll into the loan will accrue interest over the live of the loan, multiplying them substantially.

• Look at the total interest in dollars you be charged over the life of the loan

• Verify if the loan offers any tax benefits – Refinances or some home equity loan products will offer these benefits. To be sure, check with the IRS.

• Check the lender's track record. How long have they been in business, and do they have a good reputation?
  
  

One of these loans may or may not be the best solution to more quickly get you out of debt. This guide should help you get one of the top debt consolidation loans. But remember, getting debt free is up to you.

Posted by debtblog at 01:48 PM | Permalink | Comments (0) | TrackBacks (0)

On the way in this morning I sat behind a brand new, back convertible Bentley Continental. You know, the one with the 550hp twin turbo 12 cylinder. While the guy driving that car was probably not all that concerned with the recent increases in the price of fuel unless it affects his business or investments, he's probably one of the few to share that sentiment. Most of us are pulling up to the pump and trying not to retch into our cup holders as we're confronted by the most recent fuel price increase.

If this describes you, and you're leasing a vehicle, investigating one of the firms that allows you to either swap your lease to drive a different vehicle, or just get our of your current car (so you can take the train to work) may be worth doing. One benefit for those who'd like to get into a newer vehicle, is that in many cases you can do it with no money down, and a comparatively low payment. It's kind of the automotive equivalent of buying a distressed property. Here's how the whole lease take over process works.

Getting out of an existing auto lease.
You go to one of the companies that specialize in lease take overs and sign up for their service. You'll typically pay a listing fee, just as you would if you ran a classified ad to sell your vehicle. When an interested lease assumer decides they love your old car and want to take over your lease, they're credit checked to ensure they're able to take over the lease. Depending upon the service, the buyer and seller will then usually negotiate the applicable terms and come to an agreement. In many cases it works out very well for the one taking over the lease because the original lease holder has offered some sort of incentives. Even if they don't, they have already paid all the fees and deposits at the inception of the lease, so the party taking over the lease can just step in and begin making payments.

It is also great for the original lease holder because they can get out from under a lease that they can no longer afford, or a vehicle that no longer suits their needs, without paying an early termination fee to do so. Those fees can be oppressive, and a huge barrier to getting out of lease early. Letting someone else take over your existing lease will avoid the whole issue, as the lease isn't terminated, just “borrowed” until the term is completed.

Taking over an existing lease.
Just as getting the drain of a vehicle that you can no longer afford the lease payment on, or is killing you at the pump can be a weight releasing experience, so can stepping into a vehicle by just assuming the payments. A further benefit is that, since you'll only be assuming the existing lease, the term is in most cases fairly short. If you want to “try before you buy” this may be just the ticket. You can make relatively small monthly payments for terms of as short as 4 – 6 months before deciding if the vehicle is right for you. There's nothing like living with a vehicle for an extended time to make sure it's really the car that you'd like to be driving. You just can't make that evaluation in the 15 minute test drive you get at the dealership.

In some cases the lease listing agency will charge a transaction fee, and in other cases, they'll only charge a listing fee. In addition you may have to pay a fee charged by your leasing company, but in many cases these fees may be avoided. Remember that many lease terms, such as the monthly payment and allowable mileage are set in the lease terms and cannot be changed, although other terms can be negotiated between the assumer and the assumee, such as additional funds or assets that can be included in the transaction. Take note that many of the vehicles listed are fairly expensive vehicles that people are no longer in a position to afford. In addition, some of the vehicles have higher mileage so one of the reasons that people were getting out of them is that in order to stay within the maximum mileage, they can only average 800 – 900 miles per month for the remainder of the lease. Some people cannot do this.

Looking at some of the sites that specialize in the lease transfer market, I've seen some interesting vehicles such as a:

2003 Acura RSX - $145/ mo for 17 months – nice, 4-cylinder (pretty good gas mileage) performance coupe.
2007 Ford Focus – $229/ mo for 18 months
2008 Mercedes Benz R350 (Mercedes Mini-Van / SUV) $380/ mo for 26 months
2006 Mercedes Benz SLK-350 $541/mo for 14 months – Want to drive a small, but pretty quick Mercedes convertible for the summer? Here you go.

The whole lease take over marketplace is one that many people just aren't aware of. Since awarenes of the secondary market is so low, most people don't think about doing this when they're either saddled with a vehicle that they'd rather be rid of, or when looking for a new one. Taking over a lease or giving one up may not be the best choice for you, but it bears looking into if you're in either position. One of the leaders in the lease trading or take over industry is swapalease.com. You can find out more about the process, and see if it is an alternative that could work for you here. They've been featured in many national publications and are Better Business Bureau accredited.

Posted by debtblog at 01:42 PM | Permalink | Comments (0) | TrackBacks (0)

For example Essex, Suffolk, and Norfolk counties in Massachusetts showed an average year over year increase in their foreclosure rates of almost 44% in Q2 of 2005. Consulting firm Global Insight prepared a report in mid 2007 estimating the foreclosure problem, coupled with declining home values, could cost the U.S. as much as 1% of the GDP, due to decreased economic activity.

A group of banking industry regulators and 10 state AGs calling themselves the State Foreclosure Prevention Working Group has been working on the problem for over a year now. The have discovered some interesting aspects to the problem that can go a long way to help understanding foreclosures. It's interesting to note, for example that:

• Payment resets on hybrid ARMS have not been the primary cause of foreclosure problems in many areas. Despite the news coverage that could lead one to believe otherwise, mortgage holders with resetting ARMs was not the cause of many foreclosures. In fact, many (the report didn't mention the exact number, only that it was a significant percentage) sub-prime borrowers were behind on their mortgage payments before their ARMs reset.

  That says to me that many of these mortgage borrowers took on loans which were beyond their abilities. Weather that was due to fraud on the part of the applicant, lenders pushing prospective borrowers toward mortgages that were beyond their capabilities from the outset, or more recent economic factors, such as job loss, is unknown. It could possibly be a combination of those factors and more.

  For all the hand wringing and hollering by the media and consumer groups, it seems as though many homeowners simply wanted a more expensive home than they could really afford, and were willing to bet that continued real estate appreciation would render their decision a good one. For too many that was simply not the case. For these homeowners taking advantage of record low mortgage interest rates and conventional 30 year fixed mortgages, coupled with homes that were more within reach would have been a much better choice. Now the piper has come a calling.

• Refinance options have, as the report so eloquently states, “nearly evaporated”. One thing that the media has gotten right is that refinancing out of a rising house payment is not an option that remains open to very many borrowers. In the past it was a relatively simple matter to grab a lower house payment by refinancing. That's no longer the case.

• 45% of homeowners that have taken the step of contacting their lenders are working toward some type of mortgage modification. That speaks volumes. It isn't in the best interest of the lender to enter into foreclosure. They lose money on every one. As with any business, they're not in business to lose money. Instead of foreclosing on a home, they'd rather get a long term stream of interest income.

  The fact the almost half of all mortgage holders that have spoken to their lender were able to work toward some type of mortgage modification shows why contacting the lender early is so important. Unfortunately some lenders will only agree to such steps once your loan is already in default, but early contact, not avoidance is still the most important step that you can take if you feel foreclosure is imminent.

  There may be some pending legislation that can help with mortgage modification. Currently H.R. 5579, titled the “Emergency Mortgage Loan Modification Act of 2008” is being debated in Congress. It has been placed on the calender, but is still in committee and has yet to be voted on. According to it's description it is “To remove an impediment to troubled debt restructuring on the part of holders of residential mortgage loans, and for other purposes “ what exactly that impediment is, I am unsure.

  It's possibly the treatment of the forgiven portion of debt as income by the IRS. Currently if a portion of your soon to be foreclosed upon home's mortgage is forgiven by the lender the IRS treats that as ordinary, taxable income. It's their equivalent of hitting you when you're down.

  Since the report was released a few months ago, more lenders have taken the step of allowing borrowers to modify their mortgages so the 45% figure is probably higher now. Mortgage modification could be the “new refinancing”.

Nationwide the firm RealtyTrac reports that foreclosures are up 112% year over year for Q1, 2008. The top 5 states in terms of foreclosure filings were:
1 – Nevada
2 – California
3 – Arizona
4 – Florida
5 – Colorado

The bottom 5 were:
46 – Mississippi
47 – South Dakota
48 – West Virginia
49 – North Dakota
50 – Vermont

You'll notice that the top 5 were those states that experienced a rash of investors trying to capitalize on skyrocketing property values, now not so skyrocketing. The bottom 5 on the other hand experienced lower property value gains over the last 5 years. Because they were not as attractive to investors, who ostensibly would be much quicker to become over extended and then jump ship, they have higher foreclosure rates. The other reason is that in certain areas property values went up so fast that the average homeowner had to resort to all manner of unconventional mortgage products to simply buy a home at all. Maybe renting would have been a better idea, but hind sight is 20/20. Hopefully this will provide a bit more information to help in understanding foreclosures. For more help, see my previous post on how to avoid foreclosures.

Posted by debtblog at 01:58 PM | Permalink | Comments (0) | TrackBacks (0)

That is part of the reason for the economic troubles we’re facing these days. People want to get mortgages to buy houses, they have shown that they are trustworthy and historically are fairly unlikely to miss payments. However, many lenders (or their investors) are so skittish that these folks are being denied the opportunity for a mortgage in many cases.

If you are one of those that gets through the net and is in the position to be offered a mortgage, you shouldn’t just take whatever then lender is offering. There are some questions you should be asking first, even though you may just feel damn lucky to get a mortgage at all.

Here are mortgage questions to ask when analyzing your mortgage offer.

Mortgage Question to Ask – 1
What is the interest rate?

That is numero uno. The interest rate will have the greatest impact on how much you’ll pay every month and how much you’ll end up paying over the term of the loan. (For mortgages of the same amount, obviously.)

Mortgage Question to Ask – 2
Is this an ARM or a fixed rate mortgage?

In a survey of mortgage holders last year, over 30% of respondents were unsure of what type of mortgage they had. That amazed me so much I did a post on it. (Type of mortgage post) How so many could fall into this situation still amazes me, but don’t end up being one of these borrowers.

If you don’t know the difference between the different types of mortgages, here it is in a nutshell. A fixed rate mortgage is basically what the name implies. The interest rate will stay the same over the term of the loan. On the other hand, an adjustable rate mortgage (ARM) will change, or adjust, the interest rate at various times throughout the term of the loan. Rest assured the interest rate adjustment will be up, and so will your monthly payment. For more on this, see a post I did last year on how to select a mortgage.

Mortgage Question to Ask – 3
Are there prepayment penalties?

This is of huge importance. The majority of borrowers keep their mortgages for 5 years or less. That means you’ll pay off the mortgage and either get another one for your existing home, or you’ll buy a different house. In any case you’ll hold the mortgage for less than the full term. If you are charged a prepayment penalty it will cost you a hefty premium to do this.

Prepayment penalties are charged by lenders to help mitigate the risk that they’ll not get the entire revenue stream provided by the loan going full term (sounds like a pregnancy). Typically prepayment penalties expire after the first 2 – 5 years, but in some cases can persist longer than that. The penalty is monetary, you’ll not be asked to pledge your first born or classic ’57 T-bird. The normal prepayment penalty is about 2 – 3% of the outstanding balance at the time of the loan payoff.

You may be offered some consideration for agreeing to a prepayment penalty, such as a lower interest rate. On the other hand, you may be required to agree to one if you have bad credit, although at the present time few borrowers with really bad credit are able to get a mortgage at all, unless they have absolutely huge down payments.

A prepayment penalty may apply to a refinance only, in which case it is termed a “soft” penalty. If it applies to both a refi and a payoff of the mortgage, it is called a “hard” prepayment penalty.

Mortgage Question to Ask – 4
How much will this mortgage cost me in addition to the principal and interest?

Paying fees and closing costs for your loan are completely normal. There are a myriad of fees associated with securing your loan, such as appraisal fees, title insurance, documentation fees, recording fees imposed by the county for recording the deed, prepaid insurance, notary fees, application fees (try to negotiate your way out of that one), and so on.

You are required by law to be informed of any and all such fees and closing costs within three days of your loan application being received by the lender. These fees and closing costs can vary widely so it bears checking up on. Be aware that any such fees that are rolled into your mortgage will cost you a substantial amount of money after you’ve paid interest on them for 20 – 30 years.

Mortgage Question to Ask – 5
How long will it take to close the loan?

Closing is when you actually receive the proceeds for the loan. When it closes can affect your house deal, so you have to know how long it will take to happen. About 3 – 4 weeks is normal.

Mortgage Question to Ask – 6
Are you charging me points?

Points are an interest rate buy down. If you are charged points, you will pay a fee to the lender in exchange for a lower interest rate on the mortgage. It’s important to know this when comparing different mortgages, because if for example, one lender quotes you a 5.9% mortgage and another a 6.4% mortgage, you aren’t making an apples to apples comparison if the lower rate was obtained by your paying points to buy it down.

Points on a mortgage are equal to 1% of the mortgage amount. So a point on a $350,000 mortgage would cost you $3,500 up front. See the specific term of the offer to see how much each point is worth in terms of rate reduction. Normally it’s only a good idea to buy points if you are going to stay in your home and not refinance for at least 5 years, probably longer, otherwise you will not have time to recoup your added costs.

These are some of the most important mortgage questions you should ask when comparing different mortgages and before you sign your loan agreement. Before going into the process, make sure you have all your ducks in a row, they’re easier to shoot that way. Get all your required documentation in order, such as bank statements, tax documentation, check stubs, and anything else the lender may ask for. Also, you should have any offer reviewed by a good real estate attorney before you sign it. Here’s to hoping you get that mortgage!

Posted by debtblog at 01:56 PM | Permalink | Comments (0) | TrackBacks (0)

What are some of the dangers of reverse mortgages?

Reverse Mortgage Danger Num. 1 -
Well, in the first place you should be aware that the amount you receive will probably be less than you are shown in the initial calculations. This is because unlike a traditional mortgage, where the taxes, insurance, and fees are paid by monies you paid into an escrow account when you write your mortgage check. With a reverse mortgage on the other hand, it actually works, drum roll please, in reverse. The money for those items is subtracted from the amount the mortgage holder receives for their monthly payment, thereby reducing the net amount of the money you'll get each month. Be aware of this when you are making your calculations.

Reverse Mortgage Danger Num 2 -
Another danger of a reverse mortgage goes to the actual structure of the loan. As it is stated in most of the loan documentation, you will retain use of your property as long it is your primary residence. The problem is that, as reverse mortgage holders are senior citizens, the chances are fairly great that they may do one of two things that could cost them their home.

One is to be confined to an assisted care facility. At this point the home is no longer their primary residence and the bank will come for their money. If the balance is less than the home equity, the home will be sold and the equity beyond what is owed on the reverse mortgage will be given to the homeowner. If the balance is greater than the home will simply be forfeit to the lender to satisfy the terms of the loan.

The other condition that could trigger the primary residence provision is that the homeowner could move for much of the year to a second home. This is very common for seniors living in northern states. They will purchase second homes in warmer climes, such as California, Florida or Arizona, where they can relax in the sun. If they take their relaxing a bit too seriously however, they could find themselves in a situation where their home is no longer considered their primary residence.

Reverse Mortgage Danger Num 3 -
Another danger of a reverse mortgage is getting sucked into paying high fees or getting bad ARMs. Many reverse mortgages are adjustable rate mortgages. Many people are well aware of the dangers of these type of mortgages as they've occupied more than their fair share of the evening news for the last year. The same problems can apply for reverse mortgages as for traditional mortgages. You can easily be risking your security with the uncertainty of a reverse ARM. Personally, I may just be too conservative, but I like the old fashioned way, fixed.

Another point to be aware of is that the FHA will charge a 2% fee to insure reverse mortgages. But the real thing to watch out for is that you may be asked to pay even higher fees and closing costs than you would with a traditional mortgage. Don't do that, because many lenders will offer basically the same fee structure with a reverse mortgage.

Reverse Mortgage Danger Num 4 -
Another danger of reverse mortgages is that they let you spend your home's equity on just about anything you want to. This could cause a problems if you need those funds for an emergency down the road. While there's nothing wrong with living it up a bit in one's golden years, be aware of the temptation to splurge with all your reverse mortgage payments on trips to Mexico or a new Prevost to impress the folks in Arizona. Keep your eye on the future and remember that the money from the reverse mortgage could allow you to keep your independence at home should you or your spouse's health take a turn for the worse in the future.

A reverse mortgage can be a great financial vehicle to carry you through your golden years in relative financial security. Just be aware that there are dangers to reverse mortgages, just as with any other financial products

Posted by debtblog at 02:03 PM | Permalink | Comments (0) | TrackBacks (0)

These days times are tough and probably no one is experiencing that more than small business owners. According to the 368 page SBA report on small business released in December of 2007, there are over 6 million non-farm small businesses. That means well over 6 million of you out there are small business owners. Because so many are owned by more than one person, it's probably closer to 10 or 12 million.

Many of these entrepreneurs are constantly operating on the ragged edge of profitability and trying to keep their heads above water, so uncollected accounts can threaten their very existence. Few small business owners have the expertise, time or temperament to be effective debt collectors and yet allowing the debts to remain uncollected can sink their ship. Speaking from past experience, the financial stress of irregular cash flow can keep you awake at night, especially when you're staring payroll in the face. One position you never want to be in as a business owner is having to tell your valued employees that they'll have to wait to deposit their paychecks.

In the majority of cases, the cash flow problems are created by debt you can't collect in a timely fashion. Late and delinquent payments will ruin your cash flow. You may be profitable on paper, but your accounting won't pay your bills, only an influx of cash can do that. As a business owner there are times when you may have to hold your own paycheck in order to pay your employees. That doesn't go over too well on the home front, I can assure you.

You have some alternatives. You can just hope your accounts will pay, which sometimes just isn't very realistic. After all, in many cases your accounts are other small business owners just like you, and they're having their own financial problems. You have to make sure paying you becomes one of their top priorities. When cash gets tight, most business owners will pay their employees first, then the lease, and then vendors and other debts. Key vendors get pushed to the front of the pay line, while less important vendors are moved farther back.

If you don't have the skills to get your account moved to the front of the payment priority line, you'll need to hire someone who does. As I mentioned before, that expertise can come with a hefty price tag. An alternative is to use one of the online debt collection agencies that have come with the dawn of the Internet. For many of the same reasons other industries can become low cost service providers by becoming virtual, so can debt collection agencies.

This alternative can offer some advantages to you as a business owner. Typically the cost will be lower than a traditional debt collection agency, which helps preserve much need cash for you. In addition, you will usually have to pay no up front fees, which you may be in poor position to do. Basically the online agency will send collection letters from an official source for a set fee per letter, typically from $5 - $30. As you may have noticed, that's far lower than the 30% - 50% fee you may face when using a traditional debt collection agency. To be fair, a traditional agency will normally have a larger breadth of services available than does an online collection agency. For example, they may add phone calls to their repertoire.

You can have the entire process handled by an online debt collector, which could provide you with substantial cost savings. If they are unsuccessful you will have lost only a very small amount, and can turn to more traditional agencies. If they collect your outstanding debt, the money will be sent directly to your business. You will have much needed cash and can concentrate on what you really want to do, running your business, not collecting debts.

Posted by debtblog at 01:37 PM | Permalink | Comments (0) | TrackBacks (0)

A foreclosure is a proceeding that occurs when a mortgage loan is in default. Default means that the lender hasn't received a payment on the loan for a specified time period, usually 30 days after the payment due date. Typically the borrower will be assessed a late fee after the first 16 days with no payment, but the loan will not actually be declared in default until the 30 day mark has been reached.

The First 30 Days of the Foreclosure Process
Once the mortgage is in default the lender will make attempts to collect the past due balance, normally by initiating a series of phone calls to the borrower. You will also get one or more late payment notices sent by mail from your lender. Be aware that as soon as the 30 day period is reached and collection proceedings begin the lender will begin to assess additional fees and charges for collection and legal proceedings. This means that not only will you owe the past due balance on your mortgage, you will also have to contend with late fees, collection charges, and possible legal bills.

The Second 30 Days of the Foreclosure Process
The second 30 days with no payments received is where the foreclosure process begins in earnest. The lender will send a formal notice of default. This is usually done by certified mail. The notice of default will demand payment in full for the amount the loan is in arrears and any outstanding fees and other charges. There will be a specified time period by which the mortgage must be made current. Some lenders will accept partial payments, while others will demand payment in full. Many mortgages have an acceleration clause that allows the lender to demand full payment once a certain number of payments have been missed or amount time has passed with no payment being received.

This is when the lender will pass the defaulted mortgage from their collection department to their legal department. This means that you will owe even more fees before your mortgage will be considered current again. The purpose of sending the defaulted mortgage to the legal department is so that formal foreclosure proceedings can begin.

The Third 30 Days of the Foreclosure Process
The lender's legal department will forward the information associated with your mortgage to an attorney that will begin the actual legal foreclosure proceedings. Specific things must happen once this stage is reached. A notice of the impending foreclosure must be advertised in a public place, such as a local newspaper. You will get a Notice of Intent to Foreclose by certified mail.

There will be a court hearing to determine the validity of the lender's claim of non-payment. If their claim is upheld by the court, the lender will be permitted to foreclose on the property. A date for the foreclosure auction is set. At this point in the process another notice will be advertised, this one of the actual foreclosure sale of the property.

It is important to realize that you are not legally compelled to move out of your house at any point in the foreclosure process. Only after the property has been sold at auction will you receive a formal notice of eviction. This notice is normally sent within 72 hours after the sale. If you fail to abide by the notice, you can be forcibly evicted by the sheriff's department. In some cases the new owner will allow you to pay rent in order to remain in the home for a longer period of time. If you fail to move, eventually the sheriff will evict you by force and you can be arrested. This can take 6 – 10 weeks from the time you are sent the formal eviction notice, but in some locations can be as little as 1 week. Normally the new owner must go in front of a judge to actually have you evicted from his new house, but you can appeal the decision, granting you even more time.

The most important thing you can do to avoid such unpleasantnesses is to never let it get this far. Do not ignore the lender's communications. They will have little to gain from beginning the foreclosure process against you. They're a lender, not a real estate company. See my previous post on how to avoid foreclosure for more on how to keep your home.

Posted by debtblog at 01:50 PM | Permalink | Comments (0) | TrackBacks (0)

Actually yes, there are debt relief programs that can help you do that, but it's not really that simple. After all, you don't get something for nothing, although it could be argued that if you get a portion of your debt eliminated, you actually did.

There is some confusion among many debtors about the differences between the various debt relief programs. Are debt settlement, debt relief and debt counseling all synonymous? Actually no, they're not. They actually mean different things, and if you choose to avail yourself of one of these options to handle your debt, the option you actually choose could have long lasting effects on your credit and future financial picture.

Debt settlement is a term that most often refers to the process of negotiating with creditors to only repay a portion of a debt. Although that may sound like a fantastic option to many creditors, remember the whole free lunch thing. Using debt settlement services will impact your credit in a negative way and affect your ability to secure future credit, and the interest rates you pay for years to come. There are a few basic ways that these programs work, and before you enter into any such program you absolutely must go over any agreement with a fine toothed comb, preferably with the advice of an attorney who's well versed in such matters. It may seem like spending money to seek the advice of an attorney may just be compounding your debt problems, but a few hundred dollars up front may save you thousands of dollars and some financial migraines later.

Some debt settlement firms will simply charge you a flat fee for their services, but the more common scenario is for them to charge you either a percentage of the total outstanding debt or a portion of the savings they provide through the negotiated settlement. With most debt relief negotiations, the debt relief company will negotiate a settlement with each of your creditors that will represent between 40% - 50% of the original debt amount. They must negotiate independently with each credit card account. Debt relief companies can handle other types of debt as well, but credit cards are far and away the most common. Typically only unsecured debt is negotiated through this process, as unpaid secured debt will be satisfied by the creditor repossessing the security for the debt, such as a vehicle or land.

As the debtor, you will be required to set up a debt repayment plan for the agreed upon amount with each open account. This will include the payment to the debt relief company, the creditor, and the time frame for the repayment plan. You will then make payments either into an account set up by you, or an escrow account set up by the debt relief company. Once you have accumulated the requisite amount your debt will be satisfied. The process repeats with each debt until all your debts are paid at the individually agreed upon amount.

This is one of the places where things can go wrong for you as the creditor. Stories abound of less than scrupulous debt settlement companies simply keeping all the funds you've already paid should you miss a payment. This does happen, and needless to say that could cost you a bundle. If you feel that you realistically will not have the money to maintain such a settlement plan, you may want to consider another option, but even more important is to thoroughly evaluate any such agreement before you enter into it.

This highlights the importance of having a qualified, independent party look over the contract before you sign it. If you sign a contract that permits the firm to keep any funds paid to date should you miss a single payment, it's really your fault for such a debacle. If you feel such a clause is worth it in order to secure a substantial reduction in the amount of your debt, that's a decision only you can make. Remember that you will have your debt reduced a substantial amount, but there is also the debt company's fee to consider when calculating your total savings. In total, the savings may not be as large as you think.

The process lasts from 1 – 4 years in the majority of cases. It is exceedingly rare for the debt relief company to offer any sort of guarantee for their services. The key is that you should be using this technique as a way to avoid bankruptcy.

Debt Settlement Pros -

• Debt settlement / relief / negotiation can help you avoid bankruptcy.

• Debt relief companies can make creditors stop hounding you.

• Debt relief companies can get you debt free in less time than if you simply tried to repay your debts on your own.

• Debt relief will improve your credit in the long term because you will have no outstanding debt. It's up to you to stay debt free, however. Since about 30% of your FICO score is your amount of outstanding debt, reducing it to zero will improve your score.

Ah, but with anything there is also the not-so-bright.
Here are the -

Debt Relief Cons -

• Debt relief will give you a big drop in your credit score in the short term, however it will not be as bad for your credit as declaring bankruptcy.

• Debt relief programs require you to pay as agreed. If you fail to stick to the debt relief plan, you could lose every cent you've paid to date. Think of the rent to own scenario. Miss a payment, and there goes your TV. If you don't have the requisite amount of money in a single lump sum, it's time for some negotiation of your own. Before you enter into the debt relief arrangement, have the contract stipulate an installment payment system.

• You will owe more taxes to the IRS and possible the state department of revenue. In a spectacular example of hitting you when you're down the IRS views forgiven debt as taxable income. For example, that means that if you are in the 10% tax bracket and owe $18,000 in credit card debt, of which $9,000 is forgiven through the debt relief settlement, you will incur a $900 income tax liability. This will be reported to the IRS with a 1099 form. If you've ever been an independent contractor, you'll be familiar with such a form, as it's the same one used by those that hired you to report the income they paid you. Make sure you figure the increased tax liability into your calculations when deciding to use a debt relief or settlement company's services. This is an area where consulting a professional is vital, because you may be able to eliminate all your tax liability due to your financial status.

• The same process used by the debt relief companies to make the credit card companies stop hounding you, will also prohibit them from contacting you for anything positive. You may be able to do some debt negotiation on your own, but try this before you make the decision to use a debt relief company, because they will probably prevent the creditor from initiating any further contact with you.

Debt settlement or debt relief is not the same thing as credit counseling. Credit counseling is usually a precess whereby you meet with a person or team who looks at you financial state and makes recommendations about how you can improve it, and get debt free. There are for profit and non profit credit counseling services, although the non profit services are not necessarily free. See a post I did last year on non profit credit counseling for more information. It details 6 questions you must ask a credit counseling service to help make sure you're making the right decision.

Your credit is nothing to mess around with. There are pros and cons to any decision and the decision on weather or not to use a debt relief company as a solution to your financial problems is a mighty big one. They may be just the solution you've been looking for. On the other hand they could plunge you deeper into a financial pit of despair. Just make sure you go into a debt relief agreement, as with any of life's big decisions, with both eyes open. Don't make such a decision on emotion. To help avoid an emotion based decision it's sometimes better to take a few days to make your decision.

Here's to getting debt free, no matter what plan you use to get there.

Posted by debtblog at 01:22 PM | Permalink | Comments (0) | TrackBacks (0)

There are 2 possibilities; they could be trying to collect a debt that never existed, or one you’ve already paid. The second is much easier to dispute because you can show documentation that you paid the debt in full and their request is invalid. Trying to prove a negative on the other hand is much more difficult.

Rest assured, you wouldn’t be the first to be informed that you were in default on your debt for your Sears card that you owed $2,100 on. But, what if you didn’t actually owe the money? You either never made the purchase, or didn’t have an account with the firm in question. The first thing you do is jump on your trusty computer and fire off a letter to the collection agency and the merchant, disputing the debt. Want to do this as soon as possible. Use fake legal letterhead to make it appear even more impressive…..just kidding, definitely do not do that, however tempting it may be. Do, however provide every shred of documentation (copies only, please) supporting your position.

You will have to send the credit reporting agencies and the collection agency a letter disputing the debt. For reporting that you have a debt that you don’t actually owe, they can be in violation of section 623(a) of the Fair Credit Reporting Act (FCRA).

This provision of the FCRA states the following:

Duty of furnishers of information to provide accurate information.

(1) Prohibition.

(A) Reporting information with actual knowledge of errors. A person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate.

(B) Reporting information after notice and confirmation of errors. A person shall not furnish information relating to a consumer to any consumer reporting agency if

(i) the person has been notified by the consumer, at the address specified by the person for such notices, that specific information is inaccurate; and

(ii) the information is, in fact, inaccurate.

(C) No address requirement. A person who clearly and conspicuously specifies to the consumer an address for notices referred to in subparagraph (B) shall not be subject to subparagraph (A); however, nothing in subparagraph (B) shall require a person to specify such an address.

(D) DEFINITION- For purposes of subparagraph (A), the term `reasonable cause to believe that the information is inaccurate' means having specific knowledge, other than solely allegations by the consumer, that would cause a reasonable person to have substantial doubts about the accuracy of the information.

According to the same section, but in subsection (b), creditors, agencies and any other party who furnishes or reports information about your credit or transactions, have a duty to correct and update your information. They are also required to report that the entry(ies) are in dispute if you have disputed them.

First, check your credit report with the major credit reporting agencies (not the collection agencies, you owe them, and should give them nothing, or to quote motivational speaker Matt Foley, give them “Jack Squat”) to ensure they have all your updated information regarding address and phone number. In some cases these are problems of mistaken identity. If, for example you have a fairly common name, there could be another person with your name living on the same street in your city. If you work at a large company, they could even work there as well. If you’ve moved several times in the past, they may have an incorrect address and you could be mixed up with someone who actually has the debt. So, make sure the credit reporting agencies (CRAs) have deleted all your former addresses and updated your current one. When your information with the CRA is accurate, you can more easily get your dispute resolved, if the debt is really invalid.

One quick note; if someone from any agency calls you and requests personal information, such as your bank account number or SSN, DO NOT GIVE IT TO THEM. You could be at risk for identity theft, because you really have no idea if the person on the other end of the phone is in Moscow, Russia or Moscow, Idaho. If they are legit, they’ll already have your SSN, and if it’s incorrect, you’ll se as much in your report. You can call them at their customer service number if you feel the need.

Next, check to see that the collection agency in question is licensed and properly permitted to do business in your state. It’s kind of a long shot, but you can strike gold here. It gives you a lot of leverage you can use against them. Most likely they’ll just transfer the collection to another agency, but any leverage you have is good.

When you send out your letter of dispute, you usually want to send it Certified Mail Return Receipt Requested, understandably abbreviated as CMRRR. This will allow you to more easily document your efforts in the event that legal action is necessary in the future. You can also fax your letter of dispute to the collection agency; it’s easy, fast, and cheap. Now may not be the time to save $5.00 however. Some experts advise first sending your request handwritten on regular paper, and only proceeding to the use of a CMRRR in the event things are not rapidly resolved. The theory is that a handwritten letter gets more attention from the collection agency personnel.

Be sure you include copies of all your supporting documentation when you send in your debt dispute letter. Legally the agency has 30 days to respond to your dispute or the incorrect item must be removed, but that’s often not as easy as it should be. On the flip side, you have to respond to their allegation within 30 days as well. It’s very important that you do file your dispute in the allotted time frame so you maintain all your legal rights.

Knowledge is power here. Too many consumers don’t know their rights in this area and have never heard of the FCRA. You’re no longer one of them, so don’t take this lying down. Hit all parties concerned over the head with section 623(a) as hard as you can. Of course, in many cases, they’ll reply that according to their records, you really do owe the debt, and demand payment in full. Most of these companies are used to people trembling in fear or ignoring the situation entirely, so the mere act of firing back a response that sounds like you know of what you speak will take them a bit by surprise. Keep in mind that all parties trying to collect a debt are covered under the Fair Debt Collection Practices Act, which limits their actions. See my previous post on What Debt Collectors Can't Do under the act.

The CRA does have, according to the law, a “general duty to investigate a dispute when notified by a consumer.” So legally they just can’t shine you on. They have to make an attempt to resolve the issue, but all too often the attempt isn’t to resolve it in your favor.

They need to validate your debt, which if the debt isn’t truly yours, they will be unable to do. They may however send you an affidavit of the debt, which is not the same things as actually validating the debt, it merely states that they believe that you owe the debt. They need to provide something demonstrating that you actually owe what they claim, such as an invoice with your signature. If the debt is invalid, they will be unable to do so. It is imperative that you send them a CMRRR disputing their affidavit as soon as possible. Lack of response on your part can be taken as your approval of the debt according to the terms stated in the affidavit.

Unfortunately, you may have to threaten them with, and eventually pursue, legal action. First you’ll want to file a complaint with your state’s Attorney General, the BBB and the Federal Trade Commission.  It may cost you some money to get a competent lawyer with experience in resolving credit disputes. Sometimes that is what it will take to get the collection agency off your back.

One more thing; if you really do owe the debt, just pay it. Don’t pretend you don’t owe it and go through all the rigmarole of sending dispute letters. That’s the definition of insanity, not to mention fraudulent. If you really can’t afford to pay it, call your creditor before it goes to collection and make payment arrangements. In many cases they’ll be open to your attempts to resolve the situation. After all, what they really want is your money, and remember, a collection agency is going to take around 50% of your debt as a fee, so it behooves the creditor to work with you to resolve the whole thing.

Posted by debtblog at 01:42 PM | Permalink | Comments (0) | TrackBacks (0)

FICO, the folks who brought you the whole credit scoring system you either love or hate, are having a big sale. From now until the end of April you'll save 25% on any of their myFICO credit management or credit protection products. Click on credit sale for your savings.

Posted by debtblog at 01:09 PM | Permalink | Comments (0) | TrackBacks (0)

How to get out of debt fast isn’t rocket science, or missile science, as one of my friends once said. It is like a diet, but with your finances. If you take in fewer calories than you burn, the caloric deficit will result in weight loss. Similarly, if you take in less money than you spend, the deficit will result in debt. So, the trick to getting out of debt is to reverse the trend.

As with any equation, there are at least two sides. You can either reduce the money going out, or increase your income, preferably both. The key to getting out of debt is to optimize the combination of income and spending. Here are the keys to get out of debt fast:

Before you change anything, contact one of the three credit bureaus and get a copy of your credit report. It’s free once a year from each of the major credit reporting agencies. You can stagger these reports to get one every 4 months. You can also get a more comprehensive service from FICO, the fine people behind whole credit scoring system, that includes neat graphs and charts with your score from all three agencies at the same time and such niceties as real time credit monitoring. This isn’t free, but it is pretty inexpensive and does provide much more information in a timely fashion. You can get a free trial here.

Once you get your report(s) go over them with a fine toothed comb to make sure that all your debts are, in fact your debts. Only once you’ve done this can you be sure you’re not starting the debt dig out procedure from a hole that’s deeper than it should be. Start that process first, and while you’re waiting to get your information, jump into the rest of the steps (with both feet).

Get Out Of Debt Fast Key #1
Control your spending. This is the single most important thing you can do to get out of debt. The average American consumer is about $11,450 in debt. You have to spend at pretty fierce clip to amass that much debt. This debt calculation counts those all Americans age 18 and over as consumers. There are about 220 million Americans in that age group and the total amount of consumer debt in the U.S. is about $2.524 trillion. Controlling your spending as a means to get debt free is important on two fronts.

First of all, the majority of those who exhibit high levels of consumer debt, not including mortgage or emergency medical debt, got that way through poor spending habits. Here are some things you can do to help control your spending, and most importantly developing a lifestyle that precludes excessive spending.

1.      Control your spending by developing a sensible budget. – This step to getting debt free is numero uno. You can’t plan if you have no basis for it. Many people have a poor idea of how much money they really spend on various items. To prevent those seemingly insignificant expenses that really add up to significant ones, a budget is a must. I posted on how to make a budget recently.

2.      To control your spending, check every expense to make sure it is legitimate. - It’s a real pain the backside, but you’d be amazed at how much money you have that you give away unintentionally. Look at receipts and billing statements closely to ferret out all those charges that maybe shouldn’t be there. In addition, make sure that actually get those sale prices at the store that you’re supposed to. It’s fairly common to have the price in the computer not agree with the promotional sale tag on the shelf.

3.      Control your spending by reconciling all your medical bills with your insurance statements. - Most medical insurance plans limit the amount health care providers can charge for certain procedures for those on preferred plans. The allowable cost will be listed on your insurance statement for each procedure. Make sure that you are not being charged more than the allowable amount for any of the procedures you’ve had performed. If you’ve checked the cost of medicine lately, you realize that it’s gone up. No, really, it has. Being overcharged for a single procedure can easily cost you hundreds of dollars, so it’s worth it to take steps to prevent it.

4.      Control your spending by putting as many of your recurring bills as possible on auto-pay. Make sure you set this up so the money is withdrawn from your account at a time when you have money in there. Setting up your finances this way reduces the time you spend paying bills, but not as much as you may think, because you still must check everything to ensure the proper amount was debited from your account. The real reason to setup auto-pay for your bills is that it prevents you from paying financial institution fees and charges associated with late payments. A strong secondary reason for doing so is that helps protect your credit score from the effects of late payments.

Get Out Of Debt Fast Key #2
The other side of the equation is how much money you bring in to feed your budget beast every month. A two pronged approach to get out of debt fast requires you to not only control your spending, but increase your income as well. There are myriad ways to increase your income. These range from increasing the income you make at your current job, to starting an second job, to plunging into your own business on the side. As with getting out of debt, it’s best to take a multi-pronged approach to increasing your income.

Since there are so many opportunities available to accomplish the goal of increasing your income, it’s silly not to avail yourself of more than one. For example, try to increase how much money you make from your current job and investigate home business opportunities (many great ones, even more scams). The advantages of a home business are flexibility and almost unlimited possibilities. The disadvantages are risk and the possibility of sinking endless hours into something that may not pay off as well as you would like.

To maximize your income, it’s usually best to create multiple streams of income. These would include your primary job, side business(es) and investments. One caveat here; it is very easy to get yourself torn in many different directions when developing multiple income streams, so it’s important to approach this with some semblance of planning.

The other advantage of creating multiple streams of income is that diversification of your income, as with diversification of your investments, provides you with some measure of protection. You won’t be as effected by things such as outsourcing, your company going out of business, or company mergers if you have a secondary or tertiary source of income. You’ll not have all your eggs in the same basket. At some point you’ll have multiple baskets, each with more eggs than you started with.

Get Out Of Debt Fast Key #3
How should you go about paying your debt down, once you begin doing so? There are multiple schools of thought on this, but I prefer a combination approach to paying down debt. As with the snowball approach, you’ll pay off your highest interest obligations first using as much money as you can dedicate to doing so, while paying only the minimum payment on all your other debts. After you pay off the highest interest debt, you’ll use that money toward the second highest rate, and so on.

With the hybrid approach however, you’ll first pay off any cards that are at, or close to their credit limits. Why would you do this? The reason to get all your cards at a target of about 60% of their individual credit limits is to improve your credit utilization score, a measure of what percentage of your available credit you’ve used. Having a few credit cards at or near their limits decreases your credit utilization score and lowers your overall credit score.

If you can raise your score, you’ll usually qualify for lower interest rates on your credit cards. You won’t be given this lower rate out of the goodness of the lender’s hearts though, you’ll have to ask (beg??) them for it, so get on the damn phone!! Lowering your interest rate will obviously lower your monthly payments and allow you to get out of debt even faster.
 

Debt Freedom Tip:
Talk with your accountant, tax professional or financial planner to make sure your tax burden is as low as legally possible. If you haven’t done a very good job in this regard, you may free up enough income from this alone to propel yourself toward debt freedom more quickly than you could have imagined.

Posted by debtblog at 02:32 PM | Permalink | Comments (0) | TrackBacks (0)

Interestingly enough, we are going deeper into debt at a highly disproportionate rate. According to the same Fed report, overall consumer credit increased at an annual rate of 3-1/4 percent in January, revolving credit jumped at an annual rate of 7 percent, and non-revolving credit increased at an annual rate of 1 percent.

Think about that for a second. U.S. consumers are increasing their levels of revolving debt at a rate that's 7 times greater than their level of non-revolving debt. Non-revolving debt is for loans that are taken out once, then paid down over time, such as car loans and mortgages. Revolving debt is an account that can be borrowed against and then repaid repeatedly, such as general credit and store credit cards. That means Americans are increasing their levels of debt for major purchases at a level far below that of inflation, while their debt levels for credit card purchases are forging ahead at levels almost double that of the inflation rate.

This is problematic for consumers on a few levels. One is that revolving accounts tend to have far higher interest rates than non-revolving accounts. This means consumers are spending a larger percentage of their money on something for which they receive nothing in return. Actually the latest Fed consumer debt statistics indicate that as of December 2007, the average credit card interest rate was 12.16%. As a way of comparison, the average 48 month new car loan was only 7.59% (corrected from the Jan, 08 report), and the latest 30-yr fixed mortgage interest rates (according to Bankrate.com) were lower still, at only 5.73%.

Who are we borrowing this huge amount of money from? Well, the usual suspects, of course. The largest credit card issuers, in order of outstanding credit are:
Bank of America
JP Morgan Chase
Citi
American Express
Capital One – Apparently, they are in your wallet!

Eveybody's Not Really Drowning in Credit Card Debt!
Although you may feel as though you're right in there with everyone else, drowning in credit card debt, it's actually not true. According to the U.S. Federal reserve, just over 50% of U.S. consumers either have no credit cards (GASP!), or pay off their entire balance every month. Furthermore, according to FICO, the folks that bring you the credit scoring system, 40% of consumers regularly carry a balance of $1,000 or less. FICO also reports that only 15% of credit card users regularly carry a balance of over $10,000.

Of concern for some consumers is that the credit card issuers are willing to let consumers have so much credit available. Credit balances are increasing, but credit limits are increasing even faster. The aggregate credit card limit is now $19,000. This actually helps your FICO credit score because if you have higher limits as a percentage of your outstanding balance, your credit utilization score will be lower. A lower credit utilization score will raise your credit score. However, this gives consumers the ability to charge absolutely huge amounts at a relatively high interest rate, something that's not good for their personal finance picture as a whole. Thankfully, relatively few consumers actually do this, but it could spell problems ahead for the economy if the trend changes.

According to FICO the typical American has 9 credit cards of all types, including gas cards, store cards and such cards as Visa and Master card. If you cross this with the Fed information that about 25% of the population has no credit cards, that indicates a small percentage has about a dozen cards, which I'm sure most financial experts would agree is far too many.

Hopefully these credit card statistics will give you a bit better understanding about the state of credit cards in the U.S. and where you fit into the picture.

Posted by debtblog at 01:49 PM | Permalink | Comments (0) | TrackBacks (0)

So, what are you to do? Where are you going to get the money it will take to put yourself behind the wheel? First you’ll have to wrestle with the lease vs. buy decision. That’s a subject for another post, I’m going to assume that you’ve already made the decision to buy your car, and leave the leasing to someone else.

Car loans are available from a number of sources. Most traditional lenders, such as banks and credit unions, offer car loan products. In addition, you can finance through the dealer, if you’re buying your car there. You can also get a loan from one of the many on line vehicle loan providers. All have their advantages and disadvantages. Rest assured, you can get a good loan, and with the average price of a new car for 2008 hovering at around $28,000 according to Edmunds.com, you’re probably going to need one.

First of all, negotiate the price of the car down as low as possible. One way to pay less in interest payments is to just finance less. Pretty basic, but it bears repeating.

Car Loans Through the Dealer –
Rule number one; secure your financing before you ever go near the dealer’s lot. Even if you don’t use it, and for some reason you do finance through the dealer, having your loan secured from an outside source gives you a hefty advantage at the negotiating table. Dealer financing has its advantages for you as a customer, however most of the advantages lie with the dealer. Many car dealers make a large percentage of their profit through the financing they provide. Many car dealers are on the up and up, but there are those that aren’t, and even those that are reputable are out to make as much profit as possible. For more info, here's a post I did some months back on car dealer scams. 

One possible advantage by getting a loan from the dealer is one of the low interest incentive programs offered by many auto manufacturers. You have to run the numbers however, as many of these low, or zero interest loan programs are offered in lieu of a substantial cash rebate. Look at how much you stand to save by foregoing the discount and financing at the low interest rate, versus taking the discount and getting a good loan somewhere else.

Here’s an example:
GM is trying to rid itself of some excess inventory that burns a bit more fuel than some would consider desirable, so they’re offering 0%, 60 month financing on Silverado pickups. You can also choose a $2,000 rebate, if you’d rather have that. Now this is a nice truck if there ever was one, and if you can afford to feed it, more power (and it has up to to367hp) to you.

0% Car Loan
Where do you end up after you analyze this loan? A Silverado extended cab 4x4 with the 5.3l V8 fetches about $33,000. If you financed at zero percent it would cost you $33,000, but it would effectively cost you less, due to the time value of money. Your real cost is closer to $30,000 after the effects of 3.5% inflation is calculated on your payment stream.
 

Cash Rebate in lieu of 0% loan
If you took the $2,000 discount and financed $31,000 at 6.75% for 60 months, your payment would be $610 per month for 60 months, vs. the $550 you’d pay for the 0% loan on the $33,000 loan. Your total of payments would be $36,600. The present value of the payment stream is roughly $31,165. That $610 you pay for your last payment in 5 years is only worth about $512 in today’s dollars.

So, in real terms you spend about $1,165 more for the cash rebate plus the third part loan. If, however, you invested the $2,000 at 10% for the 5 years, you’d end up with about $3,300. That’s enough math for one Friday, I think. Just remember to bring your financial calculator to the F&I office with you and don’t take the F&I manager’s word for everything. Remember, they are all about getting you to say “yes”. So when they say, “If I could, would you”, just say no! (At least until you’ve run the numbers yourself)

You can get a good car loan. They key is to look at all the alternatives. Weather you finance through the dealer, get a loan at your bank or credit union, or get a loan from a on-line car loan website, just make sure you compare all the offers, and make the best choice. Don’t just grab the first loan to come your way.

Have a great, Debt Free, weekend!

Posted by debtblog at 12:18 AM | Permalink | Comments (0) | TrackBacks (0)

In most cases they will cut off access to your credit line with no warning. You'll continue to write checks against your credit line as you always have, but all of a sudden the checks will be returned, unpaid. In some cases, banks will send out letters to inform credit line holders that their line has been terminated or suspended. Countrywide Home Loans has reportedly sent out about 125,000 notices to borrowers indicating their home equity lines were being frozen. Other banks freezing home equity credit lines include Indy Mac, Chase and WaMu, but not as many as Countrywide so far.

Many people assume that if their home values decrease, their equity will drop and their line of credit limit may be reduced accordingly, but that's not what most lenders have been doing so far. For most people with HELOCs, banks are just freezing or terminating them completely. People who live in areas with rapidly declining real estate values such as Florida, southern California and Nevada are more likely to get letters of death about their HELOCs, although King5 news in Seattle, an area with relatively strong home values, is reporting this phenomenon as well.

What can you do if this happens to you, or to determine if you're at risk of having your credit line frozen? The first thing you can do is to call your lender. They may just reverse the freeze by you asking them to do so. In most cases, however you'll have to get an appraisal to determine weather the value of you home has indeed declined. (Be aware that home appraisals are not free) If if the value hasn't declined or if it has only gone down slightly, you may be able to get them to reinstate your credit line.

People with homes whose loan to value is above 90% are in more danger of having their line frozen. At such LTV numbers it only takes a relatively small drop in home values to erase all the home owner's equity. It obviously scares lenders that the security on the credit line could disappear, hence their propensity to freeze the borrower's credit. If you have 50% equity in your home, you're much less likely to be in this predicament.

Posted by debtblog at 02:40 PM | Permalink | Comments (0) | TrackBacks (0)

It wouldn't be a bad way to go for the consumer, but many consumers are not ready for the dozens of phone calls they'll get after signing up with such a service. Does it work for the lenders? In some cases, yes, and very well. The more information the lead generation site gets, the better, in theory, they can match the lender with the applicant. Different lenders are looking for different types of borrowers, and given enough information, they can do a pretty decent job of creating a match between the two. The problem is that many people on-line have the attention span of a gnat with ADD. The amount of information required to give a good match necessitates a fairly long form. That will, in many cases drive people away from the site, even though it would be beneficial for the lender to have more information.

The other problem with sites that require more information is that many people feel some trepidation about having all their personal information floating about on the Internet. The greater the amount of information, they larger their goosebumps. That concern can have some validity, especially when it seems like every other day there is a news story about a stolen computer or compromised database.

If you do use one of these sites to get a mortgage or refinance, make sure you are getting all the information. Remember, in addition to the interest rate, you need to include the fees and points that may be included in the offer when you are making your calculations. Before you can determine weather or not you're getting a good deal, you need to include all the pertinent information. Make sure you get all the necessary information, especially regarding an ARM, including the rate index, caps, maximum interest rate, and adjustment date. These sites will not offer this information in most cases. You'll have to get it from the actual lender yourself. Don't forget to do so.

So, remember that these mortgage lead generation services are a business. As such they have to get paid. Their employees, vendors, and investors would like to be paid, you know. They way they get paid is by selling your information to those who value it, in this case mortgage and refinance lenders. It's worth big money, too. They'll get from $100 - $500 per lead, per lender, depending upon the quality of the information, your demographics, and their contract with the individual lender. That means your information could be worth $2,500 to them, depending how many lenders they sell it to. Not to say that's a bad thing, but you should be aware of it.

Posted by debtblog at 03:16 PM | Permalink | Comments (0) | TrackBacks (0)

PMI has been required on homes with an equity level of below 20%. This protects the lender from default by the borrower. PMI reduction of risk for the lender has been instrumental in allowing first time homebuyers and others without the ability to scrape together a 20% down payment, the ability to finance a new home. Now however, as the result of the high level of defaulted mortgages, PMI providers are rethinking their level of exposure.

A few have decided to make changes that will make it more difficult to obtain PMI, and that, in turn, will make getting a mortgage more difficult. On Feb 11^th the PMI group announced they would no longer be offering PMI to borrowers with less than 97% loan to value.

On March 3^rd Mortgage Guaranty Insurance Corporation (MGIC) sent out a letter indicating they’d no longer provide PMI for borrowers with credit scores below 620 and if buyers had loan to value ratios of over 95%, they would now require a FICO score of 680. They had already announced they would no longer be approving insurance for borrowers having a LTV, no matter their credit score, who are living in certain real estate markets where prices have recently been declining. This includes the entire states of Florida, California, Nevada, and Arizona, in addition to 25 other real estate markets throughout the country.

What can you do as a consumer to mitigate the risk that these changing rules among PMI providers could affect your chances of getting a mortgage? There a few things;

1)                  How to Avoid Paying PMI  - Make sure your credit score is as high as possible. That will not only give you the widest range of options by ensuring that you’ll be above prospective insurer’s cut offs, it will give you lower interest rates on your mortgage and a wider array of lenders to choose from.

2)                  How to Avoid Paying PMI  - Some lenders will let you avoid PMI, but will charge you a higher interest rate to compensate for their increased risk. You can work with one of these lenders, and then refinance your mortgage when your home appreciates such that your LTV falls below 80%.

You’ll definitely pay for the privilege and in some areas of the country there’s no telling how long until real estate appreciates to the point where you’d have enough equity to refinance. This would mean you could be paying the higher mortgage payments for quite some time, rendering this a very expensive option.

3)                  How to Avoid Paying PMI - Increase your down payment to exceed the 20%. This isn’t an option many people will be able to take advantage of, but look at all your alternatives here. You may be able to borrow enough from other sources that you can make this work.

4)                  How to Avoid Paying PMI - Look at a cheaper property. If it’s possible, set your sights a bit lower so that you have the required 20% down payment. This may not work for your particular situation, but evaluate where you sit to find out if you can get an acceptable home for a lower price. It may be worth revising your expectations for your new home downward a bit so you can not pay PMI.

5)                  One popular way to avoid paying PMI has been what’s known as an 80/20 mortgage, where you actually get 2 mortgages, one for 80 % of the home and another for 20%. With the recent problems in the credit and mortgage industries, these are very hard to find now, as lenders have dropped many of their more creative financing options.

Bottom line: You can avoid paying PMI, but some of the options of doing so can end up costing you more money than just paying it until you no longer have to. Look at your individual situation to determine what works best for you.

Posted by debtblog at 02:54 PM | Permalink | Comments (0) | TrackBacks (0)

For example, the 90 point range from a FICO score of 760 – 850 currently nets you an average loan rate of 5.457%. Stepping down a bit into the next range, which falls from 700 – 759 will put you at an average interest rate of 5.679%. As your credit falls, credit ranges shrink, and their effect on your credit score becomes much greater. That’s why, when your score is relatively low, small moves can pay off for you big time. At the bottom end of the FICO score range it’s actually fairly shocking how much lower your interest rate becomes by raising your score 20 points or so.

The lowest range is between 500 -549. If you have the misfortune to find, or have put yourself, in this range score range you’ll currently be looking at an average interest rate of 10.479%. The next range up is only 29 points wide and gives you an average interest rate of 9.910% a reduction of .569 percentage points. Moving up, the next score range is also smaller, only 19 FICO points this time, from 580 - 599. The interest rate reduction is a drop of .404 percentage points, to 9.506%.

Another 19 point score increase will reward you with the 2^nd largest drop in the whole scoring ladder, a .571 percentage point reduction to 8.935%. That’s nothing, compared with the reward you’ll receive for raising your credit score into the next 19 point range, from 620 – 639. That must really give the guys in the scoring algorithm and risk department the warm and fuzzies, because that 19 point boost in your FICO score moves you from the aforementioned 8.935% rate all the way down to 7.046%! What that means is that a 21 point increase in your FICO score, from 599 to 620 will lower your average loan interest rate down about 2.5 full percentage points.

To give you’re an idea of the impact that could have on your finances, your payment on a $250,000 30 year fixed rate mortgage at 9.506% will cost you about $2,103 for P&I. Raise your credit score 21 points, from 599 to 620, and your payment will drop to $1,671. 21 points difference on a mortgage this small saves you about $500 a month, for 30 years. It's definitely something to think about.

This all points to the importance of knowing your credit score at all times. In this example, if you were trying to get a mortgage or car loan, some work on your credit score in the months before you applied for the loan would pay huge benefits. If you weren’t aware of what your credit score was, however, that blissful ignorance would be expensive indeed.

Remember, you are eligible to receive a free credit report once a year from each of the three major credit reporting agencies. You should definitely take advantage of this, if nothing else. If you stagger your requests, you’ll get a report every 4 months. You’ll be far more informed than most Americans about your credit worthiness, and that should be the minimum that you do. The information from each agency is a little bit different, but you’ll still have a pretty accurate picture of your overall credit health.

If you would like to be a bit more up to date on your credit, and that’s never a bad idea for one who’s concerned about their financial well being, you can check out the services offered by Experian, among others. They are very affordable and will monitor your credit activity and score daily. To ensure you are as informed as possible about changes in your credit score, they’ll send you email and/or wireless alerts when something changes. This alone could easily save you thousands of dollars when financing vehicles or getting a mortgage, but it will also make sure you get the best deals on credit cards and other financing as well. Remember, a small change in your credit score can have a very large impact on your interest rates, depending upon where you start. That’s why you need to know where you stand at all times.

A further benefit of this sort of monitoring is that it helps protect against unauthorized use of your credit, something else that can be extremely expensive. See how you can help yourself get the best rates on financing by ensuring your credit score is optimized when you apply; go here.

Posted by debtblog at 02:04 PM | Permalink | Comments (0) | TrackBacks (0)

Here are some of the ways that this act can help you when dealing with creditors. According to the act a creditor may not do the following when attempting to collect a debt:

1- Use or threaten violence. While it may be obvious that using leg breaking tactics to collect a debt would be illegal on many counts, some of the more dubious debt collectors used to threaten or imply this type of fate for difficult creditors. If this happens report them at once to your local police and the FTC.

2 – A debt collector may not use obscene or profane language when communicating with you in any way, including speech, or any written communication. Once again, this is prohibited and if the jerk on the other end of the phone starts cussing at you, no matter how far your debt is past due, they are breaking the law.

3 – Harassing you with repeated phone calls. The act even views “causing the phone to ring” as a phone call, so the collector may not call your house at 3:00am and hang up or engage in any other such shenanigans. A debt collector may not call you“repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number. “ although at times, it may certainly seem that they are doing that. Remember that if you are receiving debt collection calls from debt collectors for different debts, and from different collection agencies, that does not apply.

4 – If a collector is calling someone besides the debtor in order to collect a debt, they are severely restricted in what they can and can't do. They can call a 3rd party in an attempt to get your address or telephone number, but they cannot reveal to a 3rd party that they cannot state that you owe any debt, or use any language on the envelope of written communication that may reveal that they are in the debt collection business. They cannot communicate with a 3rd party more than once, unless that person specifically requests that they do so, or they legitimately think that person is lying to them or withholding information. Also, post cards are a no-no. If anyone gets a post card from a debt collection agency, send one of your own to the FTC.

5- If the debt collection has been informed that you are represented by an attorney in the debt collection matter, they must communicate only through your attorney. They cannot call you again after they have this knowledge. Again, if you get a phone call from the collector after you've informed them they should speak to your lawyer in the matter, drop a line to the FTC. The only way they can speak to you again is if your attorney ignores their attempts at contact. For $200 an hour, you'd hope they can answer the collection agency's communications.

6 – Unlike the police during the interrogation of a suspect, a debt collector cannot lie to you or misrepresent themselves in any material way. They can't say or do any of the following:

a. Say or imply they are with the government or affiliated with any government agency

b. Say or imply that you'll go to jail for nonpayment of any debt. Debtor's prisons don't exist in 21st century America. If, however, you fraudulently obtained a credit card or any other financing, you are in violation of the law, and can be imprisoned for fraud, but not the actual debt itself.

c. Say they are an attorney, when in fact, they are not.

d. Lie about the debt or how much you actually owe.

e. Indicate or imply that you have committed a crime regarding the debt you owe.

f. They cannot threaten any action, such as wage garnishment, unless they actually expect to take such action. Making empty threats in order to collect a debt is a violation of the act.

g. Send fake court documents making any claims regarding the debt. This seems so logical, you wonder why the government even had to include it.

h. Not disclose that they are attempting to collect a debt and any information they receive will be used for that purpose. They have to state this in their first communication with you, weather it is written or oral.

i. Using a business name other that the true name of the collection agency that they work for.

You can download the full text of the Fair Debt Collection Practices Act here. 

If anyone is using any of these tactics in order to collect a debt from you, they are violating the law. This is true weather or not you are the biggest deadbeat this side of the Mississippi. It doesn't matter how large or small the debt is, or how long you have owed the creditor money. There is certain conduct and certain actions that are prohibited under this act. If a collection agency is trying this on you, politely inform them that you know about the Fair Debt Collection Practices Act, and that they are in violation of it's statutes. That will usually make them clam up. Stay Debt Free

Posted by debtblog at 03:17 PM | Permalink | Comments (0) | TrackBacks (0)

In addition to the above debt statistics, only 51% of those in the study were able to completely pay their credit card bills every month. That means that 49% of Americans, if the study accurately represents the entire country, are going deeper into credit card debt every single month. That stands to reason, as 33% reported that their non-mortgage debts exceeded $10,000. Because the majority of Americans finance their vehicles, that could account for a large portion of the $10,000, but the study isn’t specific about this. It’s frightening nonetheless.

So, what are your options to legally eliminate debt if you find yourself in this distinguished company?

Option to legally eliminate debt #1-
Pay it off. This is the responsible thing to do, and probably what most people would choose if given the choice. If the debt is of your own making, i.e. fueled by excessive trips to the mall, clubs, casino, or eBay, it’s definitely the right thing to do, but it may require a bit of reorganization and reprioritization.

Weather you’re trying to lose weight or get out of debt; you will do well to implement a complete lifestyle change. Actually, losing weight and losing debt require many of the same things. You need to develop and implement a strict budget, weather you’re talking food or finances. Come to think of it, your food budget can really help your financial one. Evaluating your victual choices can really help in paring back the family budget.

Obviously eating out is a no-no, except on the most special of occasions. Look at your diet. In most cases you can make food choices that are less expensive and healthier for you. The health aspect is very important when it comes to keeping yourself out of health related debt in the future. A glance at the debt study numbers reveals that this is a big concern of many Americans, so a change of diet can help put your mind at ease, in addition to stemming the outflow of your hard earned dollars.

You should also look at where you shop. No more high-end markets for you. It’s off to the warehouse food store. Don’t worry, your stuffy friends (who are also deeply leveraged) will never see you there, they’re too busy trying to find a spot to park the Lexus at the Whole Foods Market. You’ll have the last laugh though, because your grocery bill will shrink by about 30%.

To eliminate your debt by repaying it, you’ll need a plan. One method that works very well is the roll up debt repayment plan. It’s pretty simple, yet effective, especially if you have a large amount of credit card debt. Stop using all your credit cards except in the direst of emergencies, and I don’t mean the Labor Day Sale at Macy’s. Once you’ve done that, here’s how the repayment plan works.

Pay only the minimum payment on all your debts except the one with the highest interest rate. Bring all your financial resources to bear on that debt. Pay as much as you can squeeze out of your budget (you did make one, didn’t you??) toward this debt. When it is paid off, switch all the money you were using to pay off this debt toward repaying the one with the next highest interest rate. With each successive debt you repay, you will put more toward repaying the next one, because you not only have the money in your budget for debt repayment, but the minimum payment you were using for all the previous debt you’ve repaid.

Option to legally eliminate debt #2-
Bankruptcy. Ouch! That’s usually the absolute last option and it’s even less attractive since the new bankruptcy statutes went into effect in October of 2005. There are 2 main types of personal bankruptcy; chapter 7 and chapter 13. Chapter 7 is able to be used for both personal and business bankruptcies. It’s the worst kind of bankruptcy with respect to your credit. There’s no going back. Your non-exempt assets are sold, and the proceeds are sued to satisfy your creditors to the extent the proceeds of the sale will allow it. The advantage to the Chapter 7 is that your debts are eliminated, not reorganized.

All your debts are eliminated, except of course, if you happen to owe the IRS anything. They always get their money, so be aware of this if your primary debt is tax related. Tax related debts are given what’s called priority status, meaning they are exceedingly difficult to get out of paying. The IRS will not go away by merely filing bankruptcy, and many state departments of revenue work the same way. It’s best to reach a settlement with the IRS to reduce as much of your back tax bill as possible because eventually, you’ll have to pay it.

In addition to eliminating your debts, a chapter 7 bankruptcy will pretty much eliminate your creditworthiness for the next 10 years. That’s a heck of a long time, but that’s how long a chapter 7 will stay on your credit report. You’ll still be able to get credit of course, especially after a few years have elapsed, but it will cost you much more, and you will have fewer options than before you filed. After all, if you’re making good money, and are fairly debt free after your bankruptcy, there are definitely creditors who’ll want a piece of your pie, so they’ll loan you money, you may just have to pay more for the privilege.

A chapter 13 bankruptcy is also called reorganization. In this type of bankruptcy, debtors pay off a large portion of their debts over time. The chapter 13 stops collection actions and prohibits collections action for a 5 year period. It freezes your debt at current levels. It requires a bankruptcy plan that’s approved by the courts. It will spell out in detail how you plan to repay your debt. You have only 15 days after you file your bankruptcy petition to complete this plan to the court’s satisfaction and have it on file.

The largest reason to file a chapter 13 over a chapter 7 is that you can save yourself from losing your home to foreclosure. After the bankruptcy however, you will have to make all your mortgage payments as per the terms of the bankruptcy plan, or you will risk losing your home anyway. Another advantage is that all creditors are paid by the bankruptcy trustee (the trustee is an impartial individual appointed by the court as the administrator of the bankruptcy), so you make a single payment, similar to what you would do with a debt consolidation loan.

After the Bankruptcy legislation of 2005 a larger percentage of your debt is required to be repaid than before. There is now a means test to help determine the debtor’s ability to pay off their debt. The legislation also required chapter 13 to be used if the means test shows that you are able to repay your debt over time, because your income is greater than your expenses.

Option to legally eliminate debt #3-
Debt settlement or debt elimination. With debt settlement or elimination, your debt is negotiated down by professionals. They basically get the credit card companies to agree to accept a fraction of the original debt and then consider the debt paid in full. The credit companies do this because if you file bankruptcy, they may receive little or nothing that you owe them. I can hear some of you thinking now; “Wow! That sounds great. How can I sign up for that?”  Slow down. Do you really think there’s no catch to that sort of thing?

There are a few catches. First of all you’ve got to be ever vigilant for debt elimination and debt reduction scams. The Internet is rife with such nonsense. In fact these types of scams are so prevalent, the Board of Governors of the Fed has sent out warnings about it. One popular debt elimination scam uses fake financial instruments to claim the debt is invalid. Think about it for a second. If you charged up that Virgin Islands vacation on your Visa card, do you really think you can question its validity? Come on! You still have the tan, you have to pay the credit card bill.

The scammers charge large up front fees, claiming to be able to get the debts eliminated by showing they are, in fact, invalid. You’ll be sucked in by a tremendous amount of logical (on the face of it) and official sounding documentation. It’s all total crap. After you pay the scammers their large up front fee, you’ll be left holding the bag, and deeper in debt than ever before.

The other catch to debt elimination and debt reduction programs is that they can hurt your credit score. Lowering your credit score can make it more difficult to secure new credit, especially now, when lenders are skittish about giving out mortgages and refinance loans without spotless credit.

The last catch is rarely talked about, especially by the debt settlement companies. Ever hear of a 1099? If you are an independent contractor, you are well familiar with these IRS forms. These are the IRS forms for non employee income. If you receive any non employee compensation for work performed such as contracting, the contracting firm will document this with a 1099. That way they can deduct what they paid you from their income, and the IRS is notified of yours. Well, guess what, the IRS considers a creditor agreeing to reduce your debt as compensation paid to you. The creditor will send you a 1099 and you will have to pay takes on that income, as sure as if it showed up in your paycheck. The problem is that nothing was withheld from your paycheck to cover the income noted on a 1099, it’s just added to the income reported on your annual W2.

So, be aware of the catches of this method of legally eliminating debt; possible scams, implications to your credit, and more taxes owed by you. If you look at all the options, you may still feel that debt elimination or debt settlement is the right choice for you. Then again you may not.

Posted by debtblog at 02:18 AM | Permalink | Comments (0) | TrackBacks (0)

Just how do you calculate debt to income ratios anyway? For that matter, after you calculated it, what is an acceptable debt to income ratio? Calculating your debt to income ratio is fairly simple, You merely divide your monthly gross income by your outstanding debt. To calculate the ratio, you have to take your annual gross income and divide by twelve. I know, you were told there would be no math, but it's pretty darn simple, really. This calculation gives you your average monthly gross income. Here's where you wish you'd claimed all those tips and side jobs you've been gloating about. If you haven't reported them, you'll have a harder time getting your lender to believe you really have that level of income.

After you figure out your average monthly income, you'll need to look at two different percentages. If you are going to get a conventional mortgage, you'll use 28% and 36%. If you are getting an FHA or VA mortgage, you'll use slightly higher percentages; 29% and 41%. What do those percentages mean? The first is the percentage of your gross income you can use for housing expenses. That will include your house payment, all your housing associated insurance, and interest. These expenses are abbreviated PITI, for Principle, Interest, Taxes, and Insurance.

If, for example, your W-2 income was $55,291 last year, you'd divide that by 12. The result of that calculation is your average monthly income: $4,607.58. Depending upon the type of mortgage you'll be getting, that will give you the amount of house payment you can be approved for, all else being equal. In this example, you'd be able to afford a house payment of $4,607.58 x .28 for a conforming mortgage. $4,607.58 x .28 = $1,290.12. As you can see, that's not too much house in many metro areas. For example that house payment will allow you to technically afford, at this week's average 30 year fixed mortgage rate of 5.52%, a mortgage with a balance after your down payment of $227,000. You might want to avoid the mistake made by too many people leading up to our recent credit problems, and finance less than that.

Wait a minute, what about that second percentage? What does it mean? That 36% or 41% is the amount of house you can afford according to the standard debt to income calculation, after you include all your other recurring debt. This is where you include your credit card bills, car payments and store charge card payments. This is why your loan officer is telling you to pay down some of this type of debt. You can qualify for a larger mortgage if your recurring debt is lower.

Let's look at the above example, but assume you have only one car, a 2005 Honda Accord LX. That's a nice, sensible, family sedan with a price when it was new of about $22,000, depending upon the option level. Say out the door, with taxes an license, you're into it for $24,000. If you financed this car when it was new, and got 4.9% financing, your monthly payments would be about $450 per month. Let's also assume that you have the national average credit card debt of about $8,500, depending on whose statistics you look at. If you are also paying the national average gold card interest rate of 11.73%, your monthly minimum credit card payment amounts to somewhere around $260. (You can take heart in knowing that if you make only the minimum monthly payment on your cards that it will take only about 15 years to pay off the $8,500 and you'll pay about $4,000 in interest on the $8,500 principle amount!).

If you include your car payment of $450, and your credit card payment of $260, your recurring monthly expenses are $710. $710 added to $1,290.12 gives you a nice, round $2,000. Your mortgage lender will let you have 36% of your monthly gross income be consumed by PITI and recurring monthly expenses. Your current gross monthly income in this example is $4,607.58. 36% of your monthly gross is only $1,658. In this example, you're way too high after adding in your monthly expenses, to qualify for your house. Now you see why you see so many used car ads that read “Must sell, buying house”. With this level of monthly recurring expenses, you can only qualify for a house that's $948/ month. You'll be staying above the garage.

Posted by debtblog at 03:04 PM | Permalink | Comments (0) | TrackBacks (0)

The problem is that for most people that have bad credit, credit cards were how they got there in the first place. Looking for a credit card if you used them to get your personal finances completely screwed up isn't going to make things any better. Too many people think that they can reverse the situation if only they can just get this one more card. Then, they'll turn things around, and everything will be okay. Only you and I know that in most cases, it won't be okay because the underlying causes of the problem still exist and until they are corrected, it's only going to be like giving a fifth of Jack to an alcoholic, who thinks “I'll just have one more and then I'll stop.”

In many cases it happens gradually. The problem is that few people actually track their finances, so they have little clue about exactly where the money goes, only that it's gone. To those that aren't financially savvy, use budgets, track their expenses, and go over their billing statements, it seems that one day they're simply blindsided. They wake up and realize they're in way over their head and have little hope of reversing the situation. If this sounds all to familiar, you're not alone. It can be a case of keeping up with the Joneses, being just a bit too social, gambling, or myriad other causes of excessive spending.

There are times when people with bad credit may need a credit card and it's not a bad idea. You may fall into one of these categories. If you had one time, extraordinary expenses or income loss that put you over the edge, such as job loss or medical bills, you may fall into this category. These experiences can destroy the credit of someone who previously was a prime credit risk. These people tend toward the financially responsible, but just got into a bad situation. In this day and age, living completely sans credit card can be a difficult proposition especially if you travel or purchase things on line (another addiction that can get you in trouble in a hurry).

You can use a credit card to help reestablish good credit, but it's essential that you've done all the groundwork first. Job 1 is to reign in your spending. If you're still spending more than you make, getting a new credit card is the last thing you need to be doing. Pay off any outstanding debts on existing cards, if you have any. If you have existing credit cards, don't get new ones. Just pay off the ones you have and lock all but one of them away somewhere. Keep the accounts open, because those aged accounts, and the availability of more credit, will help improve your credit score over time. This strategy will only raise your credit score back up if the accounts are in good standing and have low or no balances. Maxed out, or close to the limit cards will detract from your credit score.

You should only use new credit cards to help reestablish your credit if you have lost all your previous credit cards. In that case, you'll need to have some type of credit account to begin a successful track record of making timely payments. Two of the things that the FICO scoring system looks at is how much credit you have, and your credit profile. You want to have a balanced mix of credit types, such as personal loans, revolving credit (credit cards are a type of revolving credit), and mortgages.

The Three Types of Credit Cards for People With Bad Credit
Here's what to look for if you must have a credit card and your credit is not so hot. You'll have 3 basic choices; secured, unsecured or prepaid cards. Secured credit cards, as the name suggests, require some security against the the possible credit limit, limiting the lender's exposure to risk. This enables those with bad credit to qualify for credit cards they'd otherwise not have a prayer of getting. Typically the security is cash, the amount of which determines the credit limit for the new card. You'll usually be charged a fee for the privilege of having such a card.

One of your key tasks is to shop around for the best fee structure. Fees are one of the card issuer's main profit centers. Many people fixate on the interest rates they're paying and forget about the fees, which can be substantial. Make sure you check both. In addition, make sure that the card issuer reports your activity to Exeprian, Trans Union and Equifax, not just one or two of them. If you're using the card to rebuild sour credit, you want to get what you're paying for (and you are paying).

If you do well with this secured card, in time your card company will offer you a real, unsecured credit card. At first you'll probably have to live with higher interest rates, but make sure you inquire about lowering your interest rates. They may say “no” at first, but ask again every 3 to 6 months. As your credit improves, you'll qualify for better rates. If not from them, you'll be able to get a card from another company. Just don't start on the same death spiral that got you in such a mess in the first place.

Your other option is a prepaid credit card, typically either a Visa or MasterCard. These are really just a glorified debit card. With a pre-paid card, you deposit money into an account for security as with a secured card. The difference is that as you spend, it just depletes the money you deposited. With the secured card, you are actually using credit. The security money is just there in the case of a problem.

Have a great, Debt Free Weekend!

GO COUGS - #4 (15-0)

Posted by debtblog at 11:15 PM | Permalink | Comments (0) | TrackBacks (0)

The fact remains that this single, 3 digit number has a greater affect on your finances than any other. It almost single handedly determines the interest rate you'll pay for credit, weather you can get credit at all, and a slew of other, seemingly unrelated things in your life. Some of the other things that your credit score impacts these days include your eligibility and rate for insurance and rental housing.

What is a good credit score?
FICO credit scores range from 300 to 850, with higher being better. You'll see few at either extreme, just as you'd expect. The majority of U.S. consumers (27%) have a score between 750 and 799, and 58% have a score of 700 or greater. The average credit score varies with time, but is usually in the low 720's. Most lenders consider a score of over 750 very good, and that should make you eligible for good rates on loans and credit cards. Exactly what is considered a good credit score varies by lender, and in many cases by product, so the best policy is just to get the damn thing as high as possible. Recently, due to the problems in the credit markets, lenders have been getting a bit more skittish about who the lend money to, so where you could have easily gotten a good loan with a 705 last year, this year the same lender may be looking for a 745.

What makes up your credit score?
Your credit score is determined by 5 things; past payment history (35%), amount owed (30%), length of your credit history (15%), new credit (10%), and the type of credit you use (10%). Take note here, people, the single most important thing that FICO looks at when calculating your credit score is your past payment history. They consider the most reliable indicator of your inclination and ability to repay creditors your history of doing so in the past. The score is weighted so that recent late payments (the last 24 months or so) are more important than those in the more distant past. About 2/3s of Americans have no late payments showing on their credit reports whatsoever, so if you do, it definitely puts you in a minority you'd be better off avoiding.

The next most important aspect of your credit considered by FICO is how much you owe. This is not just the total amount of your debt, but the amount of your available credit you have used. This is also termed your credit utilization score, and is a very important component of your overall score. To increase this number your should pay off debt, especially revolving accounts, such as credit cards. The CUS is why you can adversely affect your credit score by closing unused accounts. Doing so will decrease your total available credit, and thus your score. The amount owed on revolving accounts is weighted more heavily than is debt from installment loans, such as car loans or mortgages. FICO actually looks favorably on installment loans that have a good payment history, so if you have a car loan that is 50% payed off, and you've never been late, that will help your credit score.

To prevent you from just applying from every credit card under the sun, and then not using them, as a strategy to raise your CUS, and with it your overall credit score, you'll note that another component of your FICO score takes into account any new credit you've opened. A large number of new accounts will decrease your credit score in the short term.

The length of your credit history is important in the grand scheme of things. Experience breeds contempt, but also a better credit score, in the eyes of the powers that be. How long you've been a creditor is also a reliable indicator of your risk for future creditors, so is included in your credit score. That is why you should get a credit card the day you are able, and begin building a credit history. In keeping with the larger components of the FICO scoring system and financial prudence, make all your payments on time and keep the balance fairly low.

Last but not least, FICO looks at what types of credit you use. They are concerned that you have multiple types of credit, so having a credit card and a car loan, for example will serve to raise your credit score. Ironically, your lack of a credit history will probably cause you to pay a higher interest rate on a car loan at first, but will repay you by allowing you to get a higher credit score, and lower interest rates on subsequent loans.

So, what does not affect your credit score?
How old you are isn't taken into account, so that is another reason to begin building a credit history early. If you are 25 years old with a 7 year credit history, you will score higher than a 25 year old with a 3 year history, all other factors being equal. They also don't factor in race, color, creed, or any other such nonsense, as well they shouldn't.

A common misconception is that the amount of money you make is included in your credit score, but is not. Salary or compensation isn't used as one of the determining factors in your credit score. Apparently there are just as many deadbeats making $100,000 a year as there are making $30,000. Something to note is that lenders themselves may look beyond your FICO credit score to consider your income, as when they calculate your debt to income ration when you are applying for a mortgage.

Something else that isn't included are all types of credit inquires. Some are included (hard pulls) and some aren't (soft pulls). When you check your own credit score, something you should do regularly in addition to getting a copy of your credit report, that will not affect your credit score in the slightest. If you are attempting to open a new account, that inquiry will give your credit score a minor ding (about 5 points) for 12 months, although it actually stays on your credit report for twice that long.

Your credit score will not take into account the interest rate you're paying on other financial obligations, so if you have a credit card that you're paying 22% on, that won't automatically lower your credit score.

So, to raise your credit score you should do the following:

1. Get a copy of your credit report. You are able to do this for free once a year from each of the 3 major credit reporting agencies; Equifax, Experian, and TransUnion. Stagger your requests so that you get one every 4 months. Look through it with a fine toothed comb and contest any inaccuracies that you find.

2. Make sure you make no late payments. If you have any delinquent accounts, clear them up at once. The sooner you clear them, the sooner they will fade far enough into the past so as not to adversely affect your credit score.

3. If you have no credit history, begin building one as soon as possible. The length of your credit history is very important to your score, so the earlier you get credit, the longer your history will be.

4. “Piggyback” This is way for you to use someone else's credit to bolster your own, and is especially powerful to increase your credit score if you are young and have little or no credit history. This is why it is a great idea for you to get attached to one of your parents credit cards if they have good credit. That card's history will be reported on your credit report and increase your credit score. Due to recent abuses, such as people renting their credit histories to those with abysmal credit, this technique is in danger of being eliminated.

5. Analyze at your credit profile. Do you have 22 maxed out Visa cards? Keep a healthy balance of credit types and, this is very important, do not close accounts you no longer use and have paid off. These old, paid off accounts are pure gold for your credit score. The increase the length of your credit history, and because they have no balance, they decrease your credit utilization score.
   

Hopefully this will increase you understanding of that all-too-important financial statistic, your credit score, and allow you to raise it so you can take advantage of lower interest rates, and better loans.

Posted by debtblog at 03:08 PM | Permalink | Comments (0) | TrackBacks (0)

Lets say, for the sake of argument, that you currently have $10,000 in outstanding credit card debts at an average interest rate of 15%. You want to see all your favorite bowl games in their requisite HDTV splendor (and impress your friends with the spectacular picture quality of the large screen HDTV in your family room). That being the case, you trot your self over to your laptop to check the ratings on the latest 52” LCD and 50” plasma TVs. After a bit of research, you settle on a new Samsung LN-T5281F with dynamic LED back lighting (a marvel of technology, that) or a Pioneer PDP-5010FD Kuro plasma (the best plasma image I saw at the recent CEDIA show in Denver, although Pioneer cheated a bit by using custom produced demo material).

These are both truly fine,1080p displays that will wow even the most jaded video critic, so your drunken friends should be suitably impressed as you gather to watch the Fiesta bowl. So, what is the cost to impress your friends and enjoy a bit of HDTV bliss? The best is never cheap, and these TVs certainly aren't, but you're going to pay it off right away using your Christmas bonus, so what's the problem? The Samsung LN-T5281F is $4,499 over at Abt Electronics, one of the few web retailers to offer this high end model. The Pioneer PDP-5010FD is an even bigger stretch, at a whisker under $5K over at OneCall, again, one of the few places on line to carry it. (Yes, if you actually order one of these, I'll get a (very) small cut. It helps with the bandwidth costs.)

One note here about purchasing electronics on line – There are many unauthorized retailers out there where you can find products. However most manufacturers have only a select number of on line retailers that are actually authorized to carry their products. Failure to purchase through one of the authorized retailers will bring with it a host of problems, including loss of warranty. Not a great deal on such an expensive product. In addition, many of the products are either grey market goods (goods for other markets transshipped to the U.S.) or aren't really in stock. Upon ordering at the too-good-to-be-true price, you'll be steered toward another product.

Back to the question at hand regarding purchasing by the indebted. Spending your Christmas bonus on one of these fine TVs, while bringing untold amounts of enjoyment to you and yours, comes at a cost of failing to retire an equal amount of debt at an average interest rate of 15%. If, for example, you spent $4,499 on the Samsung, apart from helping the economy of South Korea, you are paying that 15% on an equal amount of debt that you still have, because you chose to buy a cool, new HDTV instead of losing the debt. So, in reality, the TV costs you $4,499, plus 15% a year until such time as that amount of credit card debt is paid off.

So, make sure you think about the debt you aren't paying off the next time you make a purchase instead of getting rid of some of your debt. Have a great weekend.

Posted by debtblog at 02:53 PM | Permalink | Comments (0) | TrackBacks (0)

The single, most important thing you must know is why you're in debt. That knowledge is vital in order to determine how you'll proceed. If you're in debt due to unforeseen, extraordinary circumstances you'll take a different course of action than if you have a pattern of spending in excess of your income. According to Bankrate.com the most common cause of excessive debt is failing to reduce expenses when your income is reduced. Growing one's expenses to match one's income is one of the most natural personal finance patterns. It can be seen almost every time someone's income rises. Almost invariably their expenses will rise right along with it.

The problem here is twofold. One, by allowing expenses to rise, you are depriving yourself of valuable retirement and investment contributions. Two, you are reducing your margin for error in the event of an income reduction. The second situation happens all too frequently, and is disastrous for your finances. You lose your job and your next one pays less, or you are working on a project that allows consistent overtime pay and it ends; whatever the reason, a reduction in income will put you in a real financial hole if you allow yourself to grow your expenses with your salary.

f you spend more than you make, for whatever reason, you have established a pattern that guarantees long term indebtedness, and there's little you can do about it unless your spending habits change. That's priority number one if you're seeking debt relief; get your spending under control, or all your actions will be for naught. Gambling (debt reason number 5) is a surefire way to find yourself with massive debt. That is even more likely if you are one of the 2.7% of the U.S. population that has a gambling problem (State of CT Department of Mental Health and Addiction Services).

If you are in debt due an extraordinary event such as divorce (the number 2 cause of excessive debt) or medical problems (the number 6 cause of debt) than you will be more successful by using a debt consolidation or other program to secure debt relief. Entering a debt relief program if you are one of those that has a spending problem, whatever the source, is a recipe for disaster. Priority number 1 in this instance is to cure the root cause of the spending imbalance. Only then can you reign in your debt problems.

One of the first things you should find out in the debt relief process is your credit score. That will help you lay out your options. The higher your credit score, the more options you have, and the more you have to lose by screwing the whole thing up. You should know your credit score in any case, because it's just good, personal finance common sense.

The next thing to determine is weather or not you have any assets that can be used as security. If you have assets for collateral, primarily real estate, you can get a debt consolidation loan. This is only acceptable if you have no spending problems. I'll repeat that once again for those that are reading this early in the morning, before they've had their coffee. Under no circumstances should you ever get a debt consolidation loan if you have a pattern of spending in excess of your income. One of these loans isn't always the best solution even if you have no spending problem. Like any other financial instrument, it is only a tool to be used when the situation warrants it. Just when does the situation warrant it, you may ask?

If you have exhibited financial responsibility, consistently pay your bills on time, but are saddled with several high interest credit card or other debts, a debt consolidation loan will allow you to make a single payment while saving substantially on interest payments. Be advised that you can actually pay more in total interest by using a debt consolidation loan, even if the interest rate is much lower than the loans you're paying off. How the heck is that possible? Two possibilities. One is that many of these loans have fees that you'll be required to pay. While not technically interest, the fees still contribute to the APR of the loan. The second reason is that many of these loans have long terms. When you stretch the repayment of your loan over a longer term, you're naturally paying interest for a longer period of time. It adds up, and you can actually pay more in interest over the long term.

The other thing to consider is that you can lose whatever you are using for security on the loan. That security is why debt consolidation loans have a lower interest rate than credit cards and store charge cards. The loan is secured, and so represents a lower risk for the lender. The lower risk translates directly into a lower interest rate. Be that as it may, it won't make much difference to you if you default on the loan and your collateral is repossessed. The overwhelming number of people use their primary residence as collateral, so if you default, it will be foreclosed upon. You'll be living at that big underpass on the 5, next to that guy with the blue tarp. That's serious business, so go into any such loan with both eyes open.

You may also consider credit counseling services as a way to find debt relief. There are two varieties of credit counseling. In the first one, the counselors will go through things with you and help you plot a course of action to steer your way through your debt minefield, hopefully plotting a course that results in your being debt free. It can be an excellent way to help you decipher all the subtleties that can affect your financial future. When you're finished, you'll have a financial action plan to eliminate your debt. Since 1998 FICO ignores the fact that you're visiting a credit counselor when calculating your credit score.

The other variety of credit counseling involves counselors too, but they actually negotiate with your creditors to allow you to pay back only a portion of your debt. They will also stop most of those harassing collection calls, if you've let the situation get that far. This is also called a debt management program. So, now you're saying “Wow! This is great. I can pay back only a portion of my debt and stop those nasty phone calls? Of course I'd rather go that route.” Not so fast, Bucko! That kind of debt relief will come at a cost; namely to your credit rating, which will typically plunge it's way into the financial toilet for a while, although not nearly to the extent that a litany of missed or late payments will do.

The last form of debt relief is through bankruptcy. If your credit score is already atrocious, say under 550, you obviously have less to lose by declaring bankruptcy. You should be fully aware however, that you'll have that bankruptcy on your credit report for a decade and it will make getting any sort of loan much more difficult and expensive during that time. In addition a pattern of poor spending habits will only continue after you've declared bankruptcy, unless you take steps to correct it. Once you've declared bankruptcy, you can't just do it again, either. You have to wait for 7 years before you can do so again (Chapter 7).

There are many options for debt relief. They all have their advantages and disadvantages. Carefully choose the best option for your situation.

Posted by debtblog at 03:18 PM | Permalink | Comments (0) | TrackBacks (0)

So, it's likely that if you've graduated from college in the last couple of years, you'll have substantial debt to deal with. How do you balance that with the need or desire to buy a home? You'll have to take on a mortgage. Due to the recent, well (over??) publicized problems in the mortgage industry, especially the portion of it serving the more credit challenged in the audience, you may think getting a home may have to wait. It may, but you should evaluate your financial situation to determine if it is worth pursuing. There's a good chance that you'll find that purchasing your first home does make sense for you after all.

If your analysis reveals that buying a home is for you, and you can find someone to give you a mortgage, chances are you'll get a pretty favorable interest rate on it. Although many lenders are a bit averse to actually lending money at this point, when you can talk them into it, you'll probably get a pretty fair mortgage.

As an aside, it's a shame that so many lenders are so squeamish about actually doing business these days. There are still a tremendous number of people out there that want to borrow money, and are fantastic credit risks, yet lenders are reluctant to give them a mortgage. Too bad for the borrower, the lender, and the economy. Yes, they should shy away from those that legitimately have little chance of repaying the loan, but guide your lending with common sense, not fear, please.

So, if you have a student loan, or more likely a few of them, how should you proceed? First of all, if you have multiple student loans, you should look at student loan consolidation, especially now,with interest rates so low. It will make debt management a much easier task, and reduce your monthly payment. Not only will that help your cash flow and make life easier, but when lenders look at your financial picture, you will be a bit more attractive to them.

Okay, you've consolidated, now what? Since the days of zero down mortgages are behind us for the most part, you'll probably need to come up with a down payment for your house. Here's the question; if you have money for the down payment, should you use all of it as a down payment, or should you pay off some of your student loan?

If you're fortunate enough top be in the position that you can ask yourself this question, congratulations! You're doing something right. So, which is it? Pay off some student loan debt, or increase the down payment on your house? You'll have to look at the interest rate on both loans first. The rate on your consolidated student loan will be based on the results of the 91-day T-Bill Auctions and are set on July 1^st. You should not have to pay a fee for consolidating your loans, either. Your mortgage interest rate will, of course be dependent on many factors, such as your credit rating, lender, and so forth. I've done a few posts in the past on how you can improve your credit score, and how to get a better mortgage. Look at them for steps you should take before and during the mortgage process.

If the interest rates are similar on the the consolidated student loan and the mortgage, you'll usually be better served to pay off the student loan, and minimize the down payment on your home due to the tax advantages a mortgage provides. Remember your mortgage interest still provides a nice tax deduction, despite the efforts of some in congress to eliminate it. That usually swings the answer in favor of using as much of your money as possible for paying off student debt, which provides no such tax advantages. This assumes a fixed mortgage at a good interest rate. If you have some unconventional mortgage product with all sorts of schedules, rate adjustments and fees, you're probably still better off if you put your money toward paying off your student loan, but with something that complex, you're on your own.

Have a Merry Christmas, and Happy, debt free Holidays! I may make another post between now and Christmas, but with all the loose ends left to wrap up before then, there are no guarantees. Here's to family, friends, and all those in the world that are less fortunate. I hope you're having a great holiday season!

Posted by debtblog at 02:35 PM | Permalink | Comments (0) | TrackBacks (0)

If you are one of those that does have excessive debt, weather you fear it or not, a debt cure may be in order. Curing debt is easier said than done in many cases. Sure, it's simple to spout such platitudes as “Just put 10% of your pay toward your debt until it's paid off. You'll never miss the money.” Weather or not you would, in fact, miss the money is academic. To find a cure for your debt, you'll need to analyze it and determine what will be the best course of action to eliminate it.

Debt Cures – Strategy 1 - Step by Step

Debt Cure Step 1 –
Get a copy of your credit report from at least one of the three credit reporting bureaus. You need this not only to establish a baseline credit score, but for debt elimination purposes, you need to be sure if all your debts are valid. Your credit report will show you if you have any debts you are unaware that may be invalid. If you have any debts you feel are in error, you can contest these while you move on to the next steps required to cure your debt problems.

Debt Cure Step 2 -
List all your debts. Put down the creditor, the type of debt, the balance owed, the monthly payment, any past due balance, the interest rate, and if it is a fixed term loan, the payoff date.

Debt Cure Step 3 – Analyze your debts. Why are you in debt? Determining the root cause of your debt  is absolutely essential. You can have debt from a pattern of overspending, or from an extraordinary event, such as natural disaster or medical problem. If your debt is caused by overspending, you must cure the root cause. If you’re spending beyond your income, you’ll be doomed to a life of indebtedness.

Debt Cure Step 4 -
When you have all your debts listed and categorized, sort them by the interest rate. Now it's time to plan your debt elimination strategy. Usually you'll work on paying off the highest interest rate obligation first. There are some exceptions to this.

If you have any past due debts, you must satisfy these first. There are two reasons for this. One, they are probably charging you a late fee every month you are late. Second, past due debts devastate your credit score. Lowering your credit score can actually make the interest rate rise on some of your other debts, in addition to making sure any new credit you receive will be more expensive. The farther past due the debts are, the greater the detrimental effect they have on your credit score. So, if you do have past due debt, make sure that is taken care of first. Make the minimum payment on your other debts until you have satisfied all your past due debts.

Once you’ve taken care of any past due debt, it’s time to begin eliminating current debt. Make the minimum payment on all your debts but the one with the highest interest rate. You can use some discretion here. For example, if you have a credit card with a $12,000 balance and a 21.9% interest rate, and another card with a $1,250 balance and a 22% rate, you should probably pay off the 21.9% card first. The amount of interest you’re paying every month on the larger card far exceeds the interest you’re paying on the smaller card, so you should eliminate that debt first.

When that debt is gone, take the money you were paying on the now retired debt, and shift it toward paying off the next highest interest rate debt. You’ll have more money to use for this because you’ll have the minimum payment from the retired debt and the extra money you were using to pay for it as well. You’ll add those two amounts to the minimum payments you had already been making toward debt number 2. When number 2 is gone, you’ll repeat the process with debt number 3, and so forth, until you’re debt free. Yipee Ki Yay Motherf….

Strategy 2 –

Using strategy number one will get your debt paid off, but you will take an interest rate hit. After all, the entire time you’re paying off the debt, you’re also paying interest, and at a fairly steep interest rate. You can use another strategy to pay less in total interest if you do it correctly. There is much more risk with this strategy if you do it wrong, however. Strategy number 2 is to get a debt consolidation loan. Unlike what the shills on the radio will tell you, A DEBT CONSOLIDATION LOAN WILL NOT GET YOU OUT OF DEBT!!! You get yourself out of debt by making payments on the darn thing.

The advantages to this strategy are that you’re only making one payment, so it is much more convenient, and you’re far less likely to inadvertently miss a payment. The interest rate is typically much lower as well, so in theory you’ll pay less in total interest.

The disadvantages are that although the interest rate is lower, the term of the loan is much longer, so if you only make the minimum payment, you can actually pay more in total interest by using a debt consolidation loan, than you would have if you’d just paid the debts off using strategy 1 above. The other disadvantage is, and this one is huge, you must use collateral to get that lower interest rate. What collateral? In the vast majority of cases, it’s not your comic book collection. Typically the lender will want your house as their collateral. Now if you fall behind, you not only screw up your credit, you have to find a new place to live. If you have to do that with no money and poor credit, I imagine it’s no easy task.

The other problem with using a debt consolidation loan is that in many cases, the problem that caused the indebtedness is not fixed. You can easily find yourself in a situation where you are back in debt from credit cards, vehicles, and now, a debt consolidation loan as well. Not a pretty picture, that.

Remember there are debt cures, but no magic potions. Here’s to getting debt free.

Posted by debtblog at 05:41 PM | Permalink | Comments (0) | TrackBacks (0)

CDOs are also what’s known as structured securities. This refers to the way the debt is set up. Not all participants face the same exposure to risk in such a financial instrument. Picture a CDO as a high rise building, with different risk exposures on each floor. The lower floor has the highest risk, and the highest floor has the lowest risk. Each floor is like a condo. It’s is purchased by different investors.

Why would these investors not all seek to purchase those levels on the top of the CDO, with the great view and the 12 foot ceilings (and the lowest risk)? Because, in the typical risk / reward relationship of investment instruments, the top levels of the CDO don’t receive the best return. Those at the lower levels, facing the highest risk, also enjoy the highest interest on their investment. At these lower levels CDOs can be extremely risky investments, and investors can lose everything they have invested. They are compensated for this risk by returns that regularly (until recently, for many) well exceeded 10%.

Who are these investors? They are much the same as with any other large debt instrument; pension funds, mutual funds, corporate and government retirement plans, insurance companies, large private investment funds, and banks. As you can probably guess from the types of institutions involved, we are dealing with absolutely huge amounts of money here. The 3-06 Fed report listed the total amount of outstanding debt backed securities in the U.S. alone at almost $35 trillion! Contrast that dollar amount with the equity markets, where approximately $50 trillion is in play in all of the world stock markets combined (data from the global trade association for stock exchanges).

These CDOs are one of the actual vehicles used by investors to acquire the mortgage debt made so famous in the media over the last few months. The investors, many from overseas, or as noted earlier, part of large financial groups, don’t just go out and buy somebody’s home loan. They buy securities (bonds) backed by the mortgages, including CDOs, which are made up of these bonds (securitized groups of many hundreds or thousands of such mortgage loans), packaged with other collateralized debt.

For a look at the actual math involved in a CDO (If you’re math averse, put your brain on ice first), check out this informative post by Accrued Interest

Why you should care about CDOs –
You should care about them because they are a foundation cornerstone of the mortgage backed securities market. As such they can have a large impact on the credit market as a whole. In addition, some observers feel that CDOs, because of their structure, are difficult to effectively risk analyze, and the risk can be mis-priced. That means the price doesn’t adequately reflect the associated risk assumed by the investor. That can lead to investors acquiring securities with a negative expected return.

Why would a large financial group or institution ever purchase a security with a negative expected return? After all, one would assume they would be in a much better position to analyze potential investments than your average person. They are, but due to the inherent complexity of a CDO, even some of the large investment groups sometimes have trouble  getting it right, because even they simply don’t have the depth of understanding required in these matters.

It gets better –
It has been theorized by some analysts that this lack of understanding has been capitalized on by some hedge fund managers. In order to generate their fund’s profits, they have been using a technique called credit arbitrage. That means they profit from the difference in two markets. More difference means more profit for the funds (grossly oversimplified). In order to maximize their profit they want to maximize the market difference. They can either seek to grow one side or shrink the other, possibly both. With arbitrage, risk is minimized by using simultaneous, or near simultaneous transactions.

A technique used by these managers to accomplish this Herculean task is to shake the confidence in the markets. Since credit market pricing is, in a large measure, based on confidence, lowering confidence creates a price collapse. With lower prices on one side of the equation, an arbiter can generate greater profit. That has been done in the case of the credit markets, according to some observers and insiders. So basically, a few fund managers aimed to destroy the world credit market for their gain, at your expense. For a more in-depth look at this phenomenon, take a look at this column in MSN money by Jon Markman.

Now that you’re good and pissed off, have a happy Thanksgiving (ignoring the whole genocide aspect of Thanksgiving for those of you unfortunate enough to have children in the Seattle school district).

Posted by debtblog at 02:56 PM | Permalink | Comments (0) | TrackBacks (0)

In a single day Google gets what I found to be a very surprising number of searches that pertain directly to the mechanics of perpetrating credit card fraud. For example, the search term “credit card generator downloads” got 873 searches, “credit card generator” got 407 searches, and the term “credit card reader / writer” got 1010 Google searches. This is in one, single, day! That means that on a single search engine (admittedly, the world's largest) for only three search terms on how to get the tools to perpetrate credit card fraud, there were 2,290 people actively trying to steal money from you, your credit card issuer, or from their perspective, preferably both. Perhaps I'm a bit naive, but I found that frightening.

Here are some things you can do as consumer to help prevent credit card fraud:

• Sign your card card as soon as it arrives.

• Don't keep your cards in your wallet. Keep them in a zippered compartment or a business card holder.

• Record of your account numbers, their expiration dates, and the phone number and address of each company. Keep the record in a secure place.

• Watch your credit card during a transaction, and get it back as soon as possible.

• Void all incorrect receipts.

• Destroy carbons created by non-electronic processing.

• Compare your card receipts with billing statements.

• Reconcile your card accounts monthly, just like your checking account.

• Report any questionable charges promptly and in writing to the card issuer.

• Notify card companies in advance when you change your address.

Merchants can help prevent credit card fraud on their end with some relatively simple strategies. As this sort of fraud is omnipresent and expensive for business owners, it's something they should be actively engaged in preventing. Here are some things that business owners can do to head off credit card fraud before it strikes.

1. Address Verification System (AVS) - This checks to determine if the card's billing address and the ship to address, or the address listed by the person trying to use the card match.

2. Checking ID – I'm always surprised by the number of employees that fail to perform this very simple step when I make a purchase. When I was a business owner this was grounds for disciplinary action. From the customer's perspective, it isn't a hassle. Most customers will be thankful that their ID was checked before their credit card was charged.

3. CVM – this is that extra 3 digit number on the back of the card. The trick is that this number is found nowhere in the mag strip information, so if the card is swiped by one of those fraudsters that steal your card by illicitly using a card scanner, they will not get the number. In theory, you actually have to have the card in your possession to have the code number. Most online merchants will demand it. If you aren't asked for it when you're placing an online order, shop elsewhere. If you're a business owner, you are crazy not to use this verification technique.

4. Payer authorization programs add an extra secret password that must match before the card will be approved. It does add an extra step in the checkout process, but if you, as a customer, don't have an extra few seconds to help prevent this growing problem, shame on you.

Hopefully these steps can help both merchants and consumers avaid credit card fraud.

Posted by debtblog at 03:08 PM | Permalink | Comments (0) | TrackBacks (0)

Upon a brief conversation with the bank's CSR, it became a bit more clear. In order to pay extra and have your auto pay debit your bank account by the normal amount, your check for the additional amount you wish to pay must arrive at the credit card issuer after the auto pay date, but before the closing date of the credit card statement. Go that?

It's pretty important, because if you have your credit card set up to debit your account for the amount of the minimum credit card payment, and you want to pay extra, you have to ge3t your check in during the proper window. If not, you will only succeed in reducing the amount of your auto pay debit by the amount of your extra payment. If your check for the extra amount you wanted to pay was greater than the amount of the minimum payment due, you would only ending up paying the amount your check was for and nothing would be debited from your account for the auto pay.

Hope that makes it a little more clear than mud.

Posted by debtblog at 07:48 PM | Permalink | Comments (0) | TrackBacks (0)

Credit Card Practice to Watch For #1 –
Foreign exchange fees – These fees are charged any time you purchase something on your card from another country. The exception to this is Capital One, who currently does not charge it’s customers a currency conversion fee. The conversion fee averages a little less than 3%, so they can add up in a hurry. Weather you’re traveling or ordering something online from a company whose e-commerce website is set up outside the U.S., or wherever your credit card account is based, these fees will be added to your purchases. The bank charges you a fee for currency conversion, and you pay handsomely for the service. If your account is U.S. based, the fee is based on the U.S. dollar value of the purchase, after conversion.

To avoid this you can use your card as little as possible when traveling overseas. Exchange your currency at your bank and use traveler’s checks. For some travelers, the fee is worth the added convenience and protection offered by using their credit card. If you are one of these consumers, you should be aware that you are paying for the privilege.
 

Credit Card Practice to Watch For #2 –
High priced credit card insurance and monitoring – With the high instance of large credit card balances, credit fraud, and identity theft a large market has been created for customers that are looking to protect their good names, and more importantly, bank accounts. This has given rise to a huge number of products offered by credit card issuers to guard against loss in the event of credit card fraud, ID theft or the card holders inability to pay their credit card bill due to some unexpected problem, like stepping in front of the #17. The operator from your credit card company can be pretty persuasive on the phone when they are seeking your enrollment in one of their credit protection services, so hold your ground and at least make sure that the one they are offering is the best choice for the job.

While these services can have undeniable value, they can also be fairly expensive, especially if the benefits are limited to the issuing company’s products. Many credit card companies charge between $7.00 and 10.00 a month, or a percentage of your outstanding balance for the service. There are a variety of independent services available that guard against such losses, but are effective for all a consumer’s credit products. Look into one of these if you are of a mind to secure some protection.

Credit Card Practice to Watch For #3 –
Changing interest rates – many times a credit card issuer will change the rate their customers pay on their cards, and do so with no warning, explanation or special indication. They’re sure as hell not going to send you a letter calling your attention to their little profit increasing tactic. In fact, many consumers, typically not as vigilant in these matters as they should be, will fail to notice for months, if at all. This is a practice you need to watch for.

Look at the interest rate for both purchases and cash advances (don’t get one of these from your credit card company, unless you need it for life saving surgery) on every statement. If you see the rate rise for no apparent reason, you need to call their customer service department and find the reason for it ASAP. In many cases you can get them to reverse it, and maybe even get the rate reduced to lower than it was before. In order to make this happen, you obviously must have had no late payments and be in good standing on your account.

Credit card companies are a business and are looking to maximize their profit. With the increasing number of people in credit distress, they are looking to make money from those that do pay every month in order to maximize their revenue. If you’re one of those that pay, make sure you’re only paying your fair share.

Posted by debtblog at 01:43 PM | Permalink | Comments (0) | TrackBacks (0)

So how can you ensure you get the best deal on a credit card without getting stung by unfavorable terms? There are some things you need to do to make sure this happens.

1 Way to Get Good Deals on Credit Cards – Look past the teaser rate on the offer sheet. Often the junk mail you receive is emblazoned with low, but very temporary teaser rates. After the introductory period expires, you'll get stuck with the real rate, often very much higher.

2 Way to Get Good Deals on Credit Cards – Read everything so you can avoid paying excessive (any) fees. The next most popular way for the credit card companies to get your money is by attaching fees to the agreement. You need to shop around for low, or preferably no fee offers. If you do the math and look at the fee as an extension of the interest rate, you'll be amazed at how much worse that makes your card. The less you spend on your card, the worse fees are as a percentage of what you've spent, hence they increase the apparent interest rate you're paying. For example, if your card has a $50 annual fee, and you charge $1,000 a year on it, the fee effectively added 5% to your interest rate. So now that 9% card is a 14% card.

3 Way to Get Good Deals on Credit Cards - Look at the grace period. That's where you can really get hurt. If you have a short grace period and you pay by regular mail, you can get stung badly if your check gets delayed or returned. The extra day or so may be all the lender needs to not only charge you a fee, but raise your interest rate. Once they've jacked up your rate, it'll be at least 6 months before you can negotiate it back down in most cases. In addition, if you don't ask them to lower it, they'll leave the rate high forever. Look for at least 25 days after you made any purchase. Something else to watch for is the length of time between the bill arrives at your house until it's due. In some cases you'll ahve only days to mail the check, so if you do your bills once a week or 10 days, you may miss the cutoff date.

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First of all there are two kinds of mortgage points, origination points and discount points. In this case we’re referring to discount points. A discount point is just a way you can pay a fee at the beginning to lower the interest over the life of the loan. You are, as it’s referred to, “buying down” your mortgage interest rate. Origination points, on the other hand, are a fee charged by the lender to originate the loan. A single point (back to origination points) is a fee equal to 1% of your initial loan balance. So, if your mortgage was for $200,000, 1 point would be a $2,000 fee. You pay this fee up front, at the time the loan closes. This will then lower your mortgage interest rate over the entire term of the loan.

Should you pay discount points on your mortgage? It depends primarily on how long you’ll keep your mortgage loan for. Because the lower interest rate will save you money over the life of the loan, while the fee you pay is paid up front, it will take some time before you will make back the initial money you paid. That is known as the “breakeven point”. After you’ve passed the breakeven point you are actually saving money. Before the breakeven point you’re just repaying yourself the fee you paid the lender for the points when you got your loan.

That means that if you plan on staying in your home (and keeping that mortgage) for a length of time, usually over 10 years or so, points may be a good idea, while for shorter time period you’d be better served investing that money elsewhere. Most mortgage points calculator fail to take into account the value of the money you paid for the points as an investment, only as cash. If you do include the fact that you could easily be earning a return on that money that could possibly exceed the interest savings on the mortgage loan, it changes the equation yet again.

For example, if you have a $200,000 outstanding balance on your mortgage, and you paid 2 points for the interest rate to be reduced from 6.1% down to 5.7% you’ll save approximately $52 a month. How long, at $50 per month, will it take you to recoup your initial investment? Again, that will actually depend on the rate of return you could earn on the money you paid to buy down the mortgage had you invested it instead of using it to pay points.

In this case, if you paid 2 points for the buy down you’ll save about $620 in interest that first year. That $4,000 would have to be invested in a vehicle that returned 14.4% (compounded daily) to earn an equivalent amount. In this example, you’d reach the breakeven point for the loan with points in about 5 years and 8 months. If you held the property and the same mortgage for 15 years, at the end of the 15 years you’d have saved about $5,600, assuming you are in the 35% tax bracket and could have invested your money at 4%. If you earn 5% on your investment or savings, the breakeven period stretches out to 5 yr / 10 months.

I hope this helps you figure out the points / no points question. Have a great, Debt Free weekend. 

Posted by debtblog at 01:07 PM | Permalink | Comments (0) | TrackBacks (0)

Funny, both of these events had one thing in common; a terribly flawed business model. With the e-commerce bubble it was the “gain market share at the expense of anything resembling profit” business plan; all the while buying $50,000 granite water features and custom carpet with the corporate logo for the lobby of the hopelessly large offices. With the sub prime mortgage fiasco it was the “Just loan money and let appreciation sort everything out” mindset that proved to be the industry’s undoing. Okay, now that everyone is on the same page, repeat after me “Our business model has to be self sustaining and show long term profit potential, without rewriting the rules, in order to be valid.” Got that? Great!

Now that most of the calamity has befallen us, there are still many people out there who’d actually like to buy a home. Lenders and their investors are so jittery, they’ve forgotten that many people actually will repay their loans. These prospective borrowers are earning a decent living, have equity in their homes, and aren’t leveraged to the hilt in other areas. These are well qualified buyers and represent pretty good credit risks, all things considered.

If this is you, you’re probably wondering just how in the heck you’re supposed to get a mortgage these days. I have a few friends with houses on the market right now, and they report that, while many people would like to fork over the required price to buy their home, many are unable to actually get a mortgage to do so, even though they seem qualified.

Here’s what mortgage lenders are looking for these days in order to let one of these precious mortgages slip through their fingers. You’ll be hard pressed to get a mortgage with a credit score much below 650. If you can get one, you’ll pay a pretty penny. You’ll probably not be able to get a no down payment loan, either. Be prepared to have a down payment of at least 10% for a conforming loan from most lenders. The exception would be someone who has a very nice sized down payment, such as in the 25 – 30 % range. Credit would be less of an issue for these borrowers. Remember, $417,000 is the maximum loan amount purchased by Fannie Mae. Loans above that amount are classified as ‘Jumbo Loans’ and are more difficult to get. Lenders are usually not loaning any more than 80% of the home’s value for these loans.

For God’s sake, stay away from ARMs. Have y’all learned nothing? As we speak there is little to be gained by going with an ARM. Bankrate.com reports that there’s about a 0.2% spread between a 30 year fixed rate mortgage and a 5/1 ARM. Last week there was basically no difference at all. So, for right now, stay with the security provided by a fixed interest rate mortgage.

Despite what’s been so widely reported, it’s still possible to get a mortgage for the majority of people. Lenders are just being more cautious and you may have to look a bit more thoroughly in order to find a loan, but they are still out there, so don’t’ give up just yet. It’s more critical now than ever to make sure your credit score is all it can be, and that you have all your ducks in a row.

Posted by debtblog at 11:35 PM | Permalink | Comments (0) | TrackBacks (0)

If you felt like you spent more time in you college's financial aid office than in class, you're not alone. Federal spending on student loans has increased by over 40% since the start of the decade. It now sits at $23,000 per U.S. household. Think about that the next time you think the feds are spending nothing on education. Sadly, that has barely kept pace with the increased costs of getting a college education. But federal spending for student aid of all types for parents of students, including loans, has jumped by, now sit down, 400% since 2001! If you're looking to help increase these numbers, here are the types of loans you'll be going after.

The 3 types of federally guaranteed student loans are the following: Stafford Loans, PLUS loans, and Perkins loans. Here's how they stack up.

Types of Student Loans

PLUS Loans - These loans are for the parents of eligible, dependent, students. Who are exactly are these eligible students? To be eligible for such a loan, you must be enrolled at an approved institution of higher learning, in an approved program, on at least a half time basis. The exception to this rule are that Graduate student are now eligible to receive PLUS loans. PLUS loans are provided through both the Family Friendly Education Loan (FFEL) program and the Federal Direct Student Loan program. As the name suggests, direct loans are available directly through the U.S. Department of Education, while FFEL loans are obtained from an approved private lender, such as bank. The parents will need to submit to a credit check to receive PLUS loans through either program. If the parents have marginal credit, they can use a cosigner to help get the loan approved.

A student can get up to the cost of school attendance, less other financial aid less other financial aid received for the term. It's easy to apply, simply submit the appropriate application. These are available from your college's financial aid office, or in the case of an FFEL loan, they can also be picked up at the lender's location. A completed FFEL application and promissory note will need to be returned to the school, who is also responsible for filling out a portion of the application. Once approved, there will be a check sent directly to the student's school.

The responsible parties are required to begin repayment of PLUS loans within 60 days of the time the check is sent to the school. Sorry no grace period, those responsible have to begin paying of the loan long before the efficacy of said payments are determined. The interest on these loans is fixed for new loans, although it was variable in the past. Currently, the rate sits at 7.9% for direct and 8.5% for FFEL loans. Prior to 2006, the interest rate was variable and re-indexed each July1st.

Perkins Loans – Perkins loans are for both undergrads and graduate students who can demonstrate exceptional financial need. (Really, don't all students have an exceptional need for money?) Perkins loans are made by, and repaid to, the student's school. Unlike with PLUS loans, there is no half time enrollment requirement for Federally guaranteed Perkins loans. Undergraduate students are eligible for up to $4,000 per year, while graduate students can get up to $6,000. The total available for the student's academic career is $40,000. Not all institutions of higher learning participate in the Perkins Loan program. You'll have to check with your particular school to verify their participation. Currently the interest rate for Perkins loans is 5% and they can be repaid over a 10 year period (the repayment period is subject to the total loan amount).

Stafford Loans – Loans de Stafford are also available in two flavors, like PLUS loans. As in the case of PLUS loans, both are available through either the U.S. Dept. of Education (direct) or private lending institutions (FFEL) and are available for students attending school at least half time. The difference is that Stafford loans are for the students themselves, not their parents. As with PLUS loans, there is a 10 to 30 year repayment period for direct Stafford loans, but it's possible to get Stafford loans in either subsidized or unsubsidized varieties.

Subsidized loans are for students that can demonstrate financial need. On these loans the government pays the interest until either 6 months after the student graduates or until 9 months after the student drops below half time enrollment status. It is also possible to request a payment deferment for Stafford loans, if a student feels they are currently unable to begin repayment of their loan obligation.

Unsubsidized loans are available to students without the requirement to demonstrate financial need. However with an unsubsidized loan, the government will not pay the interest. If a student takes out loans in excess of their determined financial need, the loans beyond the amount of financial need must be unsubsidized loans. Effective on July 1^st, 2007 the limits on Federally guaranteed Stafford loans are $20,500 ($8,500 subsidized) for grad students. For undergrads, the limits differ for dependent students and independent students. Independent students are eligible for $7,500, $8,500, and $10,500 in their 1^st, 2^nd and 3^rd - 5^th years, respectively. For dependent students, Stafford limits are $3,500, $4,500, and $5,500.

Posted by debtblog at 01:41 PM | Permalink | Comments (0) | TrackBacks (0)

The study had some interesting conclusions; to wit – There isn’t a correlation between the state’s cost of living and the level of debt carried by students when they graduate. In addition, North Dakota, a state with a fairly low cost of living was number 3 in the level of student debt. Iowa, another state with a low cost of living, ended up in the number 2 spot on the list of indebted students.

You’d think that going to a state school would be less expensive and help avoid graduating with a boat load of debt, but no, that’s not always how it works. In some states, North Dakota and Iowa among them, but also Kentucky, Delaware and Tennessee, you could easily end up with greater levels of debt than those who attended private schools, according to researchers.

There is also not a direct correlation between the cost of tuition at a college or university and the debt level of its graduates. Some schools with very high tuition had relatively low levels of debt among graduates. That could be because a large number of students attend the private schools on scholarships and thus pay no tuition, or because they come from relatively wealthy families that could afford to foot most or all of the bill for the student’s education out of their own pocket. In addition, some schools and states with high tuition costs have better financial aid programs to offset some or all of the student’s costs.

Student loan provider Nellie Mae reports that the average undergraduate debt upon graduation is now up to $27,600. If you’re one of these students with crushing student loan obligations what can you do? You can just gut it out and pay off your loans, or you can default and leave your lender hanging. Okay, so you’re probably trying to avoid the second choice in this scenario. The fact remains though, that high levels of student debt can set you back substantially when it comes to building a solid retirement account, buying a home or, ironically, setting up a college account for your own kids.

One way to reduce your loan payments is to consolidate your student loans. Much like any other loan consolidation program, a student loan consolidation program allows you to use a single, large loan to pay off many smaller loans, in theory at a lower interest rate. As with consolidation loans for other types of debt, such as credit cards, you’ll substantially reduce your monthly payment by doing so. You’ll also make your life more convenient by paying a single loan, instead of a myriad of smaller ones.

The major difference between consolidating a student loan and your credit card debt is that you won’t have to put your house on the line when you consolidate a student loan, as you would with credit card debt. This holds true for federally insured student loans, but typically is not the case if you got a personal loan to help pay for your education.
 

There are some huge benefits to student loan consolidation, such as dramatically reduced monthly payments, but it’s a little different than rolling your credit cards into a single loan. When consolidating student loans, you have a deadline for application each year. In the last few years there have been several changes by the U.S. Department of Education regarding how you proceed with consolidation.

Student loan interest rates are determined by the 91-day T-bill auction. To receive the current year’s rates, and this is important, your completed consolidation loan application must be received by the lender, and they have to confirm the loan before July 1^st. If the loan isn’t approved by July 1^st, you’ll pay the following year’s rates. In years gone by, there was a grace period that would allow people to skate in past the deadline as long as their complemented application was in the lender’s hands. Now they must have completely processed the loan request and approved the loan by the deadline. You can thank the 109^th Congress for that.

Unlike your credit cards, you should almost always consolidate your school loans, if they are federally insured and you can drop the aggregate interest rate. Another difference is that you won’t have to submit to much of the documentation required with other types of loans, such as credit checks or any other such nonsense. Your school's financial aid office can be a big help with your consolidation efforts. One last thing; verify if your lender will give you an interest rate reduction on your consolidation loan if you have your payment automatically withdrawn from your checking account.

Posted by debtblog at 04:50 AM | Permalink | Comments (0) | TrackBacks (0)

So, how the heck are you supposed to get to the point where you can drive around in your realtor's Lexus without wasting your time, theirs, or the sellers? Don't laugh, it happens. I have a friend who's selling their home and Realtors actually brought a few prospective buyers who were not pre-approved. Why? It's anyone's guess, but if you haven't reached that step in the process, your home may be out of reach. You won't really know (unless you can pay cash for the property or you're pretty damned confident in your financial wherewithal).

Step 1 in Getting a Home Loan -
Step 1 in getting a loan for your new home is to get all your financial information and supporting documentation in order. Key among this is a copy of your credit report, and documentation supporting your income. You need to do this well in advance of actually looking for your loan. Why?

Because, especially in the credit market in which we find ourselves, having a good credit score will enable you to get a favorable mortgage. The days of getting financed with a FICO score of 525, $25,000 in auto and credit card debt and a stated income of $40,000 are probably behind us for a while, as far as most lenders are concerned. You'll need to be able to actually verify your income by gathering 2 years worth of W-2's or tax returns, and proof of employment, such as recent paycheck stubs.

You should  get a copy of your credit report, not only to determine your credit rating, but to improve your score if at all possible. I've written several posts on the steps you can take to improve your credit score. Just increasing your score a few points could make the difference between getting a loan and sitting on the sidelines of home ownership. In addition, the better your credit score, the more favorable interest rate you'll be able to get, lowing you mortgage payment and saving you many thousands of dollars over the life of the loan.

Step 2 in Getting a Home Loan -
The second step in getting a home loan is to locate a lender. These days that may be a mite bit more difficult than it was only a few short months ago, but relax, there are still plenty of folks out there with money to lend. Your task is to find one. That's a process in itself. First, you should  call around to local mortgage companies and ask talk to them. Ask friends who they worked with when they bought their homes. A referral from a few satisfied friends, especially if they're financially savy, can be worth quite a bit here. Check your bank or credit union as well. If you've been a good, long term customer, you may do well, but don't just go to your bank and take whatever they give you (if they'll give you anything, the big banks are getting a bit gun shy lately).

Step 3 in Getting a Home Loan -
Your third step in obtaining a home loan is to evaluate the different lenders you met in step 2. Although requirements have been getting more stringent, many will still let your qualify for more house than your income can really support. In this situation you can end up being house poor. House poverty is a sad situation where too great of a percentage of your annual income goes into supporting your mortgage payments and home maintenance. Don't let it happen to you. Make a realistic budget to determine how much home you can afford, keeping in mind to have some income in reserve, and stick to it.

When evaluating loan offers, you'll want to consider the interest rate, fees, term of the loan, and how much total money you'll pay ever the life of the loan. Remember, you'll pay interest on all the fees and closing costs associated with the loan, so any costs outside the mortgage itself that gets rolled into your loan will cost far more than their initial dollar figure by the end of the loan. Look for the lowest total cost over the life of the loan. Total includes everything. The annual percentage rate (APR) stated in the good faith estimate you get from the lender will help here. Be advised however that APRs are kind of like a good guideline. There are no consistent standards that the APR value must stick to, so they may not be directly comparable between 2 different loans.

You want to then get pre-approved status from your lender of choice. Pre-approval should not be confused with pre-qualified, although it sometimes is. Pre-approval is a more thorough process and your credit will be checked so you’re ready for a real mortgage, hence the reason for step 1 above. Once you have your pre-approval, you can go find a Realtor. Good luck!

Posted by debtblog at 12:11 AM | Permalink | Comments (0) | TrackBacks (0)

First of all, check your mortgage documentation if you are unsure what type of mortgage you're committed to. Really, this is one piece of financial information you shouldn't be in the dark about. I'm not making this up about Americans not knowing. According to a survey (I've referenced it in previous posts) conducted by Gfk Roper, 34% of Americans actually don't have a clue about what type of mortgage they pay every month.

If you have an adjustable rate mortgage, there are some terms you should be familiar with. If you don't know what type of mortgage you have, you probably don't know what these mortgage terms mean, either, so read up.

Mortgage Term Definitions:

Index: By definition, ARMs adjust, You may not know how this all happens. There are various interest rates used in the financial community that are, for the most part, used by financial institutions for determining how much interest is charged for interbank lending. These are used as an index to base your ARM upon. As the index changes, so will the interest rate you pay for your mortgage. Every so often (exactly when is spelled out in the terms of your loan that you probably didn't read if you're unaware what type of mortgage you have) the appropriate index is used to calculate your mortgage interest rate. Some of the most popular indices are the 1 year treasury rate, COFI (Cost Of Funds Index), the LIBOR (London InterBank Offered Rate), and the MTA (Monthly Treasury Average).

Margin: This is a killer for ARMs. Margin is the number of percentage points the the lender adds to whatever index applies to your ARM when determining your interest rate. The total of the Index and the margin is the interest rate you'll be paying. The one thing not known by most consumers is what the margin their lender uses for this calculation. However, your lender is not required by law to disclose you ARM's margin in the loan disclosure documentation.

Cap: This is the maximum number of percentage points that your ARM can adjust. Even if the sum of the index and margin are greater than the cap, your mortgage can only adjust by number of percentage points allowed by the cap. There a various caps that will apply to your ARM. There is a periodic cap that determines how much your mortgage can adjust at each adjustment period. There is also a lifetime cap that states the maximum percentage your mortgage interest rate may be. Sadly for mortgage holders, the is also a floor cap that tells how much the lowest interest rate your lender will charge.

Teaser: Here's where so many mortgage holder's get into trouble. The teaser rate is an artificially low interest rate used in the initial period to keep the payment, well, artificially low. The thing is that too many mortgage holders rely on this dollar amount when determining how much home they can afford, only to find out they really can't afford their home after all. You usually aren't able to these artificially low payments for very long, only about a year in most cases, so your joy may be short lived.

Posted by debtblog at 01:58 PM | Permalink | Comments (0) | TrackBacks (0)

If you’re facing foreclosure, or fear it could be in your near future, you must avoid foreclosure at all costs. It’s even more important to avoid foreclosure, than it is to keep your home, although both would be nice. Too many people put off the inevitable, thinking it will go away, because they’re paralyzed with fear, or are suffering from analysis paralysis. Get on the stick, people! Foreclosure will impact your credit, and not in a positive way, either. It will dramatically hurt your credit for 7 years. That’s a hell of a long time to have compromised credit. This is especially true in light of tightening credit markets. Interest rates for those with blemishes on their credit, if they can get loans at all, will be dramatically higher than for those with great credit.

So, what can you do if you’re one of those in this pickle? There are 4 broad strategies you can use to avoid foreclosure; pay your mortgage current, sell your home before it falls into foreclosure, rent out your home, and mortgage modification.

1 - How to Avoid Foreclosure – Pay your mortgage current. This is a great solution if you can do so. Unfortunately, it’s often the most problematic. After all, if you could just pay it current, you wouldn’t be in a default situation now.

2 – How to Avoid Foreclosure - Sell your home. This is often tried by many as a strategy for foreclosure avoidance. The problem in many real estate markets is that real estate values have tumbled by 5% - 25%. Too many people are unable to sell their house for what they owe on it. In addition, there is a backlog of homes on the market, and it’s taking longer and longer to sell.

This is the crux of the whole foreclosure problem. Not to preach, but too many people grabbed mortgages they shouldn’t have, purveyed by brokers and lenders with the institution’s (and their own) short term interests at heart, instead of the long term health of the creditor, the lender, and, ultimately, the economy. That was compounded by too few people refinancing into a more favorable long term mortgage product before disaster struck. Now it’s not as easy to refinance, and to many people are stuck in a home that’s worth les than they owe, in a tight credit market, with a mortgage that’s adjusted into one they can no longer afford.

There are options for selling outside the traditional real estate market. No doubt you’ve seen the signs posted to telephone poles throughout the land, like posters for some sick circus, announcing “I’ll Buy Your Home For Cash!” These are typically the taglines of foreclosure investors. Unknown to some, these amateurish, handwritten sighs are, in some cases, actually put up by huge, national corporations. In other cases they are nailed up by small time investors that will purchase pre-foreclosure homes for cash. Either way, going with one of these operations is a better option than having your house foreclosed upon by the lender. You’ll get to retain some of the equity in your home if you have any, and keep a foreclosure mark off your credit. The downside is that typically the investor will only give you a percentage of market value for your home. On the other hand, if market values keep sinking, as they are in some locales, if you wait a few months, the investor’s offer may be right on target!

Therein lays another problem. If you are upside down in your home now, you need to get the maximum sales price you can. You are already going to have to cut a check to the bank for the difference between the selling price of your house and the payoff balance of your mortgage. If you haven’t the cash to do that, you’re in a spot o’ trouble.

3 – How to Avoid Foreclosure – Rent your home to others. If there’s a brisk rental market in your area, you may consider renting. The cash you receive for the deposit and first and last month’s rent may cover your arrears with your mortgage lender. If the market is strong, the monthly rental payments may cover your mortgage payment and even leave you with cash to spare. Even if they don’t quite cover your mortgage, the total of your apartment rental (you’ve got to live somewhere until everything gets back on the up and up) and the rental shortfall may still be less than your mortgage payment. This will obviously improve your monthly cash flow.  Remember though, you’ll still be on the hook for insurance and maintenance, although you will receive some tax benefits as a landlord.

Look at the rental rates for similar properties in your area. Make a budget and include all the costs associated with renting your property. Use this to estimate your monthly cash flow and determine if renting your property is a valid solution to your problem. If you do decide to rent out your house, make sure you screen your tenants. Run a credit check and use an appropriate screening service to check the prospective tenant out thoroughly. You don’t want your money problems to go from bad to worse by having a meth lab or some other criminal enterprise operating on your property. One last thing; don’t forget to check the landlord – tenant laws in your area. Make sure you abide by all these in your foray into being a landlord.

4 – How to Avoid Foreclosure – Mortgage Modification. This may be the best way to go for many. The key here is to be proactive. Call your mortgage company before your mortgage goes into default if you see a problem on the horizon. If they send you letters demanding payment, or statements indicating your loan is about to go into default, for God’s sake, don’t ignore them! Now’s your best chance to take action to save your home, but act you must.

Most lenders really don’t want your house, they’ve got bigger problems to deal with, especially now. They’d rather have some cash flow and another good loan on their books. Their loan portfolio probably looks bad enough already. You may be unaware of this, but Fannie Mae and Freddy Mac, the largest mortgage paper purchasers, and many other investors, actually require lenders to try hard to work things out with you. It makes good sense, investors don’t make any R.O.I with a portfolio full of bad loans and foreclosed properties. You, however, must be aggressive. You will be in a much better position to stave off foreclosure if you are less than 2 payments behind on your mortgage, so get things done before things get that far. Make sure you document all your efforts, and when calling your lender have all your information ready. They’re going to want to see proof of any financial hardship, so have it ready for them.

The bottom line is that you should call your lender at once, before things go too far, to make alternate arrangements for your mortgage. You may even be able to get them to agree to actual mortgage modification, where they’ll change the terms of your mortgage to help keep you from foreclosure. Unless you try, however they won’t go the extra mile. You can also check with the FHA to see if you are able to do what’s termed a partial claim. In a partial claim you get a one time, interest free loan from your loan guarantor to bring your mortgage current. To qualify, you must have an insured mortgage, such as an FHA loan, and be 4 – 12 months behind in your payments, without already having lost your home to foreclosure.

Some other things you should do to keep foreclosure at bay: Make a budget. Stop paying other bills if you absolutely have to. That’s a last resort, but it may help you keep your house. If you really have dire financial problems, your credit cards are unsecured, your mortgage is secured by your house. Not paying your credit cards will mess up your credit, but you’ll still have a roof over your head and credit card default will not stay on your credit as long as a foreclosure. That is a very last resort, however.

Hopefully you’ll never be in a foreclosure avoidance situation, but if you find yourself there, remember there are strategies to help you keep your home.

Posted by debtblog at 12:35 AM | Permalink | Comments (0) | TrackBacks (0)

Now, I'm not saying there aren't advantages to getting a debt consolidation loan for high interest debt, mainly of the credit card variety. In fact, it can be a solid financial choice for some. However, it's also a choice that could send you straight to financial hell if you aren't careful. You're probably well aware of the benefits of these types of loans, so lets touch on the seedy underbelly of the whole debt consolidation idea.

Reason Not to Get a Debt Consolidation Loan #1
The reason you get a lower interest rate with a debt consolidation loan than you have for most credit card debt is because the lender has some collateral to ensure the security of the loan. In the world of finance, when the risk for a lender is lower, the interest rate tends to as well. In most cases the security they'll have for your loan is real estate. For 99% of the people who get such loans, that real estate is their home.

That's right, the place where you raised your kids, threw the football around, taught them to ride their bikes and have so many fond memories is the collateral for your loan. That means, should you default on it for any reason, you will lose your house. That's a pretty huge reason to think long and hard before entering into such a loan agreement. If you don't have the financial problems behind you that caused you to amass such a large pile of debt in the first place, you'll be putting yourself at major risk for living under the overpass, or at very least having your house sold out from under you to satisfy the debt. This is so vitally important bears repeating. Get your financial house in order, most importantly your spending habits, before you even remotely consider a debt consolidation loan.

Reason Not to Get a Debt Consolidation Loan #2
Even though the interest rate is, in most cases, substantially lower than you have with your credit cards, you amortize the credit card debt over a 4 or 5 year term, where the debt consolidation loan is much longer, usually 10 – 30 years. This, coupled with the lower interest rate, is why your monthly payments are so much lower. While this may greatly improve your monthly cash flow situation, it will most likely cause your total interest payments to be much larger than they would have been had you simply paid off your credit cards in the shorter term required by your credit card agreement. This supposes that you actually stop using your credit cards, however. In many cases, people simply won't do this, causing the disastrous financial side effect in reason number 1 above.

Before you consider a debt consolidation loan there are other steps you can take to help yourself financially. The first is to call all your credit card companies and negotiate lower interest rates and a better fee structure. If you aren't in default and you have a good payment history with them many will do this, especially if you threaten to take your business elsewhere. Never underestimate the power of a big stick in your negotiations. In many cases, this alone will result in dramatically reduced monthly payments. The secret is to continue making the original payments, if you can afford to Now you'll be on track to become free of that pesky credit card debt in a much more advantageous time frame.

Next, see if you can get an unsecured loan to repay the credit card debt. If you can do so at a lower interest rate than your credit card companies are charging you, you'll be ahead of the game. Even better, you will have gotten there without risking your house or landing yourself on a lengthy amortization schedule. Another benefit of this form of consolidation is that you gain the convenience of a single payment, which is far easier to manage and reduces the likelihood of a missed payment, and all the problems one can cause. In any case, you should have your credit cards on auto pay to eliminate the risk of a missed or late payment, which can send your card's interest rates skyrocketing, not to mention the fees you'll incur.

Have a great weekend, and good luck on your quest to get debt free.

Posted by debtblog at 01:37 PM | Permalink | Comments (0) | TrackBacks (0)

There are, however, some government programs that can help you repay your student loans. The catch is that you'll have to put that fancy Wall Street or corporate career on hold for a while and eat from the public trough for a while. That's right, in most cases, you have to get a government job in order for Uncle Sam (or any of the states) to assist with your student loan repayment.

Civil Service Student Loan Forgiveness
Here are some of the places you can get government help to pay back some of the student loans you have accrued in your quest for enlightenment. Which type of student loan you have will help determine which repayment or forgiveness program you're eligible for. If you're feeling charitable and want to see the effects of your generosity assist others around the world, you can join the Peace Corps. By so doing, you'll be eligible for deferment of Stafford and student consolidation loans, but your real benefit from a student loan perspective would be the ability of Peace Corps volunteers to have up to 70% of Perkins loans forgiven. The actual forgiveness amount depends upon your length of service, and accrues at 15% per year.

If you want a job where you can sleep in your own bed every night, without worrying about mosquito netting, there are many other government programs that can help with your student loans. If you are a clinical researcher, the National Institute of health offers a series of loan forgiveness programs. One catch is that you must have a doctoral level degree and work for at least 20 hrs a week per quarter on various types of research, including pediatric, contraception and infertility, and clinical. If you meet the conditions, you be eligible for a substantial $35,000 per year repayment of your federal student loans. For all 5 NIH repayment programs, see here.

Teacher Student Loan Forgiveness
You can get some great student loan forgiveness benefits by entering the education field. In some cases you'll need it. As with research positions, forgiveness from the Department of Education is determined by which type of student loan(s) you have. Many of the programs give benefits for teaching in disadvantaged or low income schools. In many inner cities or small, rural communities, this includes just about any school you'll work in.

Another student loan forgiveness program available through the Dept. of Education includes the Teacher Loan Forgiveness Program. This one makes available up to $5,000 in student loan forgiveness for direct and FFEL loans. It’s mainly targeted at teachers in the fields of math, science and special education, as teachers in those disciplines can be eligible for up to $17,500. The conditions of eligibility include receiving your loan after October 1, 1998 and being employed full time as a teacher for 5 consecutive years. To read the full list of qualifications and eligibility, click here.

Military Student Loan Forgiveness
Another place that you can seek federal aid for your federal aid is by joining the military. A noble and difficult profession, you’ll not be greatly financially rewarded by such a career choice, so some help repaying your outstanding loans would probably be welcome. In many cases, you must be aware of the programs before you enlist to be eligible, so check up on them first. There are many government programs that will forgive part of your loan, or in some cases discharge it altogether.

One is for loans received under Title 4 of the Higher Education Act. This makes those serving in the military eligible for partial loan forgiveness if they served in an area of hostilities for at least one year and have a Perkins loan or a National Direct Student Loan. Of course you’ll need to fill out a government form to see if you are eligible for forgiveness. You’ll need to send a copy of your discharge papers and a letter of explanation to your loan servicing agency, where it will be reviewed, and then sent to that room at the end of Raiders of the Lost Ark for storage.

Other loan forgiveness programs for military veterans include the Army repayment program. This is part of the Montgomery GI Bill enacted at the end of WWII. In this case the Army will repay a portion of your student loan directly at the rate of 1/3 of your outstanding balance for each year of eligible service. This applies if the loan was not in default when you entered the Army, that you enlisted after 30 September 1982, that you enlist in a critical military occupational specialty, and that you have a valid high school diploma at the time of enlistment. Stafford loans, Perkins loans, SLS, William D. Ford loans and PLUS loans all qualify. Even consolidated student loans are eligible if they are in the student’s name.

If you have a personal loan, an equity loan, a loan from an educational institution, or if you consolidated your student loans in someone else’s name (such as your parents), you are not eligible for the Army program. Check to see that you loan is covered under parts B, D, or E of Title 4 of the Higher Education Act before you sign your enlistment agreement if you want the Army’s help in repaying your loans. Make sure you go over the terms of your loans and their repayment completely with your recruiter before putting pen to paper. You don’t want to enlist with the idea that the Army will be repaying all or part of your loans, only to discover that you’re still on the hook for the monthly payments, and you are now on a 2^nd lieutenant’ salary.

Chapter 1606 and 1607 of the GI bill apply to reserve and National Guard members. Chapter 1606 provides for monthly repayment of education expenses regardless of service, while 1607 gives increased benefits for those who served in the Guard or reserve for over 90 days of active duty ($400/month) or 1 year ($600/month). If you are eligible for educational assistance under chapter 1607, but stop drilling, you will revert to the money paid under 1606 for the length of your deployment plus 4 months.

Other Student Loan Options
There are many other government programs that can either repay or forgive all or part of your student loans. I’ll address some more of them in a future post. In addition, you may benefit from student loan consolidation. As with other loan consolidations, you’ll have only one payment to worry about, and you could get a better interest rate. That will obviously lower your monthly payment and possibly allow you to quit that second job you’re saddled with now.

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I was not looking to maximize the value of my house in the hope that its value would continue to appreciate, netting me a handsome profit in the future. This would occur after I had my house payments held artificially low through the use of an option ARM or interest only mortgage. It appears as though many homebuyers, in the interests of getting into the largest house they could manage, simply did so without any thought as to what would happen when their mortgage adjusted, or their balloon payment came due.

Now we’re in a situation where we have to have a massive, taxpayer subsidized rescue effort in order to keep the real estate market from being flooded with foreclosure properties. The Fed’s rumored to be dropping the federal funds rate from 5.25% to 5%, or possibly 4.75%. This would give some measure of protection for those who haven’t yet had their homes go into default because it would drop ARM payments. Maybe help for mortgage holders is on the way.

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There are some legitimate reasons for leasing your next vehicle. For instance there are tax advantages associated with leasing if you own a business. Some people just prefer to drive a new car every 2 – 3 years, depreciation be damned. Cars and trucks are making major advances in safety, economy, drivability (impressive, considering what porkers many vehicles have become), and content (a major cause of the added pork) in that time period, so there may be something to be said for that train of thought. There are also some folks who like the idea of keeping the monthly cash out of pocket low, even if that means a lease and it doesn’t happen to be the best financial course of action.

On the other hand, cars today last longer than ever. Remember 25 years ago, when a car with 100,000 miles on it was all used up? That’s definitely not the situation anymore. These days vehicles with that many miles are just reaching middle age. They drive great, have no squeaks or rattles, the interiors and exteriors look almost new, and there’s not a hint of smoke from the tailpipe. Unless your requirements have changed, why would you need to replace them with something newer?

If you are determined to lease, you should at least know what the F&I guy at your local car dealership is talking about when he starts into his pitch. There are some terms associated with leasing that would behoove you to know. Here are some lease terms:

Money Factor –
Not the interest rate of the lease. To get the approximate APR, multiply the money factor by 24.

Residual Value –
The value of the car at the termination of the lease. This is an estimate only. When you lease you are effectively financing the difference between the Purchase price and the residual, so this will have a major effect on your lease payment. They are always calculated as a percentage of the vehicle’s MSRP. It doesn’t matter how great of a negotiator you are. Even if you get the salesperson down to a dollar, you’ll have to congratulate yourself later, as the residual value of your leased vehicle will still be determined using the MSRP. That percentage however, can be set at virtually whatever the leasing company would like.

The higher the residual value is set, the lower your lease payment will be. Cars that have traditionally good resale values have higher residuals. These are often better choices to lease than those vehicles that lose a higher percentage of their value and thus have a larger difference between MSRP and the residual.

Closed End Lease –
This type of lease allows you to walk away from the vehicle at the end by dropping off the keys and paying any associated fees, such as excess mileage charges. If you have a closed end lease, you can purchase the vehicle for the residual amount at the termination of the lease, so there is a bit of incentive on your part to choose a vehicle where, in your area, they tend to have a high resale value. If you are able to end up with a vehicle that’s worth more at the end of the lease than the residual value, you can get a great deal, as you can buy it for the residual value, even though it’s worth more than that. If it’s worth less, it’s no skin off your nose, you just walk away from the vehicle.

Cap Cost – This is the amount the leasing company purchases the car for from the dealership. Here you can negotiate for a lower price on the car, and it will make a difference.

Cap Cost Reduction –
What it sounds like, except that you have to pay for the privilege. You are basically helping the leasing company buy the car by kicking in some cash of your own at the inception of the lease. So much for “No money down.” This amount can be thousands of dollars.

Vehicle Leasing Fees to Avoid –
There are some fees associated with vehicle leasing that you should fight tooth and nail to avoid paying, although you may get stuck with some of them anyway. Two of these are the acquisition fee or origination fee, and the disposition fee. The first is basically a fee paid by the car lessee for taking out the lease. That’s crazy, and pure profit for the leasing company, as if they’re not making enough off of you. Refuse to pay it. They may insist on it, but hold your ground or get the dealer to absorb it. You don’t need the car that bad, in most cases.

The disposition fee is another fee you should refuse to pay, but since you’ll not have to pay it until the end of closed end lease if you don’t buy the car, you may be completely unaware of it. That’s why you should actually read all that fine print mumbo jumbo in the lease contract. It’s almost always in there. Make them take it out, unless you’re pretty damned sure you’ll be buying the vehicle at the termination of the lease.

One leasing fee you’ll probably have to agree to is the early termination fee. Unlike the prepayment penalty on your mortgage, you most likely can’t get out of agreeing to this one before you sign the lease. Early termination fees are huge, so be aware of them. If you have to end the lease before the term is up, but near the end, it may actually be cheaper to keep the thing in your driveway, rather than turn it in and take the bath.

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Pearlstein Business Column

It’s sure to be only one of many plans floated in the next few weeks as government officials attempt to placate homeowners (voters) and minimize the economic impact of the credit market implosion. Pearlstein’s proposal brings the considerable influence of Fannie Mae and Freddie Mac to bear on the problem, something that may have to occur before investors consider returning to the market for mortgage debt secured products. It’s sad, because many homeowners have little chance of defaulting on their mortgages. If lending standards were sensibly (not with the strong knee-jerk reactions we’ve seen in recent weeks) revised to exclude the highest risk loans, and some of the very creative mortgage products were eliminated, the problems would fix itself fairly quickly.

All but the highest risk borrowers need to be able to refinance their balloon payments or high interest ARMs into a normal fixed interest and fixed term product. This would stabilize payments and allow homeowners to continue fitting their mortgage payments into the monthly budget, and spend for other consumer products at the same time. Other business owners would appreciate this continued ability for homeowners to contribute to the economy. The Pearlstein proposal addresses this and tries to minimize the distaste associated with a complete government bailout (funded by taxpayers, of course, as government bailouts are by necessity), as some others have proposed.

Even if his plan may be, in a way, distasteful, a collapse of the real estate market precipitated by an additional hundreds of thousands of foreclosed homes hitting the market, and the price erosion that would create, would probably be more distasteful. A cornerstone of his plan if for liens to be created that represent 90% of the difference between what the homeowner owes on the property and its’ market value (who determines this, exactly?). The lien would allow refinancing, whereas without it that would have been impossible due to negative equity in the property.

He ‘s proposing refinancing into a 40 year mortgage, coupled with the aforementioned lien, in lieu of foreclosure. The longer term mortgage would help lenders offset losing some of the value they would otherwise experience, because they could collect greater total interest. 40 year mortgages are not the hot ticket for homeowners in most cases, but an exception would be made here. The liens and mortgages would be kept by investors, or (more likely) sold and repackaged packaged into securities by Fannie Mae and Freddie Mac. These would then be released for consumption by investors.

Would it work? Possibly. It certainly seems better than some of the alternatives, especially considering the cost of failure. The market needs a correction, and this may provide it, without the total collapse many predict is in progress without it. It’s also possible that the credit industry downturn isn’t going to be as harsh pr prolonged as many are predicting, and that the naysayers (of which there are many) are over reacting. One thing is for sure, problems in the mortgage industry will have ripple effects that extend into every other area of the economy.

In the U.S., this is especially true due to the sheer volume of money pumped into consumer’s pockets as their home values skyrocketed in the last 5 – 7 years. Many pulled out newly created equity for all many of projects, from new SUVs (stupid use of home equity) vacations (ditto) to home improvements, remodels and new homes. That’s driven all areas of the economy to greater heights, and while a fun time for all, bound to correct sooner or later. It was, as the environmentalists say about our consumption of consumer goods, unsustainable.

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These loans are like many other financial products; they may be the perfect solution for some people and a financial curse for others. It all comes down to your reasons for being in debt, your current income, the stability of that income, and your financial discipline. It’s that last one that’s the key to the puzzle. If you have relatively poor financial discipline, a debt consolidation loan is almost certainly a recipe for disaster. All you’ll accomplish is to erode the equity in your home and end up deeper in debt than when you started.

Oh, you may end up with a memorable vacation or new plasma TV too. How is that? Well, in the case of creditors with an inability to restrain themselves, the lower monthly payments provided by the debt consolidation loan give a euphoric feeling of financial well being. It’s kind of like financial crack. Since the borrower’s monthly cash flow is reduced, they feel like their financial position is so improved that they can afford to spend some money. That is almost always a huge mistake.

They (it’s “they” again) don’t let you in on this little secret, do they? Spending control is vital to any financial security program. Reigning in spending to a level where it lags income is the only way to get out o’ debt, mate. A debt consolidation loan will reduce monthly spending. If you stay there, it can really help. They can give the illusion of financial good fortune, however. Remember how you got in debt in the first place. Frequent trips to the mall, club or eBay have got to stop before you end up right back where you started, but with a new debt (the debt consolidation loan) to boot.

Lowering interest rates is always a good thing. Any time you can pay less for your money, you should do so, all else being equal. Just remember that other things go along with that lowering of the interest rates. If you get such a loan, make sure there are no prepayment penalties, just like a mortgage. In most cases there won’t be any, but if the lender thinks they really have you over a barrel, there may be one of those dreaded clauses in the contract. Make sure you really read the damned thing!

Debt Consolidation Loan Secret 1
Your total interest payments may, in fact, be higher than the credit cards you’re replacing. Then again, they may not be. It’s up to you to determine this. Look at the amount of the loan, the interest rate and the term. If the loan’s term is long enough, you could wind up paying more in total interest, even though the interest rate and monthly payment is lower.

Debt Consolidation Loan Secret 2
You don’t always get a realty low interest rate on one of these loans. It depends on your credit score. If you have too many credit cards and you’re struggling financially, there’s a good chance you’ve missed payments, had late payments, and your credit utilization score is too high. This will mean your credit score is probably pretty low. Now you’re at the mercy of the lender. They can charge you pretty much whatever they want to. Because a debt consolidation loan is a secured loan, the interest rate will probably lower than your credit card interest rate, but if that’s 18% - 29%, that’s not saying much, is it?

Debt Consolidation Loan Secret 3
If you have no collateral, such as real estate, you are probably not going to get a loan. On the radio ads, they may make it sound as if anyone can just “lower their monthly payments and eliminate debt”, but that’s because you are going to secure your debt with significant collateral. If you haven’t the means to do so, you’ll probably not find a lender willing to loan you any money.

Think about it from the lender’s perspective for a second. If you’ve gotten yourself overextended with numerous credit cards, you probably represent a substantial credit risk. Why would any investor want to loan you money at a favorable interest rate? You may find a loan, sure, but the interest rate may border upon usury.

Debt Consolidation Secret 4
You can easily lose your home if things turn ugly. This isn‘t really a big industry secret, but too few people really consider the full import of putting their home on the line when they get one of these loans. The next time you’re cruising down the 405, look at those prime accommodations in the shadow of any overpass and think about the whole thing again.

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The problem for many people is that in quite a few major metro areas, $417,000 does not a mansion buy. Far from it. That's basically the amount you'll spend for a decent 3 bedroom, 2 bath within 20 miles of downtown. Bostontonians, Serattleites, SoCalers, San Franciscans, and DCers know exactly what I'm talking about. If you've managed to amass some equity in your existing home, you could easily need the use of a jumbo to get a home in the $600,000 - $750,000 range. Again, a home in this price range, while a definite step up from an entry level, or “starter” house, isn't anything remotely mansion like in many areas of the country, even taking into account the recent market corrections. That range house would be just a step up from your first home.

Not wanting to be left out of the party, jumbo's have been in the news lately, just like, it seems, every other mortgage related product. Jumbo loans have always been more expensive than other mortgage products, but now they're getting harder to come by as well. It's gotten to the point where some banks, such as IndyMac, have indicated they'll not be selling them on the secondary market, but keeping them in their in-house loan portfolios. That should say something to all the investors out there. Namely, that there are still attractive debt secured investments out there.

Not everybody is a foreclosure risk and it seems that many have gone a bit overboard in their risk assessment. Why the industry ever decided that stated income and no doc loans were a good idea is a question for those with sharper minds than mine. If ongoing problems in the mortgage industry spread and cause people outside the financial and real estate industries to begin losing jobs, it may actually cause more to unload their homes, and the market to sink further. Now, however, we're just experiencing a well deserved correction in the market caused by stupid loans given by the very mortgage industry that's now coughing up blood. Just what were the industry insiders thinking when they decided to revise lending standards so that anyone with a pulse, or a presence in cyberspace, was a great candidate for a mortgage? Were they looking so short term that they were unaware that money to repay these loans would have to come from somewhere?

Sure, you could follow the train of thought that homes were becoming so expensive that creative loans were necessary to actually afford one. However, if lenders weren't giving out so many creative mortgages, the buyer pool would have been smaller, and home prices wouldn't have gone quite so far into the stratosphere. Or, you may have noticed that that free and easy credit, coupled with historically low interest rates encouraged the pool of buyers to swell to the point where sellers were grabbing every dollar they could get their hands on. The problem is that in economics, like at your local bar, any time there is a really big party, and many people are getting intoxicated, on either cheap booze or money, fights will break out and people will be hung over in the morning. People act like the party will go on forever and no one will notice what they're doing.

Too many people were invited to this party and they all showed up. Now there's going to be a great opportunity for those that can be janitors, or serve those in the future that didn't throw up on the table last night. Just because money's cheap doesn't mean you don't have to be a little bit smart about who you give it to.

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The next time you're sitting in your mortgage broker's office, there are a couple of things you should know about the mortgage you're about to commit to. One important fact that you should know right up front is that your broker is getting paid. Nothing wrong with that, fish gotta swim, birds gotta eat, after all. It's how they're getting paid that you should be fully aware of. You should know that your mortgage broker is not only getting paid by you, in the form of fees tacked on to your loan (you can, and should, negotiate these down in most cases), but by the bank as well. If you weren't aware of this, consider yourself enlightened.

The money the broker makes from the bank or lending institution is actually, in most cases, far greater than the pittance (If you did a good job of negotiating) they'll receive from your fee. The bank's payment to the broker is referred to as the 'Yield Spread Premium'. What you may also not be clued in to is that this fee actually rises with the interest rate of your mortgage! That's right, the worse the loan for you, the better it is for your broker. A conflict of interest? Possibly so, but it drives home the point about the importance of finding a trustworthy mortgage broker. Don't worry, there are plenty of them out there, but it's up to you to find one. Just make sure you ask them about the yield spread premium, and how much they stand to make from your mortgage. You should be able to find it on your good faith estimate under the heading 'YSP', or possibly 'POC'.

The other little fact that most brokers don't clue you in on is that, like the F&I guy (or gal) you have to sit with when you buy a car, they usually get paid on all the extras and contract clauses that are advantageous for the bank or lender, but less so for you. Typically many of these clauses can be eliminated for many classes of mortgage. On big one is the prepayment penalty. Banks love this penalty, because it helps protect their investment. They count on receiving a certain amount of interest from you before you either pay off your loan during the term, or eventually refinance it. To ensure you actually pay them what they want, and help ensure they can count on a certain amount of interest income, they insert a penalty clause in your contract. That means they get a monetary penalty from you should you get out of the loan early. It sucks for you and can keep you from refinancing into a better mortgage product should the need or opportunity arise.

So, you need to:
1 – Trust your broker, but verify

2 - Know what fees will be rolled into your loan and negotiate them down, preferably to 1% or less. Then, make sure they don't back out on the negotiated fees prior to closing. I have saved thousands of dollars negotiating lower fees like this, and you should too. This doesn't include the application fee, which you should NEVER pay.

3 – Ask about the broker's pay structure, the yield spread premium, and how they're incentivized for the various contract items along the way.

Look at the possibility of asking the broker to agree to a set fee up front, in lieu of the hidden fees they typically receive. Some do this now, but not many.

There are fewer lenders out there by the day, due to the problems in the mortgage industry. As the competition thins out a bit, you may think you'll be unable to find a good mortgage. Most likely you'll do just fine, but you've got to be your own advocate. Don't be a wimp. Many people are simply too chicken to actually ask the tough questions. They feel bad or find it distasteful. Well it may be, but so is getting stuck with a crappy mortgage, and that pain could last for 30 years.

Posted by debtblog at 01:32 PM | Permalink | Comments (0) | TrackBacks (0)

Here's a way to help raise one of the components of your credit score; your credit utilization score. Credit utilization is nothing but the percentage of your aggregate outstanding balances on revolving credit accounts compared to total of their limits. With that in mind, there are two ways to improve your credit utilization, and thus your overall credit score.

You can either pay down your outstanding balance or increase your total credit limit. In most cases it's far more expeditious to get your credit card companies to increase your limits. Why? Well, unless your outstanding balances are relatively low, or you have a sudden influx of cash, you stand a fairly small chance of paying them down in the short term to the extent they'd positively impact your credit utilization score.

They danger here is readily apparent to most of you. Once your credit limits begin to grow, it's a standing invitation to charge, charge, charge. If you're trying to get debt free and find financial prosperity, restraint here is vital. This technique is not for those with little financial discipline. If you're unable to restrain yourself from using your credit card, don't get the limit increased. If you are able to take advantage of this score raising technique, there are two basic ways to get a limit increase.

One way is to simply ask your credit card issuer. In many cases, if you have a solid, on-time payment history, they'll be all too happy to comply. After all, they make their money charging you interest on your purchases. The more you spend, the more they make. Another way is to engage in behavior that will cause them to give your limits a kick in the pants. How can you do this? As we've seen, the credit card companies make their money when you carry an outstanding balance; the larger the better (for them, not you). You need to entice them to raise your credit limit by showing them you can be trusted, but more importantly, you need to make them try to get you to carry a balance on a full time basis.

The way they'll try to get you to carry a full time, outstanding balance, is to, you guessed it, raise your credit limit. Their hope is, with that new, larger limit, you'll be encouraged to make use of it. To make them automatically raise your credit limit you can do the one thing that will accomplish both of the above two actions, and that's spend money on your card. I know earlier I said that you don't want to do this. The key here is to pay the card off in full every month. If you can't do that, you shouldn't be engaging in this strategy.

Charging up your card to high relative levels every month, then paying off the balance in full will keep you from paying interest on your purchases, but it will also make the card issuer raise your limit. They'll do their best to get you to leave some money on their card so they can make that interest income. You'll do your best to charge all you can for a couple of months, paying off the balance in full. You'll most likely be rewarded with an increased credit limit and an increased credit utilization score.

A few months ago I had another post that can help you quickly raise your credit score. Check it out for more info. 

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The thing is that American Home Mortgage, although lending in the sub-prime market, really specialized in mortgages for those with less than perfect credit, not even the true, sub prime market. In theory, these borrowers are much less likely to default on their mortgages than sub-prime borrowers and should have somewhat insulated AHM from the problems in the sub-prime mortgage industry. Could this be a big sign of things to come in the mortgage industry?

Their problems began because they sold the mortgages they originated, a practice known as “selling the paper”, to investment banks and other investment groups. If the price these investors are willing to pay drops too low, it spells trouble for the mortgage originator. It's really a type of self fulfilling prophesy. If the price paid by investors sinks, it forces the mortgage originator to restate the value of their loan portfolio downward. That, in turn, causes the creditors that lend money to the mortgage company to demand more money in reserve to guard against default. If the mortgage company is unable to comply with their demands, the creditors can call their credit lines. Recently, American Home Mortgage seemed to be in a pretty strong position to deal with any problems, as they were sitting on over $800 million in cash at the end of March. Unfortunately for AHM, that was deemed an insufficient amount of cash to protect them against defaults by their borrowers.

So, what does all this mean for you, as a homeowner and mortgage holder? What if the mortgage company you used to finance your home goes out of business, an event that seems increasingly likely? Are you off the hook altogether? “WhooHoo, I got a free house!!!” Hold your horses! It doesn't work that way, as much as you'd like to get a free house. Your mortgage most likely wasn't even held by the originator anymore. In the majority of cases, it was packaged with hundreds or thousands of other mortgages, and sold to an investment bank or group in the form of a bond. Many investors actually hold the bond. Ironically, if your 401(k) or mutual fund is invested in the bond that your mortgage is a part of, you could actually, in some small part, be paying for your own retirement with your mortgage payments. Think about that for a second!

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What can you do if you need help paying medical bills? Well, there are some places you can find help and some ways you may be able to reduce your medical bills. First of all, there are some things you should not do in this situation. If you have mounting medical bills, do not try and avoid them. They are like any other outstanding debt, and will not go away on their own, like so many puffs of smoke. They will negatively impact your credit rating and will be reported as an outstanding debt on your credit report. Some people are under the mistake assumption that medical expenses aren't going to hurt their credit, but this is just not the case. In fact, about 80% of bankruptcies in the U.S. are due to medical expenses.

If at all possible, you don't want to file bankruptcy die to medical expenses, however. On top of the social stigma, it will stay on your credit report, just like any other bankruptcy. Future employers and potential creditors will see it just as if you'd gone on a spending binge you couldn't afford. In most cases you should not get a standard debt consolidation loan to pay off medical debt, either. You could lose your home by doing so. In addition, you'll start paying interest on your medical bills, something your weren't doing in most cases.

If you need help paying medical bills, you should contact your creditors. Almost all hospitals and doctor's organizations will allow you to set up a payment plan. Many will allow you to pay minimal monthly payments with little or no interest. You should definitely avail yourself of such a plan if one is offered by your medical creditor. You won't know about one however if you don't ask. Hospitals have an office of patient relations or patient finances. Go meet with the representative and discuss your debt.

In addition to a payment plan, many hospitals will forgive a substantial portion of your debt if you contact them before things get out of hand. You can easily get 25% - 75% of your medical bills waived. This is usually income dependent, but you can make a hardship case that will get you a further reduction. Almost all medical facilities will offer this. (If you got male enhancement surgery or a hair transplant, you're probably out of luck.) They will usually let you list any financial hardship you have recently suffered and will take them into account when figuring your forgiveness. They will be much less likely to do this if you wait until your bills go to collection. In fact, by then it's most likely too late, so act sooner, rather than later. Usually, doctor's associations aren't as likely to offer such programs. Medical school loans have to be paid, you know. Sometimes the doctor's school loan payment is bigger than your mortgage. It doesn't hurt to ask, however.

Before you take the trip down there for your meeting, look over every bill you received for accuracy. It is all too common for medical bills to be chock full of errors. You may be overcharged for procedures and medications you received, or charged for those you did not. Both situations are unfortunately all too common when dealing with medical bills. Be prepared for some long nights. Medical bills are notoriously difficult to understand, and there may be hundreds of line items to go over. This step is essential to prevent being overcharged, however. You'll probably want to contact the medical facility or doctors office and find out what exactly some of the items are.

The next step is talk to your insurance company if there are any portions of the bill you think should have been covered. In some cases you'll be able to get them to pick up the tab for things they originally didn't. Even if they didn't pay for certain items, you should be sure you should have to pay them. In some cases there are procedures and medications that you cannot be billed for, or the bill was submitted too late. You insurance company will be able to determine such things. So, even if you were denied by the insurance company, check with them to determine if you should be the one writing the check. If the doctor's office submitted their bill to the insurance company late, and it was denied, you should not pay for their mistake.

There are companies that will negotiate for you and also offer consolidation loan services that don't require you to use your house as collateral. This is obviously a far better option than risking your home or, in most cases, declaring bankruptcy. Look for such companies in your state, but check them out carefully before you do business with them.

Hopefully your never find yourself with overwhelming debt due to medical expenses, but if you do, make sure you go through the steps to make sure the debt is valid, then reduce it as much as possible. Once you've taken those steps, it could be a good idea to consolidate it, but only if you are not risking your home, and if the fees you are charged are not excessive. Here's to getting debt free.

Posted by debtblog at 01:55 PM | Permalink | Comments (0) | TrackBacks (0)

They are both technically security instruments used to finance property but the difference comes down to which state you live in, or more acurately, wher the property is located. Something else to consider is that a mortgage is treated differently depending upon weather the property is in a title theory state or a lien theory state. In a lien theory state the buyer holds the title during the term of the loan, in a title theory state, the lender keeps the title. Got it? Great, now it’s clear as mud.

Mortgage – 2 parties are involved; the creditor and the debtor.

Deed of trust loan – 3 parties are involved; the creditor, the debtor, and a trustee. The purpose of the trustee is to hold title to the property until the debt is paid in full. Depending upon the state in which the property is located the trustee can be either an attorney or a representative of a title company that deals in such matters.

Mortgage – When a property is foreclosed upon due to delinquent payments there is a court proceeding called a judicial foreclosure. After this is complete, the mortgage holder may sell the property and claim their portion of the proceeds.

Deed of trust loan – In most cases foreclosure is much simpler when a deed of trust loan is involved. The lender can simply document the delinquency to the trustee and the trustee can then sell the property to satisfy the outstanding loan balance. No messy and expensive court proceedings are required.

This will only matter to you if you live close to the border of two states that use different system, or are a real estate investor on a national scale. That’s because you can’t choose which you’d like to choose. That was done for you, a long time ago, by the state in which the property is located. Check with your state to determine how they handle real estate financing transactions.

Have a great 4th of July Independence Holiday. The Declaration was signed on the 4th, but Independence was actually declared on July 2nd. Now there are two reasons to celebrate. Be Safe! 

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Mortgage Mistake #1
Quitting your job? For god’s sake, wait until after your mortgage funds. Some of you will have the occasion to either change jobs or just up and quit entirely. Maybe you’re thinking of joining the ranks of the crazy, self employed entrepreneurs. Whatever the reason, get your priorities in order. Your employment will be verified as part of the mortgage process when you get pre-approved. Some people make the mistake of thinking that this is the last time they will have their employment verified. In many cases they are mistaken.

Most lenders will verify the employment of a prospective creditor immediately before the loan funds. If you have changed your employment status (to unemployed) without informing them, and they discover this fact, you could derail your chances of getting your mortgage. If you tell a little white lie by telling them you are employed, when in fact you aren’t, it could be considered fraud. In that case, you will have found another way to take of your housing worries. The state will provide housing for you, free of charge.

Mortgage Mistake #2
Failure to get your credit in order before you apply for your mortgage is a mistake made by too many loan applicants. This actually applies to any major purchase, not just mortgages. As I said in other posts, a significant reduction in interest rates can be  had by raising your credit score only a few points. In many cases this is not difficult and can be done in less than a month. It's another reason why you should know your credit score at all times.

Mortgage Mistake #3
Another mortgage mistake made by many applicants is the failure to ask for a better deal. That’s right, in many cases you can just ask for a better deal on your mortgage and your broker or lender will give it to you. Ask for fees to be reduced or eliminated. In many cases there’s no reason to pay these unless you want to enrich the lender. It will depend on the lender, your credit and their policies concerning such things.

If you have great credit, obviously you’ll be in a better position to get a fee reduction or elimination. When you’re dealing with someone who’ll be selling the paper, they are going to make quite a bit of money on the sale and you will be in a good position to ask for a reduction. I saved over $1,000 on my mortgage by simply asking. It’s not just the initial savings. Remember that you pay interest on these fees for the term of the loan. At the end of the 30 years, with my 6% mortgage, that $1,000 fee would have ended up costing over $1,100 in interest. It pays to ask. You can also negotiate for interest rates and other loan costs to be reduced or eliminated.

If you’re in the U.S., have a safe Independence Day holiday. Happy Birthday!

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First, the catches to the use of these cards –

#1 - It only allows you to purchase merchandise from the vendor who issued the card.

#2 – You have to pay a fairly large deposit on the merchandise you purchase using these cards. It's usually a catalog or website, and the prices can be somewhat less than competitive. Another problem is that some of the companies that issue these cards tend to fall on the wrong side of the tracks. You should choose carefully. It's essential to check them out carefully before applying. Don't worry about actually getting the card however, because when they say you absolutely can not be turned down, they're not kidding. If you can fill out the app, you'll get the card.

Ah, but the benefit can be huge. The cards are looked at by the credit agencies as is any other revolving account. In addition, their limits tend to be rather large. So, for the purposes of calculating your credit score you have, a revolving credit account with a relatively high limit. That raises your aggregate credit limit while only raising your outstanding limit a small amount. If your credit utilization score is too high, this will help bring it back in line. In addition, it will show up as a revolving account with a “paid as agreed” notation on your credit report. The key is to use it only for the purposes of raising your credit score, not as a card with which to by things. If you've had problems in the past with restraint, this may not be the strategy for you.

This is another strategy, that can fairly quickly raise your credit score, but, as happened with the piggybacking technique, it could one day be eliminated. There are signs that some of the credit reporting agencies are looking at not including the effects of this type of credit the way they do now.

For some more “underground” credit improvement techniques, see the Credit Secrets Bible. It will help you get a better understanding of how credit really works and some great ways to improve your score that can save you thousands of dollars on mortgages and other major purchases by getting you lower interest rates on the loans.

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It’s on the verge of collapse for much the same reason as any other business goes away; their business model was flawed to the point where it wasn’t really viable on a long term basis. Once the assumptions that the model was founded upon changed, the whole thing collapsed like Galloping Gertie. In this case lenders were too easy with credit and weren’t asking for enough money down to ensure there was at least some equity in the property. In addition, too many of these mortgage banks had virtually nothing in reserve to tide them over in the case their default rate got a bit out of hand for a while.

Many of these mortgage lenders used up most of their working capital repurchasing bad loans from their investors. Presto! - another mortgage lender out of business. This problem is being compounded by the reluctance of the remaining lenders to give mortgages to buyers with bad credit. The result of this is a reduced pool of homebuyers. With fewer buyers homes take longer to sell and tend not to bring as much money. Ironically, a percentage of these homes are those that have been foreclosed upon by the banks that got stiffed. If they foreclose on too many properties that take an extended period to sell, their financial worries deepen.

Where does that leave you? If you’re a homeowner with bad credit, it may leave you in the rental market, due to the difficulty finding a mortgage lender willing to take your business. If, however you’re a real estate investor with an eye on the long term, you may be finding the silver lining in this cloud. According to the latest Mortgage Bankers Association report, the number of loans entering foreclosure in Q1 2007 was up 14 basis points from the previous quarter and 20 basis points from the same quarter a year ago. Furthermore, FHA loans, typically used by those in the lower end of the lending pool set a new foreclosure record last quarter.

This points to a nice opportunity for the foreclosure and pre-foreclosure investor. You’ll have a large number of properties to choose from. If you’re in position to expand your portfolio, now could be a great time. You may have a larger pool of renters to rent your properties to as well, due to the number of people renting rather than buying.

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There are several techniques that work well to raise your credit score. One of these is called piggybacking. As you might have guessed from the name, piggybacking refers to the practice of using someone else’s credit to help your own. It works best in situations where you have very little credit history. In suchb cases, your credit score will be fairly low, because payment history comprises roughly 35% of your credit score, and how long you have used credit makes up an additional 15%. So, if you haven’t used credit much, either because you’re young, or because you’ve been married and most of your credit has been in your spouse’s name, about half your credit score can be helped by just adding something. Anything. Really.

You just need to have a credit history that your score can be based upon. Piggybacking is typically used by getting added as an authorized user on someone else’s credit card or other revolving account. When you try this, make sure you check with the credit card company to be sure your payments will be reported.

This technique has worked so well that companies were started just to match up people in piggybacking relationships (for a fee, of course). It’s gotten so popular that the popularity of this credit boosting technique could very well be its downfall. FICO has indicated it is going to deemphasize piggybacking effects from their credit scores on it’s newest credit scoring algorithm. That will get rid of those who have been getting a big boost to their credit scores by essentially renting other people’s credit histories, but it will also tank legit users of the piggybacking strategy, such as college kids being authorized users on their parent’s credit cards. This has been done for years to help kids develop a solid credit history. What to do now??

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