Home Equity Options

Posted by Credit to the Wise on August 20th, 2009 filed in Mortgages and Real Estate
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Second Mortgages are often called “Home Equity Loans”. If you want to avoid re-doing your first mortgage (maybe you have a really good interest rate on it now, for example) but you still want to access your equity, you may want to consider a 2nd mortgage like this.

There are two basic types of Home Equity Loans. You can either do a defined loan with set terms (HEL) or you can do a flexible type of loan known as a Line of Credit (HELOC). The type you choose has a lot to do with your feelings about risk and what you plan on using the loan for. A quick look at your options with help you decide which is best for you.

Difference Between HEL’s & HELOC’s

Home Equity Loans (HEL):

The loan amount is set, the interest rate is typically a fixed rate (but some lenders offer adjustable rate HEL’s). The repayment term is set. So for example, your HEL might look like this: $50,000 loan @ 9.0% fixed-rate interest with repayment over 15 years. At closing, you’d get your full loan amount (less any closing costs unless you pay for these yourself outside of the loan – which would be unusual) and you’d begin making a regular monthly payment to pay back the loan. Because this example is a fixed rate loan, your monthly payment wouldn’t change over the life of the loan and at the end of 15 years, you’d have it all paid back.

Home Equity Lines of Credit (HELOC):

HELOC’s typically come with variable interest rates – although there are some that offer fixed rate options. On a line of credit, your payment each month will be based on how much money you have borrowed against your “line”. For example, if you set up a $50,000 line, but you only borrow $30,000 of it, your payment will be based on that $30,000 balance – much like a credit card monthly payment is set. As you pay down the balance, your monthly payment will go down. But with a HELOC, you are given the option to borrow more of your available line at any time. You don’t have to ask anyone permission to access it.

You are usually given a checkbook or a debit-type card and you can spend your line any time you want. When you do, your payments will go up based on how much you borrow.

You can even pay off the entire balance of the HELOC, and as long as you don’t close the account (or the lender closes it for you – which can happen), you can re-access the line again – still without asking anyone’s permission to do so.

Unlike a HEL, when you open a HELOC, you often have the option of how much money you want to begin with – known as your initial “draw”. Some HELOC’s require that you start with a minimum draw amount and others may let you start out with no initial draw at all – meaning you’re going to need that money sometime soon, you just don’t want to take it out now and start paying interest on it before you need to.

What’s The Costs?

Many HEL’s and HELOC’s have similar types of closing costs to first mortgages, but usually, because the loan sizes aren’t as large, they are not nearly as high. You’ll typically need an appraisal done to determine the value of the home – but sometimes lenders waive this requirement for you, depending on the mortgage markets and your risk profile. You also will usually need some sort of title work and various other mortgage-type fees. Some of these fees go to the lender, some go to pay for the third-party services on your behalf.

No Cost Options?

There are many “no-cost” options for 2nd mortgages, depending on the lender and your loan criteria. Rates and terms can vary widely, so it doesn’t hurt to look around a little bit before choosing a lender. Often times, your own bank can be a good source for a low-cost option, so check those signs hanging in the lobby for information.

Currently in the mortgage markets, many lenders have restricted their 2nd mortgage programs or eliminated them all together. This is likely a temporary situation as lenders like having their loans secured by real estate – at least in “normal” real estate markets. But as it is, you may need to check around a little more to find good options, and you’ll likely need to have a strong credit profile and a good equity position in your home. (If your 1st mortgage is already as high as the value of your home – you don’t have any available equity to access. But if you owe less than your home is worth, you can probably find a HEL or HELOC option if you need it.)

Repair Your Credit

Posted by Credit to the Wise on August 20th, 2009 filed in Understand Your Credit
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How’s this for a nightmare scenario – your car broke down for good, and you desperately need a loan to buy a new one. You go to the bank, confident in getting a good rate. After all, you pay your monthly bills on time and your mortgage is average for your lifestyle. However, after a credit check, the bank manager refuses to lend you the necessary funds. You leave the bank, shocked and embarrassed. What happened?

In all likelihood, you have a bad credit report. All the information in your report is statistically collected into a score, and this score was uncomfortably low for the loan officer. What do you do, and what the heck is on your report to warrant such a rejection?

Your Credit Report and the Law

By law, you are allowed to order a copy of your credit report for free, once per year, from each of the three main credit bureaus. These bureaus are in the business of collecting all the financial information about you and sell this information to institutions and people who wish to know your financial history. These people include bankers, insurance companies, potential landlords, potential employers, and anybody else who needs to make sure you are financially reliable. If your credit file is inaccurate, it reflects badly on you. Fortunately, your credit report is not set in stone. By law, you are allowed to dispute any item in your file.

Click to learn how to order your credit reports.

Once You Get Your 3 Credit Reports

You will want to order a copy of all three, since different financial institutions subscribe from different agencies. Each agency collects your credit information a different way. Your information isn’t verified – it’s all collected from creditors, who may not send info to all the credit agencies, but only the one they most often deal with. Thus, all three reports will likely be very different, and are bound to have errors.

Scan through each report, circling each item that is wrong or unfamiliar to you. Information goes back seven to ten years, and inquires on your file (which also negatively affects your score) is kept for two years. Note that if the information is old, ask the particular agency’s report to remove it. Take note of any accounts you may have opened, those you have closed, bankruptcies, unpaid or late bills (did you, in fact, pay them on time?), and any other financial information.

You will very likely find information you can dispute. Once you do, the next step is to begin the dispute process.

Disputing Your Credit Report – Do it Yourself Or Hire a Credit Repair Service

You can easily do this yourself, however, there are reputable credit repair services who have attorneys to make your case on your behalf. If you decide to do it yourself, it will take some work, letter-writing skills, and a trip to the post office.

Document each item you think is in error, and be prepared to dispute it with backing documents. If you do not have the necessary documents, you can still dispute the item. The credit bureau must then prove the item with their own supporting documentation, and if they do not have it – which they won’t, if it is a genuine error – then they must by law remove it.

If you have a negative item on your report that is accurate, such as a late payment or a loan default, nothing but time will repair your report. Contrary to some “too good to be true” advertisements from credit repair services promising to erase your bad credit, “GUARANTEED!”, there is no way to remove accurate, negative information in a credit report. Such strategies to erase bad credit are ill-advised, may be illegal, and could even be an outright scam to get your hard-earned money. A strong financial plan, debt reduction strategy and paying your bills on time is the best way to improve your score.

Once you have documented all the information on your reports that you believe are either inaccurate or just plain wrong, you can either write a letter to the appropriate credit agency who sent you the report, or order a dispute form through them.

Debt Consolidation – What to Look For, What to Watch Out For

Posted by Credit to the Wise on August 20th, 2009 filed in Get Out of Debt
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With recent market dynamics, the average American has accrued more debt than savings, which is detrimental to long-term financial health. Many options are available that can assist you in achieving your financial goals to free yourself of heavy debt. Debt consolidation has become a growing trend for consumers to conveniently lump all of their monthly payments together into one solution. Many professional debt consolidation experts can help you through the convenience of the Internet.

Debt consolidation is a simple concept – pool all your outstanding debts into one manageable payment plan. This is a very tempting way to gain control of your debts. However, it could also land you into even more trouble down the road. If you do not change your spending habits, new debt will creep up.

Debt Consolidation – Only A Solution if You Change Your Spending Habits

While consolidating your debt online can be a solution, there are several factors that will decide if it really helps you. If you continue to spend above your means, then debt consolidation cannot save you from the deep hole of debt. Discipline and self-control, when it comes to spending, are the biggest factors to long-term financial freedom.

Whereas debt consolidation can be beneficial for your finances, it is more of a bandage for the problem and not an actual cure. Only prudence and good judgment on your part would be a true long-term cure.

Although consolidating your debts can and does help many consumers, you can also be faced with major risks and problems – especially ending right back into the debt hole that you are trying to escape. However, if are truly motivated and disciplined to step out of the red, then debt consolidation can be both your short and long-term solution. Below are several venues of debt consolidation that you could take:

• Home equity loan or line of credit: These types of loans are usually hyped up to get you out of debt quickly and easily through using the equity from your home. These are also called second mortgages, and they add to the full amount that you will owe on your home. Borrowing against your home can be a quick way to consolidate your debts – however, there is also a risk of losing your home if financial trouble hits again.

 

• Zero-percent credit card: Some people do not own a house, or they may not have available equity in their homes; in these situations, many believe that obtaining a zero or low percent credit card is the answer. While it could be an immediate answer, the problem is that this fix is usually just short term. That low introductory rate will not last for long, and in fact, after a few months, the rate will jump to the same high interest you were paying previously. Therefore, this is only a real option for those who have tremendous discipline to pay off their debts in a short period of time.

 

• Debt consolidation plans: If you have a serious debt problem, you most likely receive advertisements for institutional and online debt consolidation plans regularly. Convenience is probably the biggest attraction to these plans because it can turn a dozen monthly loan payments into one single payment a month, usually at a lower interest rate. The trade-off to the ease and convenience is that you have to cancel most or all of your current credit cards, you have to pay a monthly administration fee, and the loan is spread out for a longer period of time. Paying less per month only means paying your debt off slower. In the long run you will likely pay more in overall interest.

 

Managing your debt first takes the realization that you have a problem, and then discipline to pay it off without collecting new debts. There are many techniques and plans out there, and a reputable credit management company will help you with a consolidation plan and schedule. Stick with a plan, remain disciplined, and you will begin to feel the load gradually ease.

Credit Card Debt

Posted by Credit to the Wise on August 20th, 2009 filed in Get Out of Debt
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“You’ve been pre-approved!” You see these all the time. Credit card companies do anything to gain your business – why wouldn’t they? With their huge interest rates, that’s a lot of extra cash they can profit off you, if you carry a balance every month. And with it being so easy to simply put all your purchases on this convenient little piece of plastic, it’s no wonder so many people carry massive credit card debt. But you don’t have to be chained to your credit cards.

Credit Cards, and How They Work

There are certainly many advantages to having a credit card. It is a convenient way to make your purchases without having to carry cash or your checkbook with you. However, when you compare the tremendous negatives of credit cards, the drawbacks quickly outweigh the benefits.

The credit card companies earn their greatest profits from the exorbitant interest rates they charge consumers. When you receive your statement monthly, it outlines the details of all of your activity, including purchases made, any late or outstanding fees, interest payment, and the total amount owed.

The card holder has to pay a minimum amount of the total bill by the specified due date. If you pay the bare minimum, the remaining balance gets charged interest and is carried over to another month.

The danger of credit cards stems from the interest that consumers must pay on their purchases – if the debt is not immediately paid, then the initial interest accrued becomes part of the total amount owed, which is subject to additional interest. It is identical to the technique of compound interest, but this time it is working against your financial health.

Credit Cards and Your Credit Report

When you have credit cards, they will be listed on your credit report as a revolving account. The credit bureaus give a rating on how well you pay your monthly amount due. The ratings range from 1 – 9, with 1 being the very best payment history. They will be listed as “R” for revolving, followed by the rating, such as: R1, R3, R9, etc. Therefore, how you manage your credit card debt and payments is directly reflected on your credit report, which can impact not only your interest rates for mortgages and car loans, but even the type of jobs or leases you can obtain.

Choosing different credit cards for different solutions

Because of competition within the credit card business, providers have developed many incentives to gain market share, such as gift certificates, frequent flyer miles, and cash back. For many credit cards, the more you charge, the more rewards you will receive. Unfortunately, this is how people plunge deeper into credit card debt.

There are several different types of credit cards that fit various needs, depending upon your financial history and spending patterns. In general, cash rebate cards are the most valuable, as you do not have to accrue “points” to gain limited rewards; instead, you can use your 1% or 2% cash back to purchase whatever you would like – or put it into your savings account.

Below are some of the many types of credit cards:

• Low Interest Credit Cards – People with excellent credit qualify for credit cards with reduced interest rates.
• Instant Approval Credit Cards – There is no waiting period required for this type of credit card because it is approved instantly.
• Bad or No Credit Credit Cards – People with bad credit or no credit at all can obtain these types of cards, but the interest tends to be exorbitantly high.
• Rewards Credit Cards – This credit card lets you earn prizes, points, and other rewards when purchases are made.
• Cash Back Credit Cards – Earn rebates for cash back and cash incentives when you use the power of your purchases.
• Student Credit Cards – These cards are specifically designed for college students with little or no credit history.
• Business Credit Cards – These are an effective way to manage business expenses, whether for a small business or large corporation.
• Balance Transfer Credit Cards – This credit card consolidates credit card debt into one low payment.
• Hotel & Airline Credit Cards – Exotic vacations and future business trips earn flying miles and points.
• Prepaid Credit Cards – These offer the convenience and benefits of standard credit cards, but spending is limited to your own prepaid credit limit.

Credit Card Debt Management Tips

There are many trustworthy organizations that can advise you on how to get yourself out of credit card debt. The National Foundation for Credit Counseling would be the first place to search for a customized credit card debt solution. They have highly qualified counselors can create a customized financial plan to help you accomplish your own credit card debt solution.

The following tips are helpful as a credit card debt solution; however, if you do not have the motivation or discipline to reduce your credit card debt, then you may want to contact the NFCC or other debt management programs. Through a personalized credit card debt solution, you can become debt free. There are several easy strategies that you can implement into your daily life to begin reducing your debt:

• Try to “Kill” accounts. Focus the majority of your resources towards one account at a time until you kill it completely. (BUT DO NOT CLOSE THE ACCOUNT ONCE IT’S PAID OFF!!!)
• Paying off credit cards with the highest interest rate first is a good idea, but killing off smaller accounts first may allow you to free up extra cash flow – providing more money to pay down other debts.
• Pay slightly over the minimum due on all revolving accounts to minimize the chances that the card issuer will raise your interest rate.
• Transfer high interest rate credit cards to ones that have lower interest rates – but ONLY if you’re sure you’ll be able to continue making the minimum payments on time.
• Refinance your house and include the balances onto the lower-interest home-equity loan (Be careful with this, or you may lose your home if you can’t pay the loan!)
• Do NOT close any accounts – even those with zero balances. You will NEVER increase a credit score by closing an account. The exception is closing accounts that charge annual fees once you’ve gotten your credit score where you want it.
• Do NOT spend all your money each month on paying down debt. Even though you have debt, don’t neglect building up your savings accounts. The best way to reduce debt is to make sure you don’t have to continue using credit cards to pay monthly expenses, and only when you have a savings cushion is that possible.

After having taken these steps to get out of credit card debt, it is important to evaluate your budget and spending patterns to prevent future debt from accumulating. Having credit is useful, but if it is not handled carefully, you could find yourself having to seek a more drastic solution to your credit card debt.

Credit Repair Services

Posted by Credit to the Wise on August 20th, 2009 filed in Understand Your Credit
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Yes, you can repair your credit report yourself, though it does take time, research and paperwork. Many people choose not to spend their valuable time learning consumer laws and the process of formulating dispute letters, preferring to let a trusted expert take care of it. This is where a legitimate credit repair service can help you. These companies specialize in credit and consumer issues, and know the strategies and nuances in dealing with the credit bureaus.

Once you order your reports from the credit bureaus, you scan and note any items that you wish to dispute. These can either be inaccurate, misleading, untimely or completely erroneous items that contribute to a bad credit rating. Legally, you can dispute any item, as it is up to the credit agency to prove the transaction. In practice, this is bad advice and is rife with abuse. Accurate but bad credit can only be fixed with time and good financial practices that will eventually improve your score. Examples of items to dispute include loans you know you paid on time but are reported as being late, and transactions or creditor queries you did not authorize.

A credit repair service can then dispute these items on your behalf. Legitimate companies will have attorneys and legal professionals on staff who have extensive knowledge of credit laws and practise time-proven strategies to dispute your items.

Unfortunately, the credit repair industry is full of unscrupulous companies who often give you bad and even illegal advice. Beware of scams promising to legally fix any and all of your bad credit, guaranteed. If it seems to good to be true, it is.

A Checklist to Spot The Professional Credit Report Agencies From the Bad

• Do a search online to find reviews and feedback, and check with the Better Business Bureau where they are located.
• You have a three-day period in which to cancel the service, without penalty.
• No fee should be collected before work has been done.
• Review their business history and number of satisfied clients.
• They should know legal issues, current consumer laws, and apply these laws.
• You have a right to fix your credit yourself. The credit repair company must disclose this information.
• Having a privacy policy is pertinent, as well as confidentiality protection.

A Credit Repair Service Versus a Law Firm

Many companies provide credit repair services – however, they may not have the legal muscle, connections or expertise to adequately represent your interests. A law firm specializing in credit repair should have attorneys and paralegals with experience in dealing with bankruptcies, tax liens, collections, judgements, and other scenarios that contribute to bad credit.

Lexington Law

Lexington Law is one such firm with a dedicated team of attorneys and paralegals who specialize in credit repair. Founded in 1991, they have represented over 400,000 people and removed over 2 million items from their clients’ credit reports, six hundred thousand of them in 2006 alone. You pay a low flat fee per month (starting at $39) for disputing an unlimited number of questionable items on your reports.