Wednesday, December 30, 2009

Why do so many people have bad credit histories?

A good way to understand why so many people have a bad credit history is to examine the use of credit cards. There are two ways to use a credit card. One is as a convenience. Those who use credit cards solely for convenience tend to not want to carry a lot of cash and find writing checks to be a nuisance. They pay for their purchases with their credit card and each month pay their credit card bill in full.

If this describes you, you have made the credit card a useful tool. You may even get extra benefits, such as cash back or airline miles. However, in the credit card industry, you are called a deadbeat. Using a credit card to your benefit is not what the credit card company had in mind when it issued the card. Some credit card companies will charge you a fee for not making installment payments (paying interest). Even though the credit card company charges a fee to the seller of your purchases, the big money is made on interest paid by the credit card holder. Furthermore, while you have made your credit cards a valuable tool, you are not developing a credit history, as the loan companies mainly look at how you handle making regular payments on a balance so they can determine how you will handle making a thirty-year mortgage payment.

The second way to use a credit card is to pay less than the total monthly bill, thereby costing you an interest payment. You are borrowing money every time you use your credit card, and what that costs you depends on how you use the card. While paying this interest is certainly costing you money, it is giving you a credit history you can later use to borrow greater sums of money, such as what you will need to buy a house. All of this depends on your ability to properly manage your credit cards and your payments.

Friday, December 25, 2009

Recognizing The Red Flags That Lead to Debt

When you’re paying off your student loans, or paying off any debt for that matter, it’s a great idea to know where you stand financially. Specifically, it’s a great idea to recognize any warning signs that might foretell a personal economic plunge that may take years to recover from. For example, in the student loan repayment realm, three unopened invoices from your lender lying in a pile on your desk is a big red f lag that you’re not keeping up with your loan payments. Here are some common financial red f lags to look for in your busy life:

Your bank account is consistently overdrawn.
If you keep getting those thin envelopes in the mail from your bank telling you that your checking account is overdrawn, it’s time to regroup and find out why you’re not keeping up.
Tip: Ask your bank for overdraw protection against your checking account. For a few bucks each month, most banks will be happy to comply.

You are only able to make the minimum monthly payments on your credit cards.
A biggie. If you can’t maintain a clean credit card bill each month then you’re staring at big trouble down the road. At 15 percent or so interest, credit card companies clean up when you pay only the bare minimum of your monthly bill. At those rates, that new jacket you bought for $80 three months ago can cost you $350 in a few months if you don’t pay your credit card bill in full.
Tip: If you have multiple credit cards, cut all of them up save one. And use that only for emergencies.

You and your partner, if you have one, are arguing about money.
Money is an emotional issue, a power struggle sometimes between couples who usually have different ideas of how cash should be handled. If you and your spouse or partner are haggling over bills more than usual, it’s probably because your bills are higher than usual.
Tip: Agree on a budget and a spending allowance, if necessary, then stick to it.

Your savings account is busted.
Money experts agree that a savings reserve of six months of your annual salary is mandatory to ride out rough economic times, like the loss of a job or a serious illness. If you don’t have any money at all in your savings account, it’s time to reexamine your budget and see where your money is going every month.
Tip: When you get paid, pay yourself first; take 10 percent of your check and stash it in a savings or money market account.

You are juggling your monthly bill payments.
If you’re applying selective reasoning to your monthly bill payments (“Hmmm, we’ll pay the phone bill this month, but not the dog walker.”) then you’re in over your head financially.
Tip: Lose the dog walker and any other luxury item on your “to pay” list. In tough times stick to the staples: home, heat, groceries, and electricity. You might not think about it, but 20 years ago, nobody had an Internet bill or a cell phone bill. But you probably do now.

Thursday, December 24, 2009

Should You Apply for Student Loan Consolidation?

Think of consolidating your student loans as reorganizing all your key business contacts and putting them into one Blackberry or one Rolodex. Or think of it as combining your DVD remote, your stereo remote, your VCR remote, and your satellite TV remote all into one easy-to-handle device.

Imagine that? Bundling all your debt into one loan with one bill and one payment—maybe even with a lower interest rate of student loan consolidation. By consolidating, you’re actually lowering your monthly loan payments past the average ten-year student loan limit. The downside is that you’re shelling out more money in interest payments because you will be making loan payments over a greater length of time. That’s a big downside of student loan consolidation.

Should you consolidate your student loans? It depends on what your financial situation is and what your financial goals are.

If your goal is immediate financial liquidity, that is, more money in your pocket for the short term, then student loan consolidation may be a good way to go. But if your goal is to get rid of your student loan debt ASAP and you can manage those regular monthly payments, then it’s not such a great idea, unless you can consolidate your loans with a bargain-basement student loan consolidation rates that’s much lower than the one you have now.

In US, student loan consolidation interest rates are fixed, meaning they can’t and won’t change. The rate you get the day you consolidate your loans is the rate you have the day you pay off your consolidation loan. To make things even sweeter, Congress made sure that the fixed interest rate on student loan consolidation could never exceed 8.25 percent.

So far, It’s look like easy to jump right in and consolidate your student loans without thinking the whole thing through. One loan, one payment, maybe a lower interest rate. What’s not to like, right?

There are, however, reasons not to consolidate your student loans. That’s especially true if you have other, better options available to you. Consider these scenarios:

• I need a lower monthly payment. Most lenders will be happy to discuss different loan repayment options, such as the graduated payment and income-sensitive payment plans.
• I’m having trouble keeping up with my loan payments. You can temporarily stop paying your loans, or at least reduce them, under either a deferment or a forbearance plan.
• I just want all my loans rolled into one. Your lending institution may be willing to purchase all your other student loans and bundle them together under one “roof.” In financial circles, that’s known as loan serialization.

So, student loan consolidation, a good deal or not?

source: Book by Brian O'Connell. "Free Yourself From Student Loan Debt"

Tuesday, December 22, 2009

What is a loan-to-value ratio?

One of the standard procedures before making a loan is to determine the value of the property. This is done by an appraisal, which determines a value for the property for loan purposes. The lender may have its own appraisers (in-house appraisers), or it may use an independent (outside) appraiser.

There are several different types of appraisals, some of which are highly complicated and require the appraiser to complete special education and licensing procedures. Appraising a home, especially a tract house or condominium, is relatively easy. The most common appraisal method used is to compare similar properties that have recently sold. A computer database with this information is available to the appraiser, who physically inspects the subject property to assess its condition. The property is then valued based on the sale prices of similar properties in the area, called comparables or comps. If the comps are not exactly the same model as the subject property, a price adjustment is made for square footage, lot size, and any amenities, such as a swimming pool or room addition.

For certain types of loans in which there is an extremely low loanto- value ratio, the lender may even use a desktop appraisal. With this method, the values of comparable properties are checked on a computer and there is no physical examination of the property beyond a drive by by the appraiser.

The amount of money you ask the bank to lend you compared to the value of the property is the loan-to-value ratio. The lower the ratio, the lower the risk for the lender. For you, the lower the ratio, the lower your credit score can be.

Sunday, December 20, 2009

Control Your Student Loan Bill by Managing Your Lifestyle.

Irish humorist Joseph O’Connor once said, “I feel these days like a very large flamingo. No matter which way I turn, I have this large bill attached to me.” While O’Connor aptly states the emotional condition of the high-debt sufferer, there’s no need to flap your wings over a big student loan bill. No need, that is, if you know how to control your debt.

The idea here is simple. Control your debt by managing your lifestyle. Consequently, the key to controlling debt is to first try to live as inexpensively as possible. If that means renting an apartment with a roommate or bringing a bag lunch, then so much the better. Once you pay off your student loans you can ramp up your lifestyle, because you’ll have more cash at your disposal.

Let’s start with a household budget. Without going through the punishing ordeal of ranking your spending priorities, it is difficult to guarantee you will have anything left over at the end of the month to pay your student loan. If this sounds too taxing, then use the paperless budget method. Start by holding out a reasonable portion of every paycheck to pay down your student loan and other debts and force yourself to live on the balance.

If every now and then you come out ahead, be sure to apply your windfall to eliminate student loan debts before you start to accumulate savings. This makes sense for a number of reasons. Borrowing rates typically exceed savings rates. Interest expense is usually nondeductible, while savings are taxable. Interest charges are a certainty, but investment returns are volatile. Sure, these terms seems dry and boring. But let’s face facts, it’s not your father’s economy anymore. In an era when consumer spending is high and there’s plenty of new goods and services to buy that weren’t available even 20 years ago, knowing how to budget properly is a big key to your financial success.

According to a recent American Express consumer survey on everyday spending, today’s list of typical, day-to-day expenses is still dominated by traditional items such as groceries, fast-food lunches, tolls, and gasoline. But they’ve been joined by certain 21st-century wallet-sappers such as cellular phone service, paging fees, and Internet service costs.

Consequently, as everyday expenses increase, managing a household budget becomes more complicated. The best solution? Get those costs into your budget as soon as possible, because people tend to spend whatever money is left over after paying the fixed expenditures and stop only when either the ATM won’t give them more cash or the bank calls.

One way to keep money from flying out of your pocket is to write down what you’re spending as you spend it. You may not realize it, but that glass of Merlot after work, the dry cleaning you picked up on the way home, and that four-cheese pizza you had delivered to your door for dinner all add up. A record of your daily, weekly, or monthly expenditures makes for some interesting reading in most American households, testing the patience of millions of spouses in the process.

As I’ve mentioned, some consumers like to use a credit card to buy everything (the credit card companies LOVE to push that strategy). That way, at the end of the month, they have a readymade laundry list of expenditures sent to them by their credit card firm. Bad idea. Sure, you get a nice, clean list of what you spent each month. But getting into the habit of using a credit card is never a good ploy. It’s easy to treat that Visa card like cash, but it ain’t. Sooner or later you’ve got to pay for it, with high interest payments to boot if you’re not on time every month.

Besides, in the age of the laptop, it’s easy to sit down at the end of the day and compile your own list. You’ll have your record and you won’t get sticker shock opening your credit card bill every month.

Saturday, December 19, 2009

What is a promissory note?

When you sign all the documents that go along with giving a mortgage, you will sign what is called a promissory note (also referred to simply as a note). This is the document that sets out the terms of the loan, and as the name implies, is your promise to repay the money. The mortgage is the document that puts up your real estate to secure repayment. In other words, the promissory note describes how much you are borrowing and the terms of the loan, while the mortgage is what gives the bank the right to take your home if you do not live up to what you agree to do in the promissory note. It is common for the mortgage to restate all the terms of the note, making the documents sometimes look very similar. However, they have very distinct purposes.

The reason the note is so important is because it is a negotiable instrument. Negotiable instruments are what make the system work. A buyer of a negotiable instrument, as long as the procedure is done properly, becomes a holder in due course. The point behind a holder in due course is that once the loan has been sold, you may be stuck with it—even if you did not fully understand the terms or there were irregularities because of a dishonest original lender.

Negotiable instruments are treated differently from other contractual promises. They must be in a certain form (they are sometimes called form or formal contracts.) When in the proper form, they create rights for those to whom they are transferred (those who buy them) that other contracts do not.

Friday, December 18, 2009

Breaking Your Credit Card Cycle

Managing your personal finances—especially your credit card debt—is job one when it comes to squaring your student loan debt. While credit cards are a necessary evil, when you’re trying to free yourself from student loan debt, they can be more evil than necessary. How so? Well, try paying off your college loans when your monthly Visa statement looks like the annual operating budget for Portugal. In many cases, the interest rate on credit cards is 16 percent or more; the interest you pay is not tax-deductible; and quite often the money you owe is for something you’ve already gotten the most use out of.

Pay it off. But first, make sure the credit card bill is accurate. Analyze the bill. Make sure it matches your receipts. Sometimes when you sign on the dotted line, you don’t double-check the amount of the purchase. For example, amid the rush of holiday shopping, you might not have been charged the sale price for an item; you might have been charged twice for a single item; or you could even have been charged for an item purchased by someone else in line. It happens. If you notice a discrepancy, call your credit card issuer and dispute the charge.

Meanwhile, don’t fall for any season’s greetings from your credit card company offering to lower your minimum payment or saying that because you’re such a good customer, you can skip this month’s payment. That sounds enticing, but remember, the interest rate clock is still ticking.

With all your holiday shopping, in addition to your regular expenses, suppose that your January credit card bill is $2,500, a typical amount. If the annual interest rate is 18 percent, skipping January’s payment could cost you about $38 in finance charges that will show up in next month’s bill. No wonder the credit card company is so nice.

Thursday, December 17, 2009

How are mortgages structured?

There are two general ways that mortgages are structured. The structure affects how the foreclosure procedures are performed should you not make your mortgage payments. In title theory states, the lender owns the property and deeds it back to the borrower when the loan is repaid. In lien theory states, the borrower owns the property and the lender has a lien on it. Title theory states are more commonly found in the eastern part of the country, with more lien theory states in the western United States.

In either a title theory state or lien theory state, the general effect is the same. The lender’s rights in the property are only for the purpose of securing the loan. If the borrower abides by the terms of the note and mortgage, the lender has no right to interfere with the borrower’s use and enjoyment of the property.

The differences in the theories may become important when the borrower fails to abide by the terms of the mortgage loan. The foreclosure process varies from state to state, with some state laws being more favorable to the borrower and some to the lender. Since state laws control the real property located within that state, every person must follow the laws of his or her particular state.

Wednesday, December 16, 2009

Some Responsibilities for Student Loan Borrower

When you accept the terms of a student loan, it means you have to take those loan obligations seriously. Even if you don’t, the lending institution will, and they’ll want their money back. In fact, they’ll want it back so bad that they’ll hound you like a dog, stick to you like a barnacle to the hull of a boat, and be like bubble gum on your shoe until they get their money back—or ruin your financial life if they don’t. Believe me, lending institutions aren’t charitable institutions. They have absolutely no problem making your life miserable if you’re slow or a no-show in paying off your loan.

Also remember that when you take out a student loan, you have certain responsibilities. Primary among those responsibilities is your promise to pay back the money you borrowed. As stated by the U.S. Department of Education in the Student Guide— 1996–1997:
When you sign a promissory note, you’re agreeing to repay the loan according to the terms of the note. The note is a binding legal document and states that, except in cases of loan discharge, you must repay the loan—even if you don’t complete your education (unless you were unable to complete your program of study because the school closed); you aren’t able to get a job after you complete the program; or are dissatisfied with, or don’t receive, the education you paid for.

Some other responsibilities you have as a student loan borrower— and the excuses you cannot use—are as follows:

I never got the bill. Sorry, but not receiving a bill or loan statement in the mail is not grounds for not paying your student loan bill. Lending rules state that loan recipients must make payments on their student loans even if they do not receive bills or repayment notices.

I need more time. Sometimes you hit a rough patch and you
can’t pay your student loan bills perhaps for months at a time. In those instances, it’s a good idea to ask for a deferment or a forbearance— basically a “loan holiday” when you don’t have to pay your student loans until you get your financial act together. If, that is, your lending institution goes along with your request. But, according to the U.S. Department of Education, if you request such a delay you still have to make payments until you are notified that the request has been granted. If you stop paying on your loan anyway, you could be in default. A tip: Keep copies of all deferment request correspondence because they could come in handy if your loan is in question later on.

I thought you had a crystal ball. When you graduate from school, transfer to a new school, or drop out or attend as a parttime student, it’s your responsibility to let your lending institution know about it.

I didn’t think it was that time of the month. Your loan payments are expected each month.

Tuesday, December 15, 2009

What is a mortgage?

In simple terms, a mortgage is putting up real property (real estate) to secure a loan. This means that if you fail to meet the terms of the mortgage—for example, by failing to make your agreed-upon monthly payments—the lender can sell your house through a process called foreclosure to get back the money you borrowed to buy it.

You should familiarize yourself with certain technical terms used in the mortgage industry.

A mortgage is a two-party document—the mortgagor (borrower) gives the mortgage, and the mortgagee (lender) lends the money. Most people incorrectly say that they are going to “buy a mortgage.” The expression has become so common that everyone knows that someone who says it is trying to borrow—not lend—money.

Another term that you should know—which is often used incorrectly— is pledge. To pledge something is to deliver physical possession of it, like if you are getting a loan from a pawnshop. When you do not give up possession, you hypothecate the property—you do not pledge it. Since pledge is a simpler word than hypothecate, it is commonly used—even though not technically correct.

Monday, December 14, 2009

Can I use a gift to pay for my down payment?

Check with your lender to see if all or part of the down payment can be covered by a gift from a third person. If you have a relative who is willing to help you with the down payment, get a gift letter from that relative (along with the gift) stating that you do not have to pay back the money. How much of your own money you will need depends on the type of loan you are seeking and the lender’s policy (which usually contains a minimum credit score requirement).

If you are using a gift as part of your down payment, ask the lender for the form gift letter it wants you to use. There is no standard form used by all lenders.

A gift letter must contain the following items.

• The names of the donor (giver of the gift) and the donee (receiver of the gift).
• Whether the gift has been given or only promised. The lender
may require that it be given before accepting the letter.
• The purpose of the gift (to help purchase the home). The property address is also given in this section.
• A statement that no repayment is required or expected, either in cash or future services. (Although by definition a gift does not have to be repaid, lenders want it emphasized.)
• The relationship of the donor to the donee, such as parent or sibling. The donor may also be a nonprofit organization that helps low-income buyers or those having specific jobs.
• The date and signature of the donor and an acceptance and signature of the donee. Notarizing the signatures is usually not required. If it is, your lender will most likely have a form for you to use.

The lender may also require that the donor disclose the source of the funds, such as the sale of stock, a savings account, etc. There may also be a statement that no party to the sale, such as the seller or real estate agent, is the real source of the gift.

Most lenders want you to have at least 5% of your own money in the deal. You will have to show proof that the money is yours, and not borrowed or a gift. Bank statements showing regular deposits to a savings account or a letter from your employer stating that you were paid a bonus are examples of what you may need to show your lender.

Sunday, December 13, 2009

Credit Card Debt from Your Student Loan Perspective

Not all debts are bad ones. Using a mortgage to buy a home, tackling the rising costs of college with a loan, even borrowing money to buy a car—all are good debts with high return values.

But there are bad debts, too, debts that can limit or even prohibit your cleaning up your student loan debt. Of the bad debts, few are worse than credit card debt.

Simply stated, credit card debt can kill you from a personal finance point of view. Massive credit card debt can choke your ability to deal with all your other financial responsibilities, taking over your life and limiting your ability to grow and prosper.

Sure, eating at a five-star restaurant or buying season tickets to watch the Red Sox are worthwhile pursuits—if you can afford them with what you bring home in your wallet every payday. Using a credit card to finance these endeavors is being a long-term loser, if only because most of the things you buy with credit cards depreciate rather than rise in value. Those high-top Reebok basketball sneakers may look great in the box, but once you slap them on your feet, their value resides only in your mind’s eye, because few others want them anymore. Unlike other depreciable items, like a car that provides vital transportation or a pair of eyeglasses that allows you to see, most things you buy with a credit card don’t offer much to your personal bottom line.

From your student loan perspective, any money that is earmarked toward your credit card debt is money that you can’t use to free yourself from student loan debt. That’s the primary reason why credit card debt is invariably bad debt.

It’s bad from a student loan point of view, as well. In fact, student loan debt and credit card debt are joined at the hip. For decades, credit card companies have targeted college students, offering them their first shiny new plastic card while downplaying the dark side of owning a credit card.

Well, that plan worked. Millions of young Americans who received their first credit cards in college (and millions more who didn’t, but got them right after they graduated and obtained their first job) have developed the nasty habit of using their credit cards with alarming regularity. In the process, younger Americans have put a real dent in their financial health and made it even harder to address their student loan debts.

According to the college-lending agency Nellie Mae, U.S. college students in 2000 racked up an average credit card balance of $2,748. That’s up from an average $1,879 in 1998, the agency reports.

More disturbingly, Nellie Mae also says that a college student who makes the bare minimum credit card monthly payment (with an 18 percent APR interest rate) would need a whopping 15 years to pay off that entire debt. Worse, the cardholder would have to pay as much in interest alone as he or she would the original $2,748 debt. And that’s operating with the dubious assumption that the cardholder would never use the card again.

As if, right?
Then there’s another study published by New York State’s education agency that reports 78 percent of college students carried at least one credit card while 32 percent carried four cards or more. Furthermore, 10 percent of students shouldered a credit card balance of $7,000. Another 14 percent owed between $3,000 and $7,000.

Saturday, December 12, 2009

Know Your Student Loan, One Step to Financial Freedom

Some people treat student debt like the plague and make no special effort to pay bills right away or at all. The good news is that the number of those who elect to ignore their student loan debt is declining. Educators attribute that decline to an improved U.S. economy in the 1990s and an improved awareness on the part of loan recipients of the importance of paying off their student loan debts.

Obviously, student loan borrowers are taking their debt more seriously. And people are beginning to understand that knowledge is power and that the fastest way to pay off student loans is for borrowers to face their loans head on and know what they’re up against.

This is a highly significant occurrence. By knowing your debt and understanding how it impacts your financial life, your chances of eliminating that fiscal albatross around your neck increases exponentially. But what, exactly, does “knowing your debt” mean?

For starters, it means knowing how much you owe on your loan. If you owe $8,000, then, if nothing else, you know where you stand. It seems like a simple concept, but some people can’t be bothered about their debt amounts. They’re too busy starting their careers or tackling other, more appealing, fiscal responsibilities such as buying a new Jeep or grabbing a vacation rental on the beach for the summer. These people are in the highest danger of defaulting on their student loans, simply because, for whatever reason, they stopped paying attention to their loans.

Don’t be like that. Know your loan. Know its terms, its payment schedules, its repayment options. Know that if you make higher monthly payments you can pay the loan off more quickly. Know who your lender is and where you can reach them. Know that if you move, you need to contact your lender and let them know your new address. Hey, young people move all the time. They get jobs in different cities or decide that they want to live in San Francisco or Boston at least one time in their lives and up and do so.

Knowing your debt also means knowing what to do if you can’t make a monthly payment for some reason. Lenders are usually fairly gracious about this, as long as you let them know you won’t be paying and when they can expect the next payment.

Keeping your lender in the loop is a huge part of knowing your debt. Closing them out or ignoring them will only lead to complications and possibly default. And if that happens, good luck landing that new brownstone apartment in Haight-Asbury or Harvard Square.

Above all, knowing your debt means reading and understanding all the correspondence you’ll receive from your lending institution. Yes, the language lenders use in their statements reads like the Dead Sea Scrolls. But read it anyway. Remember that it’s all part of knowing your debt.

And knowing your debt could mean the difference between financial freedom down the road or financial fiasco.

What is Private Mortgage Insurance (PMI)?

Lenders want to make loans at the lowest risk possible. With a 20% down payment, most lenders are comfortable with the risk level of the loan. To cover risks with down payments of less than 20%, private mortgage insurance was developed. Private mortgage insurance (PMI) insures the lender in the event that the foreclosure of a mortgage results in a sale that nets less than the balance owed on the loan. The cost of the insurance is paid by the borrower. For a loan with a down payment of less than 20%, you will have, as part of your monthly mortgage payment, an additional payment for PMI. The insurance does not cover the entire loan amount—only a small percentage. So, if you have only 10% to put down, the lender requires you to buy PMI to cover the other 10%. If the lender takes a loss, the insurer will cover that loss up to 10% of the amount of the loan.

Theoretically, the lender’s risk is the same as if it made an 80% loan. As a practical matter, though, the lender’s risk is greater, since borrowers who put 10% down are more likely to default than borrowers who put 20% down. The more you put down, the better chance you will get the most favorable interest rate for a loan and have to pay less in PMI.

The rates you will pay for PMI vary, based on the percent covered and the borrower’s credit score. Borrowers who put down 5% pay more than those who put down 15%. This makes sense because more insurance is required. It also makes sense that a higher down payment means a lower risk of default.

The lender may have a choice of how much insurance it requires. The lender may buy insurance to cover 30% of the loan, rather than 20%. This will cost more. If you are getting PMI, ask if the lender is getting the minimum insurance. If you have good credit and good income-to-debt ratios, you should question why the extra insurance is necessary. At the time you apply for the loan, you also want to ask about cancellation of the PMI. Once you have paid on the loan to a point that PMI should no longer be required, you should stop paying for it or get a refund if you paid the total up-front. Laws now require a lender to cancel PMI when the loan-to-value ratio reaches 78% of the value of the property at the time when the loan was made if cancellation is not requested by the borrower, and at 80% if the borrower makes a request. Ask about cancellation before taking a loan and always contact your lender when the loan-to-value ratio reaches 80% to have it canceled.

Many people hate having to pay PMI. There are ways to avoid PMI using different types of loans that will be discussed later. One way to increase your down payment and lower or eliminate PMI is through a gift.

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