Archive for May, 2007
New house new financial plan
Posted by: | CommentsNew 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
Posted by: | CommentsGet 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
Posted by: | CommentsCredit 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.
Why your lender matters
Posted by: | CommentsWhy your lender matters
Monthly payments are important, but products, performance and prices should count too.
Home loan borrowers understandably place a lot of emphasis on monthly mortgage payments. Questions like: “How much will we have to pay? And could the payments increase?” typically merit more attention than questions like “Which lender will originate my loan? And who can I call if I have any questions?”
Yet the relative merits of the lender are well worth consideration even though they aren’t directly related to your monthly payments. That’s because your lender will have a significant impact on your experience throughout the loan process and after your loan closes.
Service. Borrowers who appreciate and value good service as well as reasonable prices should pay attention to the services the lender promises to provide. Choose a lender who is responsive to your requests and who answers your questions completely, patiently and in plain language that you understand. Ask the lender what services he or she is ready and able to offer to you, and ask yourself whether you feel comfortable with the lender and loan representative.
Products. Most lenders originate all types of home loans, but some specialize in loans that meet the needs of certain types of borrowers. Find out what expertise the lender has and what types of products the lender most often recommends to borrowers in your situation. Ask your loan representative how he or she will help you figure out your needs and select a loan product that will be suitable for you. Pay attention not only to the initial monthly payment, but also to how your payment could change over time.
Costs. Monthly payments are only one component of how much a home loan costs. Ask the lender to explain the other costs and pay attention to the annual percentage rate or “APR.” Lenders naturally are entitled to earn fees for loan-related services, yet those fees should be fair and reasonable. Some lenders offer discounts or waive certain fees for existing customers, so ask whether any discounts or special offers may be available to you.
Servicing. Some lenders keep home loans on their own books while others sell the loans or the servicing rights or both. The sale of your loan and/or the servicing rights isn’t a cause for concern; however, you may want to find out the lender’s intentions, so you’ll know who will own your loan and where you’ll need to send your monthly payments. If the lender sells your loan before closing, another lender’s name and address may appear on your loan documents.
Performance. Circumstances in which a lender gives final approval to a loan, but then fails to come up with the promised funds are very rare. Yet that unusual situation can happen. Choose your lender with care, stay involved in the loan process and keep in touch with your loan representative to make sure your loan will be funded on time.
Credit inquiry FAQ
Posted by: | CommentsCredit inquiry FAQ
Multiple credit inquiries or “pulls” can affect your credit score. Read on for answers to frequently asked questions about credit inquiries and working with LendingTree.
How will using LendingTree affect my credit score?
LendingTree pulls your credit score when you complete a loan request. This is known in the credit industry as a “soft pull” because we do not pull your full credit report, just your score. A soft pull does not affect your credit negatively. In addition, LendingTree does not share your exact score with our lenders. Rather, LendingTree uses a score range to determine which lenders meet your criteria.
The information in the soft credit pull is good for 45 days. If you submit an additional loan request anytime within 45 days of your initial request, LendingTree will not pull your credit file again; however, the lenders you are matched with may pull your full credit report each time you submit a loan request.
Lender credit requests are considered “hard inquiries” and can affect your score. Keep in mind, though, that the credit bureaus understand that savvy consumers want to review multiple loan offers, so the bureaus consolidate all mortgage loan credit inquiries within a certain period (which can range from 14 to 45 days) and count them as one inquiry.
Why does LendingTree pull my credit?
LendingTree uses your credit score to determine which lenders can compete for your business. Because LendingTree pulls your credit, the lenders on our network are able to give you actual loan offers, rather than just rate quotes.
Do I have to allow LendingTree to pull my credit?
No, there’s another option. You can also be matched with lenders through our QuickMatch process. QuickMatch will still match you with lenders who meet your criteria. Without your credit score, however, lenders won’t be able to make loan offers until they talk to you directly and get permission to pull your credit. This is an important distinction between the services.
Do the lenders I am matched with pull my credit too?
They may. If you submit a request through LendingTree, you authorize the lender(s) you are matched with to pull your credit report and score. The lenders need this information on your report to generate a customized loan offer, and each lender has its own policy about pulling your credit report. The good news is that the scoring formulas used by credit reporting agencies account for this type of loan shopping.
Why do credit inquiries affect my credit score?
Lenders are interested in inquiries because multiple inquiries are an indication that you are requesting new credit. The credit scoring agencies have found that borrowers who request credit frequently tend to be higher risk borrowers. Thus, frequent inquiries on your credit report that result from frequent requests for new credit (credit cards, loans, etc.) can lower your credit score. (The lower your score, the more risk the lender sees in lending to you.)
However, credit reporting agencies understand that borrowers need to shop around to find the best loan, which can create multiple inquiries in a short time. To address this, the scoring formula doesn’t penalize borrowers for shopping around. The score is set up to take into account that even though you are looking for only one loan, multiple lenders may request your credit report. Here’s what Fair Isaac, the company behind your FICO score, says about rate shopping:
“The score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping. In addition, the score looks on your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO score.”*
*Copyright © Fair Isaac Corporation. Used with permission. Fair Isaac, myFICO, the Fair Isaac logos, and the Fair Isaac product and service names are trademarks or registered trademarks of Fair Isaac Corporation.
Tips for online safety and privacy
Posted by: | CommentsTips for online safety and privacy
Increased e-commerce security and web-savvy consumers are helping to reduce online identity fraud.
Tighter security procedures and increased consumer awareness have made the Internet a safer place to transact business than ever before. In fact, the common misconception that most identity fraud occurs through the Internet was recently called into question by the 2007 Identity Fraud Survey Report conducted by Javelin Strategy & Research.
According to the survey, identity thieves have greater success stealing private data through physical, real-world channels like “dumpster-diving” (fishing documents like bank statements and pay stubs out of the trash) than they do via online transactions. Plus, the number of identity fraud cases in the U.S. is dropping. Identity fraud and theft cases fell by 12 percent between 2005 and 2006.
However, it’s still important to know how identity thieves operate and how to safeguard your personal information when online.
Encryption technology
Before submitting bank account or credit card information online, make sure the information you’re sending will be transmitted via a secure Web page. The page should be protected by encryption technology that scrambles the data during transit so no one other than the host site can decipher it.
Secure URL
Even though a site may look professional and legit, that’s not a guarantee that it’s secure. You can usually tell if the page you’re viewing is encrypted from the URL: Unencrypted pages typically begin with http://; encrypted ones begin with https://. If you are entering sensitive financial information such as a credit card number, be sure to look for the https:// in the url.
Lock icon
A lock icon should also appear on secure pages in the status bar of your browser window. Click on it and the security certificate of the page you’re viewing should come up. The lock icon is a helpful tool, but you should always test its functionality; some sites create a fake status bar and lock icon to give users the impression that the page is secured when, in fact, it isn’t. If the site has a privacy policy, read it carefully to see what personal information you will be asked for and how it will be used.
Password protected
You can be confident you have an added layer of protection, if a Web site requires you to input a personal password in order to access your account. This prevents anyone who does not know your password from being able to go online to view your personal information.
Personal firewall
Online security isn’t restricted to the Web sites themselves. You can buy protective “firewall” software for your computer to prevent any sites you connect to from accessing your hard drive and to keep your private information safe from hackers. Also, you should store any login or password information for secure sites in a safe place and make sure you don’t share them with anyone.
For companies that do business online, keeping their customers personal information private and secure is vital. For example, here are some of the ways that LendingTree ensures your data is kept private:
• LendingTree protects your financial information by using SSL (Secure Sockets Layer) Technology that encrypts data in a format only LendingTree can decode.
• All pages on LendingTree that prompt you to enter personal financial information are protected from hackers by the https secure server communication layer.
• Pages that retrieve information about your loan status are password-protected, and any personal or sensitive information you submit is viewed only by authorized personnel. To retrieve information about your loan status, you are required to enter both your email address and password.
• LendingTree stores your information on a computer that is separated from the Internet, so any information you submit will remain safe from hackers.
By checking that all the companies you transact with online protect your personal data in a similar fashion, you can ensure your Web transactions remain private and safe.
Lending standards changing to protect borrowers
Posted by: | CommentsLending standards changing to protect borrowers
Freddie Mac has announced it will stop buying home loans that carry a high risk of payment shock.
In recent years, many homeowners have taken advantage of non-traditional adjustable rate mortgages (ARMs) that provide low introductory interest rates. However, the “teaser” rates on these mortgages rise sharply after the initial period. Buyers not prepared for this increase may find themselves in the position of having taken on a loan with larger monthly payments than they could handle.
But there’s good news ahead. In April, Freddie Mac — the company mandated by the federal government to encourage a healthy mortgage market — announced that it would stop buying subprime home loans that carry a high risk of payment shock. Responsible lenders have adopted the new standards, since they should lead to fewer homeowners defaulting on their loans.
The situation in today’s mortgage market is partly due to the recent housing boom. While many homeowners benefited from skyrocketing house prices, the boom also led to a huge increase in the number of mortgages granted to people with poor credit. In 2006, these so-called subprime mortgages accounted for one in five home loans, compared with just one in 20 five years before.
Many home buyers with shaky credit signed on for mortgages such as 2/28 hybrid ARMs, which provide a low introductory rate for two years before switching to a higher, fully indexed rate for the remaining 28 years. The problem was that when this sudden jump in the size of their monthly payments occurred, many borrowers were overwhelmed by their new obligation. As a result, in recent years, the number of foreclosures has been on the rise.
Fortunately, the climate is changing, and mortgage lenders across the country are tightening their standards to protect borrowers from default. By the fall of 2007:
• Responsible lenders will ensure that their customers qualify for loans at the fully amortized, fully indexed rate (the higher, final rate the loan could jump to and the resulting higher monthly blended principal and interest payment required to pay it off at maturity) rather than just at a low introductory teaser rate.
• There will be more restrictions on low-documentation loans (loans that allow you to pay a higher interest rate in exchange for providing less personal financial information), to ensure that borrowers have the income and assets they need to comfortably carry their loans.
• In order to provide borrowers with safer mortgage options, Freddie Mac is developing new hybrid ARMs with smaller margins and less volatility.
• The new lending standards will make it more important than ever for prospective home buyers with poor credit to work hard at raising their credit scores and saving for a down payment.
If you currently have a subprime mortgage and worry you may not qualify under the revised guidelines, you may want to consider refinancing before September 1, 2007, when Freddie Mac’s new standards go into effect.