Your Guide to Credit and Personal Finance

New house – new financial plan
Our mortgage is bigger, so where will the money come from? Now’s the time to take a look at our financial plan.

Do you have a financial plan? Chances are the answer is no. Our annual Smart Borrower debt survey found that 54 percent of Americans don’t have one. I started thinking about that - why don’t most of us have a financial plan? And what exactly is a financial plan? We all like money - so why is it we can’t find a way to get the most out of the money we have?

First, our survey didn’t define what constitutes a financial plan. Do you have to have a spreadsheet? Is a budget a financial plan? Or is it enough to save 15 percent of your salary and decide not to live beyond your means? Ideally a financial plan would encompass a budget, saving money for emergencies, investing for retirement, and making sure you and your family are properly insured.

That’s a lot of work, and it’s not all fun. But I realized my husband and I need a new plan - a real plan - now that we’ve bought a new house and our housing costs have increased substantially. Our spending has been based on a sub-$1,000 monthly mortgage payment. Now what?

Start small
I easily get overwhelmed - I have to break projects into chunks to make them more manageable. Rather than worry about a complete financial plan, I decided to take baby steps and ease our way into it. I started by asking myself a few questions.

1. What’s important to us?
This is the fun part. What do we really want to spend our money on? Do we want to travel? Is having a designer-looking home something we want? If we have kids, we’ll have to think about their education. Right now, we want to make the house we bought into our home by updating it and buying some new furniture. (Yes, our house is our new toy.)

These are our goals - the reason we go to work every day. As you work on your financial plan, it helps to keep your goals in mind. They’re the whole reason you’re putting a plan together!

2. Are we spending more than we earn?
This is an easy task, especially today with so many transactions being credit or debit card based. One month, set aside your all your bills and bank statements. Add up how much you spent on utilities, all your loans, your credit cards, etc. Make sure you’re adding up what you spent on your credit cards, not what you paid. Also include automatic drafts from your bank account for monthly recurring expenses like gym memberships, as well as ATM withdrawals.

Subtract this from your take-home pay - that is, your pay after taxes, medical insurance, etc. Ideally there will be money left over.

I did this exercise, substituting in our new housing payment for our old one. And while we’re not spending more than we earn, what’s left over is a lot less than before. There’s less money to go towards savings, unless we cut our spending. I want to make sure there’s room in our budget for the big things like retirement, but also for the fun things - like new furniture.

What’s not in our budget right now is saving for expenses down the road, like a new car (our cars are 7 and 8 years old) or for furniture to fill our house.

3. Where did the money go?
Did it go toward what’s important to you? Or is there little to show for what you spent?

If you’re not spending your money on the right things, then it’s time to adjust your spending. Sure, you’ve heard it before - but if that $4 latte from the coffee shop is just a habit and not important then you should start making your own coffee at home every morning. Same with eating out. I found last month I didn’t eat lunch out that often, but when I did it cost about $15 every time - that adds up.

There are ways to cut out bigger expenses, too. In our case, we’re considering dropping our YMCA membership, which is $85 a month, because since getting a dog we exercise with her rather than at the Y. What about cable and internet? My husband is pushing for HD (we’d have to buy the TV as well) but I’m resisting. And I rarely use the internet at home - after being on the computer all day at work the last thing I want is to be on the computer in my free time. If you think the same way, maybe downgrading to a lower-bandwidth plan won’t be noticeable, except in your bank account. Then there’s the phone. If you use only your cell phone, it might be time to cut the land line.

If you find that a lot of your income goes toward debt payments, particularly credit cards, you may want to consider debt consolidation. This can lower your monthly payments, freeing your money up for things you’d rather spend it on.

4. Can you wait to make those big purchases?
I don’t want to go into debt to furnish our house. Instead, I’m increasing the amount that goes into my savings account each month. It’s automatic deposit, so I don’t even miss the money. In about 6 months we’ll have saved enough for a new rug, a sofa and some club chairs for the den.

I know, it’s hard to wait. But if you plan for your expenses rather than finance them, you end up having more to spend. Let’s do the math:

Cost for furnishing den: $5,000
Credit card interest rate: 12.75%
Interest cost for 12 months: $636

It’d rather take the $636 and spend it on nicer fabric or throw pillows than interest.

5. Think before you spend.
Impulse buying is really what kills a financial plan, at least for me. There are few things I watch out for in particular:

• Catalogs are especially dangerous. I rarely open catalogs now - they go straight in the trash.
• Stay away from the mall. It’s a pain to find parking anyway so I try to shop at smaller centers than fight the crowds.
• Make a list for the grocery store. You’re in and out faster, and you’ll spend less.
• Don’t always splurge when eating out. It’s easy to say “What the heck, we’re out anyway, we might as well enjoy ourselves.” I enjoy a nice dinner as much as anybody else, but if you do that every week it changes from an occasional treat to a drag on your budget.

That’s it - that’s the start of our new financial plan. It’s certainly not a comprehensive one, but once we’ve gotten used to the bigger mortgage payment we can move on to making sure our money is working hard for us. We recently had wills made, so that part of our plan is taken care of. But since we got married, we haven’t combined our accounts or looked at how our money is working for us jointly. We’ll have to review:

• Where is our money invested?
• Do we have enough insurance? The right insurance?
• Are we getting the best deal on all our loans?
• And in a few years, we’ll revisit our mortgage, to make sure it’s still the right one for us.

A financial plan isn’t supposed to be a chore. It’s about making sure you can enjoy what’s important to you in life. When you think about it in those terms, it’s much easier to tackle.

Get the latest smart borrowing tips
By Brenda Spiering – LendingTree.com

If you’re in the market for a new home, or are looking to refinance, you probably find yourself visiting the same Web sites over and over again searching for the information you need. Now there’s a better way. RSS (Really Simple Syndication) enables you to receive targeted info on the topic of your choice without having to check numerous sites and without cluttering up your email inbox.

Through the LendingTree Smart Borrower Center you can get RSS news feeds on a wide variety of topics. Looking to buy a home? You can choose to get updates on the housing market. Looking for a mortgage? You can select to receive all the latest info on home loans. Or, you can subscribe to news feeds about saving money, buying and selling a home, getting out of debt, and more.

In fact, LendingTree has recently introduced a new RSS feed entitled “7 for 7.” Sign up for this new feed and each Monday morning you’ll receive seven smart money tips — one for each day of the week.

Bridget Smith, editor in chief of the Smart Borrower Center, says, “We know most people consider financial advice about as enjoyable as a trip to the dentist.” Finding the information you need can also be overwhelming. She describes “7 for 7″ as an easy way to get useful money management advice that “cuts through the clutter.”

Indeed, RSS itself helps to cut through the clutter. It’s as simple as its name implies. You can choose to either have the information delivered directly to your computer by downloading a desktop newsreader, or set up an account to have it delivered to a Web-based news aggregator. And most newsreaders are available at no cost.

Then, once you’ve set up where you want your RSS feeds to go, all you have to do is subscribe to the particular feeds you want and you’ll start receiving content in your reader immediately. You can subscribe to as many feeds as you want, and you can add, edit or delete your subscriptions at any time.

If you’re reading an interesting article or column and want to be sure to get the latest updates on the subject sent directly to you, look for an icon or button with the letters RSS or XML (the programming language used to create the feed) or simply the words NEWS FEEDS, like used on LendingTree. Other sites mark their feeds with a small orange square containing a series of curved lines representative of broadcast waves.

Ready to get started? Sign up now to receive Free RSS feeds from LendingTree.

Credit categories dictate loan products
Borrowers who score high are offered most attractive interest rates and terms.

If you’re wondering how lenders decide which loan products to offer to which borrowers, you might want to learn more about mortgage credit categories, which include Plus, A, Alt-A, B, C and D.

High credit score can smooth loan process
While guidelines may differ slightly from one lender to the next, borrowers in the Plus category typically are offered the very best available combination of interest rate and terms. These well-positioned borrowers, who typically have a credit score of at least 720, also may be able to obtain a mortgage more quickly and with less documentation than other borrowers can expect.

The next-best loan products are those in the A and Alt-A categories, which typically are offered to borrowers who have credit scores in the neighborhood of 680-720 for A-quality and 650-680 for Alt-A-quality products. The difference between A and Alt-A may be as little as 10 points on your credit score or whether your income will be documented or only stated on your loan application. Either way, the difference will depend on the guidelines for specific loan products.

B, C and D-quality loan products generally entail higher interest rates and higher closing costs to compensate the lender for the statistically higher risk of lending to borrowers who have lower credit scores.

Some people also use the terms “prime,” “subprime” and even “non-prime” to describe categories of borrowers or loans, though these terms tend to be ill-defined. “Prime” may refer to loans offered to borrowers who have good credit while “subprime” may refer to loans offered to credit-impaired borrowers. And while some lenders might equate Plus and A to “prime,” the terms “subprime” and “non-prime” can’t be definitively matched to the more specific B, C or D categories.

Larger down payment can offset lower credit score
While your credit score is important, it’s not the only factor that determines which loan products you’ll be offered. The dollar amount of your down payment, the ratio of your loan amount to the purchase price of the home you want to buy, and the ratio of your monthly debts to your monthly income are also important and may be weighed more heavily for borrowers who have lower credit scores.

For example, a borrower whose credit score was only 520 might still be offered somewhat more attractive pricing or terms if his or her debt-to-income ratio was low and he or she could make a down payment of, say, $30,000 to buy a $100,000 house. The low debt-to-income ratio and high loan-to-value ratio might mitigate the risk of the relatively lower credit score from the lender’s point.

Multiple factors determine loan products
Borrowers needn’t worry about the finer points of differentiation among mortgage credit categories. The more important point is that your credit score, down payment, loan-to-value ratio and debt-to-income ratio are all important factors that should determine which loan products you’ll be offered. The less risk that’s built into your personal situation, the better-positioned you’ll be to save when you obtain a home loan.