Archive for July, 2007
How to keep your debt under control
Posted by: | CommentsHow to keep your debt under control
Debt can be a good thing when its carefully managed. Follow our tips and stay in the drivers seat.
Borrowing money can be an essential part of achieving your dreams, but it’s important to borrow wisely and keep your debt under control. Without discipline, it’s easy to get in over your head and end up with a bad credit rating. One of the best ways to prevent this is to understand the difference between good debt and bad debt.
Avoid bad debt
Debt is like cholesterol – there’s a good kind and a bad kind. A prime mistake people often make is incurring too much bad debt. Things to avoid include:
- Carrying too much debt on credit cards
For most people, credit cards are a daily fact of life. But it’s important to manage your use of plastic. Many people will borrow against credit cards (don’t forget, a credit card is often just a higher-interest loan) in order to buy new clothing, electronics, entertainment and other nice-to-have items. But this is a bad-debt gamble.The longer it takes you to pay off a credit-card loan, the more interest you’ll pay. If you’re only able to afford making minimum payments each month, you could end up spending hundreds, if not thousands, in interest on relatively small purchases.
Also, make sure when you apply for a credit card that you understand how the interest on your account is going to be charged. You may find that interest is charged on cash withdrawals, for example, from the date of withdrawal rather than the date the statement is due. And watch out — many cards with low introductory rates only have them for a limited time, after which their rate skyrockets.
- Zero-money-down loans
It’s easy to be tempted by ads that promise items for sale at “no money down, no interest for one year.” But if you can’t pay off the loan by the due date — normally 12 to 18 months – the interest rate usually balloons, often to over 20 percent.In the worst-case scenario, along with owing the original amount, you may even find yourself liable for retroactive interest on all the monthly payments you’ve delayed. All of a sudden, you could be faced with a big bill for hundreds or thousands of dollars.
Be sure to read the fine print when considering such deals. And be disciplined. Avoid spending sprees that rely on zero-money-down loans unless you’re absolutely sure you’ll be able to pay off the loan when it comes due.
Manage good debt
Good debt is like an investment: Incurring it usually reaps a reward. It includes such things as:
- Mortgages
A mortgage lets you to purchase a home that can enable you to build equity. Not only is it a tangible asset that you can use, but it also has the potential to increase in value. - Home equity loans
A home equity loan can enable you to borrow money at a lower interest rate than an unsecured loan. It’s therefore a good way to obtain capital for such things as home improvements, which can increase the value of your home. But remember, the loan is secured against the value of your home. You must be careful to meet your monthly payments or the lender could take possession of your home. - Student loans
A student loan fosters professional advancement and usually leads to a higher salary and more job satisfaction.
You can maximize the value of good debt through careful management:
- Watch interest rates and try to lock in a low rate on a mortgage.
- Consolidate high-interest loans into one lower monthly payment.
- Use any unexpected financial windfall to try to eliminate bad debt.
The key is to actively work your debt. Be its master, rather than its slave. Keeping debt under control may seem like a lot of work, but the money you save will be well worth the effort.
11 questions to ask your mortgage lender
Posted by: | Comments11 questions to ask your mortgage lender
Here’s what you need to know to be sure you choose the mortgage that will best meet your needs.
So you’ve requested a mortgage and received three or four home loan offers. Now what? Here are the most important questions to ask each lender.
1. What is the interest rate?
This is the most obvious question. The interest rate is used to calculate your monthly payments, and it will determine how much you’ll pay over the life of the loan. But you’ll need to understand more than simply the quoted rate. A good benchmark for comparing offers is their annual percentage rate (APR). This figure combines the interest costs and other fees charged by a lender over the life of the loan, and expresses them as a yearly percentage. Make sure to also ask for an itemized list of what’s included in each APR calculation, so you know you’re making a fair comparison, as some lenders don’t include all of their fees in the calculation.
2. Will the interest rate change over the life of the loan?
In the case of a fixed rate mortgage, the interest rate will remain the same for the entire term of the loan. Adjustable rate mortgages, however, have interest rates that change periodically. If you’re considering an adjustable rate mortgage, make sure you understand what the adjustment period is — that is, how often the rate will change (usually annually). Also, ask what the index and margin are that will determine your rate, and find out what caps will protect you from large rate increases. You can request a chart showing the past performance of the index the rate is based on, which will give you an idea of the rate swings other borrowers have experienced in the past with the same mortgage.
3. Will I be charged points?
A lender may offer to lower your rate if you pay discount points up front. One point is equal to one percent of the principal — two points on a $150,000 mortgage, for example, will cost $3,000, and might lower your rate by 0.5 percent. Lenders may also charge origination points, which are an administrative fee for processing your application and do not affect the interest rate. Make sure you understand which type you are paying for.
4. What are the closing costs and other fees?
Ask each lender for a good faith estimate of their closing costs. (Lenders are required by law to provide one within three days of your application.) Take the time to go through each estimate carefully to be sure you understand what each item means. This is important when comparing offers as lenders sometimes use different terminology for the same item.
5. Will you lock-in the interest rate?
A lender may allow you to lock-in the interest rate and points quoted in your offer for a specific period of time, often 30 to 60 days. This will protect you if rates go up during the time it takes to process your application. Ask what date the lock-in becomes effective and whether there is an additional fee involved — and get the agreement in writing.
6. How will my down payment affect the cost of the loan?
Some lenders require only a very small down payment of 3 or 5 percent, and some even offer zero-down-payment loans. But these may carry significant costs to offset their inherent risk. Typically, if your down payment is less than 20 percent, the lender will require you to pay for private mortgage insurance (PMI). On the other hand, you may be able to reduce the cost of your loan, or at least improve the terms, by making a larger down payment.
7. What documentation do you require?
Lenders will ask you to provide a bundle of personal information, such as your income, employer, social security number, information about your assets and an appraisal of your home. Ask for a checklist so your application is not delayed by missing paperwork.
8. What are the payment terms?
Ask each lender what method of payment they require, such as sending back a coupon with a check or arranging an automatic withdrawal from your bank. Determine whether there is a grace period (typically a week or two), and ask about late payment fees.
9. Can I pay the loan off early?
Chances are you may want to refinance your mortgage before the term is complete. So check whether a lender will charge you a prepayment penalty for doing so. Some may also charge a fee for paying down a substantial portion (more than 20 percent) of the principal before it is due. In many cases, prepayment penalties decline each year, and may eventually disappear.
10. How long will it take to close the loan?
Processing a mortgage application can be time-consuming. Ask each lender how long they expect it will take to review your documentation, check your credit rating and approve your loan. A minimum of two weeks is typical, though it is not unusual for it to take six to eight weeks to close a mortgage.
11. What might delay the process?
Ask each lender what information — employment, marital status, other outstanding debts — they will be checking, and make sure you advise them of any changes in these areas. You can also head off problems by checking your own credit file a couple of months before shopping for your mortgage.
New survey shows Americans’ relationship with debt
Posted by: | CommentsNew survey shows Americans’ relationship with debt
By Brenda Spiering LendingTree.com
According to the newly released results of the nationwide LendingTree Smart Borrower Survey, 48 percent of those polled said they were uncomfortable with the amount of household debt they carry and 50 percent said they were concerned or extremely concerned about the amount of credit card debt they have. However, even though 74 percent of respondents said they envision themselves eventually becoming completely debt free (outside of their mortgage), 54 percent said they have no financial plan.
“There’s no question that the seemingly contradictory results indicate the need for consumers to become better educated about how to manage debt,” says Bridget Smith, editor-in-chief of the LendingTree Smart Borrower Center.
Of those surveyed who had less than $3,000 in credit card debt, nearly 30 percent said they had an overall financial plan. However, only 4 percent of those who had over $30,000 in credit card debt said they had a plan. So, while Smith says it’s great news that so many people share the goal of becoming debt-free, she points out that the overall responses of those polled show that many aren’t making wise choices when it comes to managing their debt.
“When many people think about what they need to do to get control of their finances, they only consider their budget. But they also should make sure they have the information they need to make smart borrowing decisions. Loans today can be very complex and there’s a lot of choice out there. It’s more important than ever to become educated about the differences between various products so you can choose the one that’s best suited to your particular needs.”
Smith recommends that consumers use resources such as those found in the LendingTree Smart Borrower Center before making major borrowing decisions. “Our aim is to provide consumers with engaging articles and easy-to-use calculators that take the pain out of learning about personal finance.”
“We learned from the survey that there was a significant difference in the responses between various age groups and that young families have the highest debt-to-income ratio and the most discomfort with their debt level,” says Smith. “What’s really unfortunate is this group is young and they are raising families with debt that they simply do not understand how to manage and this could manifest into a generational pattern. As a result, we’re in the process of developing specific tools designed to help those in this life stage.”
The Smart Borrower Survey, which LendingTree plans to conduct on an annual basis, polled consumers nationwide about such things as their loans, credit card debt, credit scores, savings and financial plans.
New polls show decline in monster homes
Posted by: | CommentsNew polls show decline in monster homes
By Brenda Spiering LendingTree.com
Those sprawling 10,000-square-foot monster homes that began to be shoehorned into upscale neighborhoods across the country in the late 1980s may finally be losing ground in the luxury home market.
The latest Design Trends Survey by the American Institute of Architects, comparing home layout and use in the first quarter of 2007 with survey results from 2006, indicates that, for the first time in three years, luxury homes are starting to decrease, rather than increase, in size.
It should be no surprise that the average American home size may have reached a tipping point. Over the past 50 years, the size of an average home has more than doubled. Many of today’s new homes are being built with living rooms that are rarely lived in, dining rooms where few meals are ever served and guest bathrooms featuring tubs that are seldom bathed in. And the cost of maintaining so much unused space has been rising rapidly.
The trend to more modestly scaled homes may be the result of several factors coming together:
Increasing energy costs. In recent years, the escalating cost of electricity and natural gas has made it far more expensive to maintain a large home.
Changing demographics. As an increasing number of baby boomers become empty nesters, the largest American demographic has a declining need for bigger, family-size homes. Also, boomers building homes for retirement tend to want easily accessible homes of a more manageable size.
Shifting values. Among those who can afford to go big, REALTORS® have been noting a shift towards going for quality over quantity. Today’s buyers are more likely to put their money into expensive upgrades rather than additional square footage. They’re looking for smaller homes with many fine details such as quality woodwork and tiling.
Resale market. With today’s slower housing market, some buyers worry that a jumbo-size home may be more difficult to sell in the future. There’s concern that if they invest too substantial an amount in a large home, it may become more difficult to recoup their investment.
Of course, no one can predict for certain what the future will bring for the real estate market. And there will always be a segment of the population looking to buy a large home to support a desired lifestyle. However, depending on the current size of your home, if you’re thinking of a renovation with an eye on resale, you might be wise to consider an upgrade rather than an expansion.