Top Personal Finance Blogs
Wednesday November 13th 2019

Why and How You Should Avoid Late Payments on Your Mortgage

In this tough economy, home owners are increasingly struggling to make mortgage payments. The good news is that being a few days late paying your mortgage is not a big deal; most lenders give a 15-day grace period and as long as you get payment in during that time, there is no penalty whatsoever. After the grace period, you have an additional 15 days during which you will be charged a late fee. As long as you pay during this period, you are still considered to have paid on time. Now onto the bad news…

If you are 30 days late, your credit takes a hit. Depending on your beginning credit score, being just 30 days late can lower your score by 60-110 points and can take between 9 months and 3 years to fully recover from. The higher your score was before the late payment, the longer it takes to fully recover. If you start with a score of 780 and are 90 days late with a mortgage payment, your score may drop by 130 points, almost as much if you go through foreclosure. A low credit score can cost you more in many other areas too – they drive credit card rates up, affect auto loans and even drive up auto insurance premiums.

Clearly, it’s in your best interest to remain current on your mortgage payments. What should you do if you are having problems? First, keep your wits about you and don’t panic. Refusing to admit there’s a problem will not solve anything. Be proactive; contact your lender with your issues. Most of them are willing to work with you, but communication is key. Don’t just hope they won’t notice if you are late; they will.

Secondly, you need a plan. Track all of your expenditures to see where your money is going. Do it by hand, do it by computer spreadsheet; just do it. Keep track of everything for a month or two. This exercise alone may open your eyes. You may not have ever realized that you spend $15 a month on office birthday cards, for example, and may find something right away that you can cut out or reduce easily. It’s important to find out where your money is going.

Once you do that, you get to look for “extra” money. Don’t look at it as cutting things out or depriving yourself. Make it a challenge; make a game out of it. Cut back on obvious things first, like excessive shoe shopping or those office birthday cards. Analyze the expenditures you identified, and see what can easily be discarded without much trouble. Be ruthless, but make it as painless as possible. You may love your morning Starbucks coffee, but could you buy it at the grocery store and still enjoy it for less?

Then, take a closer look. There are tons of ways to save money you may not have considered. Cook more from scratch. Not only will you save money, you will eat healthier. Use generic products when possible; clip coupons and couple them with sales. Grow spices. Cut out commercial cleaners and start cleaning with baking soda and vinegar. You’ll breathe fewer toxins and help the environment at the same time. Be creative with your cost-cutting, but don’t make it painful or you will have a hard time sticking to it for long.

As you identify areas you can trim, take the “extra” money and pay that mortgage payment on time every month. You may find enough that you can even begin paying down other debts like credit cards too.

Hard times have a tendency to cause people to panic and get stressed out. You don’t need the added burdens that late mortgage payments and lower credit scores can bring. Remember, denial is never a good plan. Get help from your lender if you need it; then make a plan and stick with it.

Realtors Trying to Head High Down-payments Off at the Pass

The housing and financial crisis of the past few years has caused Congress to take another look at the regulations surrounding these two industries. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama last July, contains a number of new regulations and reforms many others. Several of these relate to home mortgages, and, unfortunately, the end result may be that it becomes almost impossible for the average household to purchase a home.

The ultimate reason this is so comes down to the risk retention section of the Act. The inter-agency group working on this act is considering a change to the loan standards for a Qualified Residential Mortgage (QRM) that would necessitate extremely high down-payments –as much as 10 or even 20%. As the vast majority of home loans are QRMs, this will effectively rule out home ownership for anyone who can not come up with the requisite large down-payment.

A quick look at the numbers will show why this is the case. The median home price in 2009 and 2010 was $170,000. Assuming closing costs of 5% of the home value, this translates into a 20% down-payment of $42000, or $27,000 for a 10% down-payment. A family making the median income of $49,777 would take 14 and 9 years, respectively, to save enough to meet these requirements, and that’s assuming a savings rate of $3,000 a year, or more than 6%. The current national savings rate is 5.8%.

Families who make less than the median income, or those who live in areas with high home prices, would have to save even longer. A newlywed couple might have children leaving for college before they managed to save enough to put down on a home. The institution of these requirements would be a disaster for the real estate industry and put home ownership out of reach for tens of millions of families.

Fortunately, the National Association of Realtors is fighting these new regulations. On March 16 they, along with two other organizations, sent a joint letter to the group of regulators considering these requirements and urged them to abandon the plan in favor of more reasonable approaches. There are other options the group could pursue, as NAR pointed out in their letter. A better approach would be the adoption of stronger core standards for mortgage underwriting. This would lower the risk of default. Such standards would include strong documentation requirements, prohibitions on high-risk loan features like balloon payments, and requirements that the lender assess the borrower’s ability to repay the loan.

All of these reasonable requirements were ignored by many lenders during the housing boom, and now all homeowner’s may pay the price. Low down-payment loans have been around for decades and have tended to work quite well. If regulations are put into place that will prohibit predatory lending, they will continue to work in the future. There is no need to arbitrarily lock tens of millions of families out of home ownership to achieve the goal of stability in the housing market.

Five Tips for Buying Your First Home

Buying a home can be an intimidating process if you have never done it before. These five tips are a great place to start if you are considering becoming a homeowner.

Clean up Your Credit Rating

Most homeowners need to acquire a mortgage. The recent problems in the housing market have led to a large number of foreclosures, so lending institutions have become much stricter in their lending policies. Your best bet is to have an excellent credit rating before you approach a bank for a mortgage loan. Before you begin house hunting, look into your credit report to see what your rating looks like. Take care of any outstanding problems prior to speaking with a lending institution about a mortgage.

Buy in Good School District

Whether you have children or not, a good school district is a great selling point for any home. The biggest benefit of living in a high quality school district is that it will help your home sell faster when you are ready to move. Most buyers place a high priority on school districts.

Work With a Professional

Some of the details of home buying can be confusing for someone who has never gone through the process. A professional realtor will be able to help you create a more successful strategy for shopping for the home as well as guide you through the steps involved in the purchasing process. Home shoppers have great access to home listings online, but a realtor can provide advice based on years of working in the housing market.

Lowering the Interest Rate

Many mortgages will allow you to choose to pay a higher down payment in return for a reduced interest rate. If you plan to own your home for more than a couple of years, the interest rate reduction will save you more money the longer you are paying on the loan.

Become Pre-approved

Pre-approval for a mortgage can help you become a more informed shopper while you are house hunting. You will know exactly how much you can afford to pay for a home, so you can avoid spending time looking at houses that may be outside your price range. Pre-approval helps speed up any offer you might want to make on a house that you like, as well. During the pre-approval process, the bank will examine your financial data to determine a realistic mortgage offer for you before you find a house.

How Banks Make Money when They Can’t Lend

Many people don’t understand how banks make money. Essentially, they are money stores. They buy and sell money, rather than retail items. They sell loans, investment vehicles and various financial products, many of them invented by the banks themselves. Banks earn interest on loans and use that income to pay for interest on accounts and CDs. They also charge fees on financial products and services.

Because banks are in the business of lending, they can’t make money until they have money on hand. That’s why they use enticements like free checking and savings interest to gain new customers. It almost seems obscene that a bank can charge 11 percent interest on a $200,000 loan and then pay customers 1% on a $1,000 checking account, but that’s how banks make such incredibly high profits. Even in the down economy, when everyone else is struggling, banks are thriving and growing.

How Banks Earn When they Can’t Lend

Loaning money is a risky business. If the bank doesn’t get paid, it can’t pay its customers. That’s why banks have been looking for other ways to make money. One huge source of income for banks in a time when fewer Americans have the funds to borrow has been overdraft fees. According to the Center for Responsible Lending, the total cost of unauthorized overdrafts is about $23.7 billion per year.

Overdraft Fees

New regulations intended on protecting consumers from overdrafts, has actually made them more likely. While consumers can opt out of certain overdrafts, point of sale overdrafts often don’t go into effect until a month after an account is open. If the bank does not contact consumers to tell them it’s time to opt out, they may end up paying overdrafts inadvertently.

Recently, Bank of America and Citibank changed their policies on overdrafts for debit accounts. Now, the banks will refuse them unless instructed otherwise. Bank of America and Citibank will only cover debit card and ATM overdrafts if customers sign up to link their savings or line of credit to the checking account. The fees for these kinds of overdrafts are much lower.

Pay Day Loans

Another practice finding its way into banking is the Pay Day Loan. These loans must be paid back quickly, making them much more likely to result in default, then exorbitant fees. Borrowers become trapped in a cycle of debt that essentially amounts to legal loan sharking. Consumers flip the loan continually to extend the time they have to pay. In the end, the average pay day loan costs a 400% annual percentage rate.

Banks are an important convenience for consumers and an important part of our financial system. Unfortunately, they can also destroy the lives of those who fail to use banking responsibly.

Borrowing from Peter to Pay Paul with a Money Merge Account

Reduce mortgage repayment time by half or more! That’s an attention-getting message, isn’t it? Money Merge Accounts advertise that you can eliminate monthly mortgage payments sooner, saving thousands of dollars in interest. But these ventures do not provide their services for nothing. In the end, you’re probably better off just passing that offer by.

Money merge accounts or accelerated mortgage repayment systems originated in Australia and recently infiltrated the US. Despite rapidly growing in acceptance and admiration, many financial experts caution customers to tread slowly. Though the program effectively reduces mortgage repayment time, the concept is not without flaws or hazards. In effect, these accounts get you to borrow from Peter to pay Paul.

How Money Merge Accounts Work

Customers must first buy the accelerator software program. Expect to pay anywhere from $695 to well over $4,000 for the use of the technology. The tool regulates the cash flow between a high equity line of credit (HELOC), monthly wages, monthly living expenses and a regular fixed rate mortgage. Clients must monitor transactions closely to detect possible errors.

Then you must obtain an HELOC through the company or an affiliate. This is essentially a second loan based on a home’s equity value. The interest rates vary and more times than not, exceed the amount of the first mortgage. Consumers must then agree to deposit all wages into the account, which relinquishes control over spending. After the determination of monthly expenses, the client receives a credit card. The card is the only resource for paying bills. A dashboard allows clients to adjust the number of years until pay-off, the pay-off date and to visualize the amount of interest paid.

The software deposits the paychecks into the account in order to begin paying back the HELOC. The HELOC pays the mortgage payment, allows withdrawals from the credit card for living expenses and adds the excess to the mortgage loan principle. The more frequently money is applied to the principle, the faster the amount decreases. Money continuously flows from one area to another.

Fees and Pitfalls

Pitfalls with the system include the initial cost of the software, the accuracy and effectiveness to circulate funds without error and interest rates of the HELOC. In order to prevent negative balance occurrences, consumers must diligently track finances. The software’s first priority is to pay down the mortgage. Monies moving out of the account may or may not coincide with paycheck deposits or bill deductions.

Insufficient fund or late fees are the sole responsibility of the client. Subsequently, credit history becomes affected. In order for the program to operate properly, individuals must have substantial excess income after paying the mortgage and other monthly bills. In addition, customers may incur penalties after using the card for unnecessary expenses.

The software programs are available through financial and insurance advisors, mortgage brokers and realtors. Clients gain information from one on one meetings, networking systems or seminars. Experts suggest conferring with legal consultants prior to signing any documents. Examine the fine print for refund policies and warranties and receive thorough answers to all questions.

Watch Out for Capital Recovery and Private Recovery Fees

Amidst the debacle of mortgage financing that led to a financial meltdown, the recovering market in the US has brought its own controversies in this period. The resale market, valued in excess of USD 100 billion every year has paved way for a silent and smooth movement of money to builders and other construction corporations across the US.

The Purpose of the Fees

Imagine this – Every time a real-estate property is being sold, the original builders (not the landowners mind you) will be paid a fee proportional to the transacted amount involved in the sale. Even though it sounds like an intelligent way for maximizing the revenue for the construction conglomerates, a second look at the policy reveals the harm that it can cause to the entire market and the consumers involved in thousands of real estate transactions every year.

Every time a consumer invests in buying a home, they look at the appreciation value of the enterprise so that they are left with something that has grown in monetary value along with them. The builders these days are attempting to include a clause – a transfer fee that has to be paid to them, every time a real estate property that they developed is being sold, allowing them to capitalize on property sales, regardless of profit or loss on the part of the consumer. This transfer fee is regardless of the appreciation or depreciation of the value of the real estate being sold.

Almost 100 Years of Fees

If you are buying a $100,000 house and selling it for 105,000 to another party then you will end up paying $1050 to the developer of the project. If the party who buys from you sells it for $110,000 then he will end up paying $1100 to the same developer and the cycle continues for all resale transactions for a period of 99 years.

Who Gets the Money

This money needs to be paid to the investors who backed the real estate developers during the initial development of the project. Failure to pay the amount will make the reselling a legally invalid contract. The reasoning being given by the principal advocate of the transfer fee scheme – Freehold Capital partners of New York is that “private transfer fees represent an adaptation in how to pay for development costs” incurred by builders “at a time when funding is not available” to them on “reasonable terms.”

With a contract for 99 years on every piece of real estate that is being sold the developers stand to reap the benefits for decades to come.

The people looking to move their families for career changes will be hit the hardest – people working for the defense forces in particular. Every time they sell a property, not only do they have to pay a transfer fee but the buyer of the property has the right to claim a certain reduction in cost pricing to negate the amount that he will have to pay to the developers when he intends to sell the property a few years down the line.

The FHA’s Involvement

The FHA – Federal Housing Administration has raised their voice against this fee that is against the rules. If Fannie May and Freddie Mac also join the fray then it will effectively stop this scheme from being implemented. Similar transfer fee programs had been implemented in different areas at different times only to be met with opposition from the consumers leading to the scheme being removed by the developer.
With such a big segment of consumers being affected many coalitions have taken up arms against this scheme and to prevent it from being implemented.

Should You Take Control of Your Escrow?

Gain Control of EscrowManaging your own escrow used to be a popular technique among homeowners. But like all things, it has gone in and out of fashion. There was a time when taking control of escrow saved time and hassles. When the bank managed the fund, homeowners had to forward all of the insurance and tax bills to the escrow account, wait for it to get lost in the mail so they could send it again and wait to get threatening letters from the tax man or the insurance agent. Then there was the inevitable one-hour call to the bank or servicing agent, getting transfered to five representatives until you could find one who was willing to help you get things straightened out. But these days, letting the bank manage your escrow is nearly hassle free. But there are still good reasons to manage your own escrow.


Mortgage Basics: Terms You Should Understand

When you apply for your first mortgage, you’ll hear many new terms that can be confusing. Don’t assume you understand what mortgage terms mean. Take the time to educate yourself so you know what  you’re getting into. Before you ever see the mortgage contract, you’ll be discussing certain terms with the lender.


How Does a Short Sale Affect Your Credit?

Many people often believe that a short sale does not affect their credit at all. For this reason, they choose this option when they are having difficulty making payments on their home. They believe that this is going to be better for them than an actual foreclosure. What most do not realize is there are negative effects to choosing this option, as well. In fact, the damage to your credit score may be just as harmful as a foreclosure.

First, it must be stated that a short sale, while it is not a foreclosure, will still put a mark against your credit. After all, the lender is going to be on the losing end of the deal and, with the high rate of foreclosures and short sales, they are taking too many big hits. In fact, the combination is why the government stepped in to bail out some of the lenders out. These lenders, when it comes to retribution, are not going to let the borrower get away without any concerns.

With this in mind, borrowers must realize there will be a consequence to their credit when choosing a short sale to sell their home. In fact, a recent study that was completed by VantageScore, a credit scoring company, revealed that there is only a difference of an approximate 10 to 20 point drop between someone going through a foreclosure and one going through a short sale. Both drops are significant, foreclosure causing a credit score to lower as much as 130 to 140 points, while a short sale was between 120 and 130 points drop.

Along with a lowered credit score, individuals who choose the short sale may also be responsible for paying the difference to the lender. This depends on which state you live in and whether or not the lender is pushing to get the money back. In truth, many lenders are choosing not to employ this option. However, this is something that you should not count on. If it is demanded and it is not paid back, this, too can mar the credit score and prevent one from financing another home in the future.

Borrowers will also find they are responsible for paying taxes on the difference between what the home sold for and the amount they owed on their loan. In many cases, the difference could be as much as $100,000. If not prepared for this outcome, individuals could find themselves in trouble with the IRS, as well as their lender. This is the last thing that anyone in this circumstance needs to add to their situation.

Anyone who finds themselves suddenly having difficulties trying to keep up with their mortgage payments may immediately think their home is going to be foreclosed on. This process actually takes several months to get underway and this may leave you time to consider a short sale on your home. While the short sale will cause some damage to your credit score, and even less if you keep your payments current, the records will also state that you did try to prevent your home from being foreclosed on. This, of course, will look much better than sitting back and doing nothing to stop it.

Whether the bank cares about that later on is anyone’s guess. Many advisors say that as long as you pay your bills on time for 24 months after any major credit damage, you should be able to get a loan. As your credit score plays a very important role in your life, do the research on your own particular situation to help you make the right decision for you and your family. As around to friends who have gone through similar problems and speak to a financial advisor.

Mortgage Rates at All Time Low…Expected to Continue

The mortgage market has been going through a deflationary cycle recently. Since the housing bubble first started to burst in 2007, interest rates on mortgage loans have been falling like rocks.  Mortgage rates have hit fifty-year lows. Demand, however, remains very weak.

There are various questions about this phenomenon running through the financial and business sectors. There is much confusion about how demand could be so low with such attractive rates. According to the standard supply-side formula, low interest rates should spur borrowing and investment. What’s really happening is that the savings rate has risen higher in the past eight years. In fact, in the second quarter of 2009, the personal savings rate hit five percent.

Low mortgage rates plus an increased sense of frugality combined with tighter lending standards results in homeowners who either cannot refinance or buy a home, or they are afraid to take the risk on buying a new home and prefer to live frugally within their current dwellings. The tighter lending standards mean that even borrowers who would have previously qualified for refinancing may not be able to do so. Many borrowers have found their financial situation worse off, due to factors such as a reduced credit rating, lowered income, and other negative factors that make it more difficult for homeowners to refinance because they cannot meet the stricter standards.

It is not surprising that the credit crunch brought down mortgage rates. The fact that the Federal Reserve was purchasing mortgage-backed securities from Fannie Mae and Freddie Mac helped to keep rates down. During the height of the financial crisis, the money market was suddenly gutted as depositors withdrew their funds. Since banks essentially create credit by lending out large loans such as mortgages, the expansion of credit was abruptly halted and in fact drastically reversed within a short period.

The sudden contraction of credit resulted in interest rates nose-diving because there was a sudden decrease in the amount of mortgage debt owed as the rate of defaults rose. The defaults were largely the result of falling home prices and high levels of consumer debt. Mortgage defaults decreased the overall debt load because the massive waves of foreclosures effectively wiped out hundreds of mortgage loans. This made the credit contraction even worse, and the rapidly shrinking money supply spurred the Federal Reserve’s lowering interest rates in order to keep the money supply from shrinking even further.

Unfortunately, the money supply continues to shrink due to deflationary trends despite the Federal Reserve’s efforts. The newly risk-averse banks simply do not lend out the money generated by the Reserve. Nationally, especially in the hard-hit areas of California and Florida, mortgage defaults continue to increase. Although the money market has appeared to recover, the contraction of credit continues to shrink the overall availability of currency.

This has resulted in low mortgage rates because of incredible deflationary pressures, not necessarily because of decreased risk. Even once the Federal Reserve stopped buying mortgage-backed securities from Fannie Mae and Freddie Mac, interest rates continued to fall. The deflationary trends have resulted in positive effects, however; the increased savings rate combined with the tighter standards have resulted in more consumers paying off their debts, with the salutary result that overall consumer debt levels in the United States have started decreasing.

In addition, there is a talk of a second wave of recession on the horizon. Whether the predictions are true or not, the negative sentiment makes already nervous lenders even tighter with their money. Why lend money at a risk when they can invest in government bonds and have a guaranteed profit?

All of the above notwithstanding, the low mortgage rates are continuing to stay low due to the continued credit contraction. Once the contraction bottoms out, mortgage rates should level off. They expected to remain low because of continued deflationary trends as the accumulated citizen and government debt is slowly paid off.