home mortgage

Coming to Terms With Your Long-Term Debt

Kelly Kehoe — Fri, 10 May 2013 09:48:33 +0000

Investopedia.com defines "long-term debt" as loans and financial obligations lasting one year or more. Think home mortgages, student loans, and car loans.

Since the 2008 housing crisis and ensuing recession, many families have taken on greater debt loads to cope with the volatile economy. Some may have lost their long-term debt to foreclosure or personal bankruptcy along the way, while others are still shouldered with debt from supposedly short-term credit card loans, or long-term mortgage, student, and auto loans.

With all the governmental incentives offered to first-time homebuyers and the Federal Reserve keeping interest rates low to promote investment and growth in the economy, perhaps you've taken on more long-term debt in these past few years.

The word "debt" has a negative stigma attached to it, and while most personal finance gurus advocate for debt-free living, having long-term debt isn't always a bad thing, if you can come to terms with it. (See also: Good Debt, Bad Debt)

Assessing the Situation

First step — assess your financial situation.

What is your overall debt load, both short-term and long-term? What loans or payments incur the most interest each month? How are the loans benefiting you (or how did they benefit you originally)?

For example, say you have student loans leftover from your college days. American Student Assistance says that 37 million Americans currently have outstanding student loans totaling nearly $1 trillion. Taking out a student loan and working to pay it off carries a lot of implications (such as higher interest rates), but remember that having a certificate or degree improves your chances of getting hired in a rough job market. Ergo, you may have incurred some long-term debt to receive an education, but rather than chiding yourself for taking on more debt, think of it as a valuable investment to boost your employability.

And what about credit card debt? A February 2013 Bankrate survey reported that only 55% of Americans have more money in savings than they have in credit card debt. If you have credit card debt, rest assured you're not alone — the average American household has almost $15,800 in debt. Again, think of your debt accumulation as a valuable lesson, rather than focusing solely on the negative aspects, like what you would've done with the money if you weren't too busy making monthly interest payments.

All of these factors must be considered when tackling your financial situation, regardless of the type of debt involved. Once you account for your debts and the consequences of having these loans, it's time to do something about them.

Taking Action

Where debt is concerned, gloom and doom surrounds us. It seems to have taken permanent residence in American society: media reports about debt, politicians bemoaning the debt woes of the government and the people, and the digits under the "to pay" section of our bills all appear to be multiplying.

But don't despair; prioritizing your debts and paying them off — not randoml, but based on simple principles of finance and psychology — is key to stabilizing your finances.

Prioritize

When it comes to prioritization, you have a couple of options: either continue paying the minimum balance required every month or funnel more money into your payments in order to pay off the loan quicker. It won't be as simple as paying off a small credit card balance within a few months, so don't get impatient.

If you have multiple credit cards, determining which one to pay off first presents a unique problem to tackle. Common sense may argue that you should pay off ones with highest interest first, but psychologists argue that it's better to tackle smaller debts first because, in paying those off, it feels like we're making progress — thus, we'll be more likely to continue making debt payments rather than throwing our hands up in frustration. If you have a debt load similar to or greater than the average American household, it will probably take a few years to pay off all your credit cards, but by prioritizing your card payments, you'll be able to pay them off much sooner.

As for mortgages, these are generally paid off in the span of decades, and the timeline for student loans can span between a few months to a lifetime (in extreme scenarios). Payments on interest accrued often outweigh payments on the original, principal amount, but in the case of mortgages, at least there's a tax deduction for interest payments.

To shrink the timeframe for paying off these loans, consider options such as extra payments or refinancing, among others.

Staying Motivated

Paying off long-term debt is quite a journey, but the benefits of owning your own home (or having a car and a good education) don't always mask the potential frustration of shouldering thousands of dollars in debt for a major chunk of your life.

Although it may decrease the number of payments over time, stinginess can prove more of a psychological hindrance than help when you're paying off long-term debts. Celebrate the milestones. Every time you pay off another $5,000 on your student loan or pay off yet another credit card, mark it on your calendar, and don't hesitate to treat yourself and your family to a nice dinner after making significant progress towards your debt-free goals. Always remind yourself why you're doing this — to fulfill your dream of going to college, being able to ditch rental living and own your own home, or take the vacation of a lifetime. Keeping things in perspective and staying organized will help you come to terms with your long-term debt and eventually, pay it off.

Have you come to terms with your long-term debt? What keeps you upbeat despite the burden of repayment?

Like this article? Pin it!

This article is from Kelly Kehoe of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

You Shouldn’t Buy a Home If…

Tara Struyk — Thu, 21 Mar 2013 10:24:35 +0000

Buying a home has often been held up as the “American dream.” Problem is, the idea that home ownership is a goal that everyone can — and should — aspire to is exactly what got a lot of homeowners in trouble during the housing U.S. mortgage meltdown. In pursuit of the dream to own a home, people threw logic (and basic math) out the window and bought into homes that were not only bigger than they needed, but also more expensive than they could afford. Of course, many lenders were only to too eager to help them get in over their heads. The rest, as they say, is history. (See also: Quiz: Am I Really Ready to Buy a Home?)

The reality is that home ownership isn’t for everyone. And even if it’s right for you, it might not be right for you right now. Whether you’re tired of renting, looking to settle down or just want to put your money toward something bigger, there are a few factors that should serve as a warning against taking the leap. You shouldn’t buy a home if …

You Aren’t Planning to Stay

Whether your job situation is a bit uncertain, you’re in a relationship you’re not sure will last, or you’re longing to make a move to another city in the not-too-distant future, renting is your best bet. That’s because home values tend to fluctuate a bit throughout the year and from year to year. If you are forced to move out in the near future, you may suffer a loss on the sale of your home. That’s why most experts recommend that unless you can stay put for at least five years, you’re better off renting. It’ll take at least that long to make up the costs associated with a home purchase.

You Don’t Have a Down Payment

It’s still possible to buy a home without a down payment, but that doesn’t mean it’s a good idea. The simplest reason is that forgoing a down payment costs you a lot more over the life of the loan. The more money you borrow to buy your house, the more interest you pay.

Unfortunately, that’s not the only extra you’ll be on the hook for. The other major cost you’ll have to pay is Private Mortgage Insurance (PMI), which is typically charged to borrowers who put down less than 20% of the price of the home. On a $300,000 house, PMI will cost you almost $1,000 per year. You’ll keep on paying that insurance every year until you’ve paid down more than 20% of the appraised value of your home. And unlike with a down payment, you don’t get anything for that money — it’s just there to protect the lender in case you default.

Last but not least, having a down payment protects you from going underwater on your loan, or owing more than the house is worth. This can happen when you buy without a down payment and then home values drop. It’s a real bummer if you want to sell.

You Aren’t a Saver

Speaking of a down payment, if you find saving for one to be a challenge, that in itself may be a sign that you aren’t ready to own your own home. When you’re a renter, all you have to worry about is covering your rent. Once you’ve done that, the rest is up to your landlord. When you own your home, the responsibility is all yours. So, whether your problem is a leaky toilet or a broken water pipe, you will have to pay to fix it (and in many cases, it’ll cost you dearly). Without a strong habit of saving, you’ll lack the cash to take care of all the expensive repairs you will face as a homeowner. If you’re already living paycheck to paycheck, the ongoing financial responsibility of owning a home is likely to land you in debt.

You Have a Debt Problem

Another sign that you may not be a good candidate for home ownership is that you’re carrying a lot of debt or you struggle to avoid taking on debt of any kind. Not only will debt keep you from saving for emergencies, but those who can’t resist tapping into available credit may find their home’s equity irresistible. It’s not uncommon for homeowners to be tempted to use their home equity as a piggy bank through a home equity line of credit (HELOC) or home equity loan. This is especially true when home prices are rising (thus creating more equity). According Bloomberg, HELOC lending rose by 30% in 2012, the highest level since the start of the financial crisis in 2008. If you’re not someone who can resist using available credit, steer clear of homeownership; not only will it allow you to dig yourself deeper into debt, but using your house as collateral could also leave you homeless.

You Have Bad Credit

If you have lousy credit, you may be able to find a lender who’s willing to give you a mortgage. That lender isn’t doing you any favors though. Bad credit makes you a high-risk borrower, which means that any lender you can get to give you the loan will charge you considerably higher interest and offer fewer options. This can make it more difficult to pay down your mortgage in a timely way — or at all.

You Think a Home Is an Investment

Real estate can be an investment — and a good one — but your home doesn’t count. In order to really be able to capitalize on any kind of investment, you have to be able to sell it when the time is right. That’s hard to do with the real estate you call home because, after all, you’ll still need somewhere to live. Plus, even if you are able to high-tail it out of your home when it appreciates, chances are you’ll have to plunk that gain right back down into your next house.

You Aren’t Into Maintenance

Whether it’s painting, weatherproofing or general repairs, homes require lots of ongoing maintenance. If you’re the type to put things off, homeownership may not be for you. After all, the longer you leave your rotten porch, the more rotten it’ll get – and the more expensive it’ll be to fix.

Many people feel that they should aspire to home ownership; many are even ashamed to call themselves renters. But while we tend to view a home of our own as a status symbol, we often overlook the fact that it’s a very big — and usually very expensive – responsibility. Owning your own home can be a great experience, but only under the right conditions. If home ownership isn’t a good fit for you and your current financial situation, chances are you’ll be too broke to enjoy it.

This article is from Tara Struyk of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Buy a Home You Can Afford With the Mortgage Suitcase Trick

Ben Edwards — Mon, 26 Nov 2012 10:36:38 +0000

Raise your hand if you’ve ever tried to stuff more than you really need into a suitcase. You begin with good intentions, wanting to make sure you have everything you need for your trip. You don’t really know if you’re going to need that extra sweatshirt, but you throw it in just in case. Before you know it you’re sitting on the lid of your overflowing suitcase just to get it closed. Although you’re finally able to zip it up, the real bummer is that you have to drag around that heavy suitcase your whole trip.

Unfortunately, this scenario of trying to stuff in more than you really need isn’t just limited to packing your bags. When buying a home, it’s easy to convince ourselves to buy more than we need even though it stretches our budget. As a result we end up dragging around tens of thousands of extra mortgage debt for the life of our 15-30 year loan.

The mortgage suitcase trick is simple and can help you avoid buying too much home. Picture your housing budget as a suitcase. Every time you think about adding another feature or upgrade during your home buying decision, ask yourself if you really want to lug around the cost of that feature for the next 15-30 years.

While the mental image of a heavy suitcase busting at the seams can be an overspending deterrent, I know sometimes it helps to have more concrete guidelines. So here are four tips that can help you avoid overloading your mortgage suitcase. (See also: Quiz: Am I Really Ready to Buy a Home?)

1. Know Your Limits

Before you even start looking at homes figure out how much house you can afford. Just because you’re pre-approved for a certain amount doesn’t mean you have to spend that much or that you can really afford it.

It helps to run through some “what-if” scenarios to future-test the limit you decide on. What if one person decides they want to stay at home with the kids? What if you lose your job for six months? Whether you’re looking at a 15 or 30 year loan, a lot can change in your life during that time, so try to take that into account.

2. Define Your Priorities

There are many different factors that come into play when you’re trying to find the right place to live. Chances are you’re not going to be able to get everything you want in a home, so it helps to prioritize what is most important to you.

This list will come in really handy when you’re comparing multiple properties and having a tough time choosing which you want and how much money to offer the owner.

3. Don’t Shop Up

My wife likes to watch these house-hunter shows that start with the potential buyer listing off everything they’re looking for and what they want to spend. Many times the real estate agent will tell them they can’t get everything they want at the price they’ve set and will proceed to show them more expensive homes.

Once you see the home that meets all your criteria, you’re going to want it. However, if you can’t afford it then, you’re just making yourself unhappy by looking at it. Two unfortunate scenarios often result from shopping up:

Your emotions overcome logic, and you’ll break your budget to buy the home.
You don’t buy it but “settle” for less and are unhappy with the home you buy.

4. Beware Payment Justification

When you’re going through the process of buying a home, most everyone involved will be happy to tell you that a more expensive property “only raises your monthly payment by a little.” Your realtor wants you to buy. Your bank is probably happy to lend you more. Sometimes your spouse/partner/friend will even jump on board and argue the case that another $20-30K doesn’t raise your payments that much.

If you’ve done steps #1 and #2, then you’ll know what you can afford and what’s important to you. Don’t let other people talk you into spending more than you’re comfortable with. You’re the one who has to get out of bed and go into work every day for the next 20 years to pay off the mortgage.

This article is from Ben Edwards of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How the Reform of Fannie Mae and Freddie Mac Will Affect You

Janey Osterlind — Tue, 15 Feb 2011 14:36:10 +0000

On Friday, February 11, 2011, the Treasury Department announced the Obama Administration’s plan to reform the nation’s housing finance system, which entails winding down Fannie Mae and Freddie Mac within the next five to seven years. (See also: Root Cause of the Financial Crisis)

What Are Fannie Mae and Freddie Mac, Anyway?

According to the report, "Reforming America's Housing Finance Market," the Federal Housing Administration (FHA) created Fannie Mae in 1938 in response to mortgage market disruptions, widespread foreclosures, and declining homeownership rates. Fannie Mae essentially provided community banks with federal money to finance home loans in order to raise homeownership levels and increase the availability of affordable housing. Many years later, in 1970, the government formed Freddie Mac in order to expand the secondary mortgage market and provide competition to Fannie Mae, which had converted from a government sponsored enterprise to a private corporation in 1968.

Why Do Fannie Mae and Freddie Mac Need to Be Reformed?

For many years, Fannie Mae and Freddie Mac did what they were created to do — expand access to homeownership, particularly in parts of the country without access to traditional mortgages. Fannie and Freddie did this primarily by creating a secondary mortgage market in which investments were secured by mortgages. In the years leading up to the financial collapse, however, a number of factors (including easier access to credit, the creation of investments that shifted risk away from the mortgage originator, and the assumption that housing prices would rise indefinitely) caused Fannie and Freddie to fail. As a result of declining home prices, Fannie and Freddie experienced catastrophic losses and were ultimately placed in government conservatorship on September 7, 2008. They remain under conservatorship today.

What Reforms Is the Government Proposing?

There are three main paths to reform outlined in the government’s proposal. The first would largely leave the mortgage market to the private sector, leaving only limited programs to aid credit-worthy low- and moderate-income borrowers. The second plan is similar to the first, but it would also include a “backstop” mechanism to ensure continued access to credit in the event of another housing crisis. The final option would add a government reinsurance (essentially, a guarantee) for some mortgage-backed securities. Each of these would, as the report says, “dramatically transform the role of government in the housing market.” Currently, the government insures or guarantees more than nine out of ten new mortgages.

How Will These Reforms Affect You?

Although there are currently a number of unknowns associated with the plan, there are some things we can say for sure:

There will be increased pricing at Fannie and Freddie.

Fannie and Freddie’s implied government guarantee of their securities allowed them to save billions annually in borrowing costs. The new plan will end unfair capital advantages to Fannie and Freddie.

Conforming loan limits will be reduced.

Fannie and Freddie only purchase conforming loans, or loans less than $417,000 (or less than $729,750 in certain high-cost areas). If a loan is not conforming, and it is not able to be purchased by Fannie or Freddie, the lender will hold all risk of default on its books and will price accordingly. In other words, interest rates on those loans will likely increase (on new mortgages only — your fixed-rate mortgage would not change). Conforming loan limits are set each year by the Office of Federal Housing Enterprise Oversight (OFHEO) based on median home prices.

Nearly all lenders will require a 10 percent down payment.

Under the new plan, Fannie and Freddie would only be able to purchase and guarantee loans that had at least a 10% down payment. Lenders, in turn, would likely require at least 10 percent down. In the interest of fully honesty, I can say that I am not sure how the requirement of a higher down payment would affect the various down payment grants available to home buyers.

The maximum loan size that can qualify for Federal Housing Administration (FHA) insurance will decrease.

The main benefit to a homeowner of an FHA-insured home loan is a lower interest rate than might be obtained without the insurance. Decreasing the maximum loan size that qualifies for this insurance will mean that a home buyer’s interest rate on a loan that could have once qualified for FHA insurance, but no longer does, will be higher. The maximum loan size that the FHA will insure is determined by county. In addition, the price of FHA insurance will increase.

Only new mortgages are likely to be affected.

If your mortgage is already sold to Fannie or Freddie, fear not. Your interest rate will not arbitrarily rise before the loan's maturity date. It is likely, however, that your home loan will be sold to another party in the coming years. This is because the government's proposal also stipulates that Fannie and Freddie must sell off their investment portfolios at an annual pace of 10% or more. Check out this piece from the LA Times for insight about what to do if your home loan is sold.

All signs seem to be pointing to higher interest rates for new home loans or refinancings, though. For that reason, you might want to carefully weigh the costs and benefits of purchasing or refinancing your home now versus waiting. Of course, I would recommend doing your due diligence and talking to a knowledgeable lender or financial professional before making that decision.

Those are some of the most noticeable ways in which the winding down of Fannie and Freddie will affect you. The proposal is fairly broad, however, and there will undoubtedly be a number of other effects felt by homeowners, investors, and even renters. Following updates of the progress of this proposed reform will help you to make sound housing decisions regarding homeownership and refinancing.

What effects do you think the Treasury Department’s plan to dissolve Fannie and Freddie will have on homeowners in general, or you in particular? What questions do you have about the changes? Share your thoughts and questions in the comments!

This article is from Janey Osterlind of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Energy Efficient Mortgages: Borrowing More to Save

Chris Birk — Thu, 20 Jan 2011 13:00:10 +0000

As deep, dreary winter sets in, bone-rattling cold is whistling into the cracks and crevices of homes across the country.

We've been taping sheets of plastic to the windows in our Midwestern abode. The time of year, coupled with the fact that home-loan interest rates continue to sag at record lows, has spurred renewed consideration of a growing trend: the energy efficient mortgage, or EEM.

These unique home mortgages are helping consumers combat runaway energy prices. They're also providing significant savings over the life of a home purchase.

What Is an Energy Efficient Mortgage?

Energy efficient mortgages are available for both existing homeowners who want to make changes to their properties and for consumers looking to purchase and upgrade a home.

With an EEM, consumers can install tankless water heaters, newer HVAC units, insulation, thermal windows, and other key upgrades and finance the costs into their overall mortgage.

Unlike a second mortgage, an energy efficient mortgage is a separate loan that is ultimately rolled into overall cost of the home mortgage. These are available on conventional loans as well as on government-backed options like FHA and VA loans.

How They Work

Homeowners first need to determine whether their home qualifies for an energy efficient mortgage. The same is true for prospective homebuyers.

The process typically begins with a specialized report conducted by a home energy rating company. This document, known as a Home Energy Rating System report, or a HERS report, examines a property's current energy efficiency. Energy raters look at things like appliances, windows, insulation, utility usage, and other factors.

The professional rater will ultimately generate a rating regarding the home's energy efficiency, as well as recommendations for efficiency upgrades and how the improvements will likely affect the home's energy rating and energy utilization.

This is key information for mortgage lenders. There are different limits and allowable amounts for energy efficiency improvements depending on the loan type. Here's a quick breakdown:

Conventional mortgages: Consumers with conventional financing can borrow up to 15% of the home's value for energy improvements. An EEM also allows you to buy more house, as lenders can increase the borrower's stated income based on the energy savings they'll reap.
FHA loans: FHA borrowers can borrow up to 5% of the home value, capped at $8,000.
VA loans: Veterans, service members, and surviving spouses who qualify for a VA loan can tack on $3,000 to the loan amount provided they can verify the cost of energy efficiency improvements. Veterans can borrow up to $6,000 for improvements provided those upgrades generate enough savings to offset the new, higher monthly mortgage payment.

Is an Energy Efficient Mortgage Right for You?

Deciding whether to upgrade your existing home or make improvements to one you plan to purchase can be a difficult decision. Adding a couple thousand dollars to your mortgage loan will equate to higher payments each month.

No one likes spending more money up front. But carefully consider the potential long-term benefits of those new thermal windows or that high-efficiency HVAC system.

Do some simple calculations and determine how much those energy efficiency improvements will save you each month and over the course of months and years. There's little sense in paying an additional $150 in your mortgage bill each month if those improvements aren't generating real energy savings.

But over the life of your mortgage, as the cold winters and blazing summers roll by, those energy improvements could easily translate to significant dollars saved. Crunch the numbers and consult a trusted lender.

This article is from Chris Birk of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

25,000 Reasons to Pamper Your Credit

Ben Edwards — Wed, 06 Oct 2010 12:00:15 +0000

Would you take good care of your credit score if you knew someday it could save you $25,000? What if you wouldn't see the savings immediately, if you had to wait a year or two? How about if you had to wait 10 years — could you keep your credit score healthy if you knew it would pay off big time?

A Tale of Good Credit

I'm sure you've heard many cautionary tales of families that ruined their credit and couldn't get a loan when they needed it most. How would you like to hear something a little different? Rather than keeping you up at night worrying about all the bad things that can happen financially when you have bad credit, what if I could tell you a story that might get you excited about the opportunities that come from good credit?

Too Good to Be True

Just a few months ago, we were a family whose credit score didn't really make much difference in our daily lives. It had been 10 years since we'd bought a house and eight years since we borrowed money for a car. We hadn't really needed our credit score for its primary purpose — to help us get a loan.

Then suddenly, in two short weeks, our credit score went from relative obscurity to one of the most important numbers in our life. For a variety of reasons, we were looking to buy a house but we couldn't afford all the criteria we were looking for in a new home.

That all changed one Friday afternoon when our realtor called me with some good news and some bad news. We had made an unbelievably low offer on a short sale, for $25,000 less than their already discounted asking price. Good news was that the bank had accepted our offer, but the bad news was we had to close on the new house by the following Friday.

Credit Score to the Rescue

If you've ever applied for a home loan, you know that you can't just go out and borrow hundreds of thousands of dollars in one week's time. The only thing that stood between us and an amazing deal on a house was the bank underwriting process.

Thanks to some skillful maneuvering by our realtor to buy us a little more time and the fast-tracking of our loan by our bank, we ended up closing on the house five hours before the deadline. None of that would have been possible if it weren't for a good credit history and excellent credit score.

Pampering Your Credit

Your credit is one of those things that you can ignore for a long time but when the moment comes, you'll wish you hadn't. It's kind of like ignoring a major health condition: You can get by for a while and feel just fine but eventually it will come back to bite you big time.

If we had ignored our credit for the last 10 years, there's no way we would have gotten the deal we just did. Not only that — your credit score impacts your interest rate, which can end up saving or costing you thousands of dollars over the life of a home mortgage.

So, how do you pamper your credit?

Make your payments on time.
Keep your balances low.
Don't close old accounts.
Keep your credit utilization low (used credit vs. available credit).

Taking care of your credit basically means showing future potential lenders that you don't borrow more than you can afford and that you regularly pay back what you owe. Stick to those principles and you might have a chance to save a lot of money in the future. It could be less than $25K, or maybe more. The thing is, you'll never know unless you pamper your credit score!

This article is from Ben Edwards of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: