6 Things to Remember when Refinancing Your Mortgage Loan

6 Things to Remember when Refinancing Your Mortgage Loan

1) Why Refinance?

There are different reasons to refinance a mortgage loan, such as to obtain a lower interest rate, to shorten the term of the loan, or to consolidate debt.

It can be advantageous to refinance when you have a mortgage loan with a variable interest rate and are scheduled for a readjustment that will result in larger monthly payments, or when you have a loan on which you are paying only interest, and after a certain period of time you will start amortizing the principal, at which time your monthly payments will go up significantly.

A reduction in the interest rate means lower monthly payments, provided you keep the same term for the new loan. The savings in financing costs over the life of the loan, due to a lower interest rate, can be substantial.

The same concept applies for consolidating debt, that is, you can save money by requesting a new loan at a lower interest rate to pay off the balances of other mortgages with higher interest rates. Debt consolidation would be the case when, for example, you have an original mortgage to purchase the home, and later another mortgage to make an addition or improvement to the home.

When you refinance a loan in order to pay it off over a shorter term, the monthly payments will be higher, but you will end up paying off the loan in less time, you will save a considerable amount in interest, and you will accumulate more equity in your home in less time.

2) How Long Do You Plan to Stay in Your Home?

Refinancing basically consists of obtaining a new loan. With the proceeds from the new loan you pay off the balance of the existing loan. This carries a cost, and in order to determine whether or not it is advantageous to incur this cost in order to get a loan with more favorable conditions, it’s important to evaluate your own personal situation with respect to the home.

For example, if you plan to stay in the home for a long time, it may be advantageous to refinance. On the contrary, if you plan to move out of the home in a year or two, that may not be sufficient time to recover the refinancing costs through the savings you realize with the better conditions of the new loan. In such case, you can simply solve your problems by applying for instant direct deposit loan from websites like ElcLoans or CashNetUSA. But each case is different and all the circumstances need to be evaluated.

homeBasically, the refinancing costs, which are generally paid in cash but sometimes can be included in the amount financed with the new loan, should be compared to the savings you can obtain with the new loan.

For example, if the refinancing costs are $5,000 and your monthly payment, in the case of refinancing over the same term but at a lower interest rate, is reduced from $1.500 a month to $1.300 a month with the new loan, in one year you will have saved $2,400 in loan payments ($200 a month x 12 months), without taking into account the tax effect for the deduction of mortgage interest, the more rapid amortization of principal due to a lower interest rate, and the time value of money,

Therefore, you would not realize any real savings, in terms of cash flow, until the start of the third year of the new loan. The savings of $4,800 in the first two years would almost offset the refinancing costs of $5,000. In this example, it would probably not benefit you to refinance if you plan to stay in the home two years or less.

You could do the calculation in reverse. When you know the amount of the financing costs and the amount of your monthly payment with the new loan, you can divide the total refinancing costs by the total savings each month in the mortgage payment to determine the number of months it will take to recover the refinancing costs. In the above example, this would be $5,000 divided by $200 = 25 months. This is a simplified example and to calculate the overall effect, you would need to take into consideration the other factors mentioned above, such as the savings you can obtain in the total interest costs over the life of the loan.

3) Analyze All the Costs

The refinancing costs and the conditions of the new loan need to be carefully analyzed. When you are quoting with different financial institutions, it’s important to compare the overall cost of refinancing the loan. Refinancing expenses could be lower with one institution, but this could be offset by a higher interest rate on the new loan, or the situation could be the inverse, where you receive a lower interest rate with one institution, but with higher refinancing expenses.

analyze costThe refinancing expenses could be higher when you are quoting with an institution other than the one with which you currently have your mortgage.

Charges for the loan application, credit review, title insurance policy, flood insurance certification and the fees of the bank’s attorneys can easily amount to over $2,000.

The points for originating the loan are on average 1.7% of the loan amount. Third-party charges can add another 1.1%, according to the U.S. Department of Housing and Urban Development.

You need to be aware of any prepayment penalty associated with your existing mortgage loan. This penalty could be from 1% to 3% of the loan amount when you refinance. The penalty could be gradually phased out, from 3% the first year to 2% the second year, and 1% in the third year.

All the charges incurred for a new loan should be compared to the savings that can be achieved with a new loan at a lower interest rate. In the website www.bankrate.com there is a refinancing calculator to help with this comparison. If it is not advantageous to refinance because of the prepayment penalty, you may need to wait a year or two, until the penalty expires.

4) Obtain All the Information You Need

Whether you are consulting with a loan officer in the financial institution where you presently have your mortgage regarding the possibility of refinancing, or you are quoting with other financial institutions, you should request a detailed breakdown of the refinancing costs and the conditions of the new loan.

obtain informationIf the loan officer does not already have this information, you will need to provide the amount you originally paid for the home, the amount you financed with the original mortgage, the balance you owe on the mortgage, and the amount of your monthly payments.

You should also ask the loan officer to calculate the amount you would pay each month with the new loan, and to clearly explain all the conditions.

Until all the details are finalized, such as the amount to be refinanced, the interest rate for which you quality, and the current market value of your home, the conditions quoted to you will be estimates. If you are getting quotes in different financial institutions, it is important that you get quotes based on the same data, so that they are comparable.

5) The Market Value of Your Home

With refinancing, there comes a new appraisal of your home, in order to determine its current market value. With the conditions that have existed in the real estate market, and especially in the market for private homes in recent times, you may find that the market value of your home has decreased significantly. You may even find that you owe more than the house is worth on the market.

You should inspect the appraisal carefully, to be sure it takes into account any renovations or other improvements you have made.

6) Availability of Credit and Interest Rates

Lenders, after the losses many of them have suffered as a result of foreclosures on subprime loans, may have established stricter standards for granting loans, and may have raised interest rates to try to cover their losses.

You should inquire about the interest rate for which you qualify based on your credit score. You can obtain a credit report that includes your credit score from the three credit reporting agencies for a small fee on the website www.myfico.com. You can use the tool on the home page called “The higher your FICO score, the lower your payments”, to see what rate of interest a person with your credit score would qualify for when applying for 3-month loans, and how much the monthly payments would be based on the amount you are requesting.

You should correct any errors on your credit report that may be adversely affecting your score. You should also do everything possible to reduce the balances you owe on credit cards, in order to help you in obtaining the most advantageous refinancing terms. Many lenders penalize debtors when the balance owed on their credit cards is more than 35% of their available credit.

High School Students: Attend Consumer Credit Counseling or Debt Management Seminars

High School Students: Attend Consumer Credit Counseling or Debt Management Seminars

We are seeing more and more people fall into the trap of credit card debt because they were not adequately educated about the dangers.

Money management does not come with an instruction manual. Sometimes it becomes a trial by error type of scenario unfortunately once the lesson has been learned you can be totally consumed by debt never to see the light of day.

To help prevent these types of situations every high school student should have to attend consumer credit counseling or a debt counseling service prior to graduation and before they apply for a credit card.

This would be similar to counseling programs that someone who is deep in debt attends.

If we can help our youth understand the dangers of taking on too much debt at an early age then we can help pave the way for a successful transition into the credit world.

When students understand the pitfalls and hear about some the actual stories of people who fell into this trap they will be more likely to be on guard against this type of activity.

Chances are they will not abuse credit and will actually look for ways to keep their credit reports in good standing.

Emergency use

Students should be cautioned about only using credit cards for emergency purposes. As soon as you charge something and upon receiving your bill you utter to yourself, after seeing the minimum payment, “oh I can afford to pay that.” This is the starting point of falling into the trap. Credit card companies want you to pay the minimum payment only so that they can keep you as a customer and continue to earn finance charges as long as your balance is outstanding.

Interest rates

A credit card company, according to the terms and agreements, can increase your credit card rate at any time. The must notify you in advance prior to the change. This helps them to earn more money in finance charges and helps you pay more in finance charges.

Fees

Other things that students should be cautioned about are the various fees they can be subjected to such as late fees, over the limit fees, cash advance fees, and ATM fees.

Credit report

If your credit file has late payments it will make your pay more when you get ready to buy a house or an automobile loan. Late payments will lower your credit score

Checking account

Students should also be told about the dangers of fees associated with checking accounts.

There are minimum balance fees you can incur if your balance is not at a certain level.

If you have a zero balance in your checking account and a check is cashed you will receive a return check fee and if you use your debit/credit card each transaction will come with a fee. This can become quite costly.

If all students attend a consumer credit counseling class that covers every facet of consumer credit then we will see a decline in the number of bankruptcy petitions filed.

A program of this sort gives students the ability to perform tasks such as balancing a check book, establishing a family budget, manage debt, and how to avoid excessive fees by shopping around for the most cost effective products and services.

Using PayPal as a Budgeting Tool

Using PayPal as a Budgeting Tool

When I first discovered EBay, I was quite skeptical of the place.

When I finally tried it out, I instantly became addicted.

I was always buying things that I thought I needed at the time, going to the post office, and impatiently awaiting the mailman’s arrival with my packages. Soon, this became a rather serious problem, as I simply do not make enough money to throw away.

I would try to tell myself I needed to save if I had anything left over after expenses. Or worse, at least try to convince myself not to buy anything on EBay until I had actual necessities covered.

But it all failed.

I bought more and more items on EBay.

Finally, I needed a PayPal account.

I told myself I would not use this account for EBay, but only for things that truly required PayPal. I used PayPal when selling things on EBay so that I could accept payments.

I would use PayPal to receive commission on photos and payments on articles. I managed to not use PayPal for EBay for about a year.

Then an idea struck me one day. What if I only allowed myself to use PayPal for EBay and other places that accepted PayPal.

If I didn’t allow myself to link a credit card to my PayPal account, my spending would be much more limited. This would force me to pay expenses with money earned from my low paying jobs, while extra work I did that went towards my PayPal account could pay for me to have some “fun money“. I liked this idea very much and decided to try it out.

I initially bought a lot of jewelry with the money I had saved up in PayPal. Then I went on to look for CDs. But what would happen when the money ran out?

This was a bit harder. I would see that I had enough money for something in my bank account, but not in my PayPal account. Yet I forced myself to wait until I had enough in my PayPal account to buy what I wanted if it was not a neccessity.

Of course, I still bought a couple things on EBay and other sites that accept PayPal with either my credit card or by money order. But I was careful to only use other options besides PayPal to purchase something that truly was a necessity.

Just by getting PayPal, I have managed to greatly reduce my spending on EBay. And all those hours watching auctions? No more wasting so much time online for me. I now volunteer at an animal rescue and a marine mammal rehabilitation center in my spare time.

Not only have I reduced my time and spending on EBay, but with PayPal I have also reduced my spending on other sites that accept PayPal. If I can spend my PayPal money instead of putting something on my credit card, I will do that instead.

I learned my lesson.

Rather than PayPal being a dangerous tool that would increase my time and spending on EBay and other sites, PayPal proved to be a valuable tool that has helped me save money, keep out of debt, and not waste as much time that could be spent doing something useful.

6 Tips to Prevent Identity Theft

6 Tips to Prevent Identity Theft

The recent massive security breach involving Sony’s PlayStation Network should be a reminder to consumers that protecting your personal information is a key part of achieving success in personal finance.

We’ve learned one of our grandchildren is involved in the security breach, as a result of their personal information being included as part of our son’s master account.

Sony uses the PlayStation network to facilitate online gaming, but they make it necessary to be part of the network to be able to download game updates and even activate some features on games. Although always calling it optional, they make it almost mandatory to be part of the network to fully use and enjoy the system.

The data loss is potentially huge, and literally includes all the information on users held by Sony, including my son’s account user IDs, passwords, credit card and billing information, personal addresses, names of his children and the entire history of every movie, game and song the family has ever purchased or downloaded.

The PlayStation network is linked to Sony’s Qriocity network, which my son and his family use to stream music and rent television shows to watch on TV via the PlayStation unit.

Sony has pushed this unified network for consumers, where you buy, download and rent all the content on their PlayStation network and watch it on their PlayStation device. It does make it easy and seamless for customers, but you see the downside, as all your data is subject to loss all at once.

If you or your family members participate in online gaming and other networked activities, you need to take steps to minimize your risk of becoming a victim and reducing your exposure if it does happen to you. While it’s impossible to prevent identity theft, there are some basic steps you can take to try to stop it:

1) Think Before You Sign Up

If Sony’s network can be compromised, no network is safe. The more things you sign up for and provide your personal information for, the more risk you take on. Consider if you really need to sign up before providing another company your complete personal profile.

2) Use a Limited Credit Card

Limit your exposure, instead of a credit card, use a debit card from a bank account with limited funds, that is not linked to any other account. Set up a basic checking account at any major bank, they will give you a Visa / MasterCard debit card. Use this card for network billing, be sure to have it billed as a credit card, not an ATM card.

Keep your bank account balance under $100 and use this for any online subscriptions. Ensure your account is set up to decline debit card transactions that exceed your balance, as financial institutions now heavily promote the option to allow them to honor these transactions, and charge you a high fee for the privilege.

3) Use a Unique Email Address

Use a free email service for this and other non-essential sign-ups, not your main email account. I have a gmail account for important personal business and contacts, a corporate email for business and a mail.com email for contests, subscriptions and any time I’m forced to provide an email address. I use that personal gmail account for banking, which is a different email than I use for online services.

Mail.com is a good free service and has many email names, in addition to yourname@mail.com you can pick from things like yourname@usa.com, yourname@email.com and many more. Using a unique email address means if the information is compromised, the email address is not useful for logging into other things, like your bank webpage.

4) Consider Your Exposure Before Adding a Device To Your Home Network

Be careful when adding a gaming system to a home network as it is possible for a device on the network to access the information on other devices. Which means it is technically possible for the PlayStation, acting on hacked software for example, to access the personal information and data found on computers on the same network.

So banking information, even personal passwords could be compromised. Resist the temptation to put everything on a single network, keep it separate. Ensure computers on the network have updated firewall software and that it’s activated and in use.

5) Limit Sharing

If you do sign up for services, always check for options that limit sharing. Companies may make it complicated or difficult to select these options, but all do offer options that limit sharing of any personal information within the company or to outside third parties.

6) Use WiFi Security

Make sure you use password protection for your WiFi and any wireless networks you set up. Use a complicated password, a random series of numbers and letters, not something easy to guess. Ensure any devices added to your network use the same level of security for access.

While you can never assume your personal data is safe, it’s almost impossible to do business these days without providing the information to major companies. By taking basic steps, consumers can reduce the possibility identity theft will happen to them, and minimize the damage should it happen.

The New Vs. Used Car Debate

The New Vs. Used Car Debate

This is a response to a blog post I read. In it, the writer simply asked the bloggers how they really felt on this topic and then posted their responses.

I was surprised at the responses of some of the bloggers who said they preferred to buy new, considering that I thought they were supposed to know a thing or two about smart money habits.

The Prefer New Responses

Overwhelmingly, the main reason responders said they prefer to buy new is for the lack of problems they will have with the car. They understood that the car loses value the second it is driven off the lot, but justified this by saying that they plan to drive it for a long time.

I tend to disagree with this logic in both cases. Who says that new cars won’t have any problems, and how do you know you’re going to drive it for a long time?

The Prefer Used Responses

Most of the responders said they preferred to buy used cars. The reasons varied slightly, but did not include their desire to drive old scratched and dented beaters all the time.

Of course everybody would like a new car, but these responders chose used for wise and sound financial reasons.

The biggest reason to avoid buying new was to not take the major hit in depreciation the moment the car was driven off the lot.

My Take on New Cars

I would fall into the category of people who have never bought a new car. My take on the issue is slightly different than all of the ones I read on Shawanda’s blog post. I agree with all of the financial reasons for not buying new, such as avoiding depreciation, better deals and lower insurance costs. But I look at the situation from an entirely different perspective.

Why do you suppose new cars lose so much of their value so quickly? Do they really actually lose their value, or did you pay too much in the first place? The only place you can purchase a new car is at a dealership.

You can’t buy directly from the manufacturer, and you obviously can’t buy a new car from a private party. Have you seen the big fancy buildings and showrooms at new car dealerships?

Do you know who is paying for those buildings? That’s right, the people who buy the new cars. So, did the car really depreciate, or did you just send send a huge chunk of money to the manufacturer, dealership and salesperson just for the privilege of owning a new car?

How I Buy Used Cars

When I am looking to buy a car, my number one rule is to avoid dealerships. I am not mad at dealers and I understand that they and their salespeople need to make a living. I simply choose not to contribute to their salaries by paying more for a car than I have to.

A used car dealer is no different from a new car dealer in that they have overhead expenses that need to be covered. In most cases, you will pay more for a used car at a dealership than you would if you bought from a private party.

Even if the dealership doesn’t make a huge margin on the sale of the car itself, they make money in many cases by selling you the financing or the rip-off extended warranty. I also prefer to avoid the whole haggling with a salesperson routine.

Private-party is definitely the way to go if you are looking for the best deal on a car. I have had luck with Craigslist for my last few car purchases.

Combine a Craigslist search with research on car values on a site like Kelley Blue Book, and you can’t go wrong.

In most cases the seller will accept a slightly lower offer than their asking price because that is just what is expected in private party transactions like this.