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Debt

Category: Articles Published: Wednesday, 25 May 2011 Written by Administrator

Too much credit card debt can be bad,

but what are a few smart ways to use credit?

The best loan rate can be had with a brokerage margin loan, but that's for folks with investments at least 2 times the loan amount. Next to that, it's the old fashioned car loan. Here are some tips.

First, get copies of your credit score and FULL CREDIT REPORT from all 3 reporting bureaus. By federal law, you're entitled to one free copy per year. Getting it in 2005 may save you a few bucks if you were to do it again in 2006. Review it for errors. Each error costs you money - and lots of it - in terms of higher interest rates on your loans. Write to the agency explaining each error and asking them to fix it IAW the provisions of the Federal FAIR CREDIT ACT, FCA, that they are obliged to provide you free of charge.

All entries over 7 years old are non-reportable under FCA, so it is easy to get errors this old removed. There are many provisions of the FCA that protect and preserve your rights, so I strongly encourage you to read it before you write your letters, because good credit means good rates and the best loans to you.

Decide how much you can afford to spend monthly without straining your budget. Remember to include insurance payments and sales and excise taxes too. Get this figured out before your proceed further. A good budget of your total monthly expense breakdown may look like this: 15% savings and investments; 25% housing; 10% food; 20% income taxes; 10-15% travel, entertainment and personal care; 10% utilities; and the rest for auto. Of course your budget may vary, but you get the picture.

Decide whether you want new or used. The loan rates and terms are different.

Factor in the cost of maintenance. With a used car the bonus is all on you. Also, figure at least $2.50/gallon on the mid grade fuel that Westphalia requires and at 15 MPG, figure out your annual estimated driving cost and factor that into the monthly cost of ownership.

Go shopping. Start with the AAA to get a benchmark rate, and then call credit unions. Pick your best deal. Go for a loan term of 4-5 years. Make sure there is no early pay off penalty in case you get a windfall or a higher income stream. Good internet resources are Kiplingers.com and Consumer Union. The library has indexed periodicals on every subject of interest, also Google.

The person with the best credit score and best income will get the best loan deal. Keep the loan in just one name so the division of assets and the credit responsibility are very clear.

Then shop for that car. Whatever your time is worth to your employer, you are likely to save yourself at least 10 times that amount annually by implementing these tips and doing your research. Figure out how much credit you can bite so that it doesn't bite you. You're less likely to fall victim to a bad credit rating under, not overestimate how much debt to carry and that's a good thing.

Older Americans, enticed by bargain-basement interest rates, soaring real estate values and easy credit, have been withdrawing the equity in their homes as though they were ATM machines. But now that rates are edging upward, are the good times coming to an end?

In the past, homeowners 65 and over were typically mortgage-free by retirement. But in recent years they have led the rush by cash-hungry homeowners of all ages to refinance their mortgages and get home equity loans.

"The growth of senior household mortgage debt," says Zhu Xiao Di, an analyst at Harvard’s Joint Center for Housing Studies, "is really quite remarkable, because compared with younger groups, their increase is the largest."

Zhu’s analysis of the Federal Reserve Board’s Survey of Consumer Finances shows that the mortgage balance of typical homeowners ages 65 to 74 was $44,000 in 2001, up from $12,000 in 1989. During the same period, bankruptcies rose as well: About 450,000 people over 50 filed for bankruptcy in 2002, up from 180,000 in 1991.

Still, borrowing against home equity—the value of a home minus outstanding mortgages and other debt on it—remains, at least for now, a reasonable way for many homeowners to reduce monthly mortgage payments, change the terms of their loan, pay off debt or raise cash.

Home equity now represents at least half the net wealth of most American households, about $121,000 on average for a 49-year-old and more than $144,332 for a 59-year-old. Most borrowers in the last dozen years came out as big winners, Zhu says, because home prices increased much more than mortgage debt.

But now, with rising interest rates [see Adjusting to Rising Interest Rates] and a cooling housing market, some borrowers could get in over their heads, draining the equity in their home—and with it, their financial security—and even risking the loss of their house if they can’t make their payments.

Experts say that before you borrow or refinance—especially if you’re ready to retire and will have less income—have a hard look at your financial situation and be sure you can pay off the debt. It may be easy these days to get large loans, but just because you can get more money, Zhu says, doesn’t mean you should. "You better think twice before you jump."

HOME EQUITY STATS

Average home equity

Per household in 2004

$130,000

Median mortage debt

In 2001

Among people 65+

$34,148

For all ages

$69,277

In 1989

Among people 65+

$17,783

For all ages

$39,802

Average size new HELOC

In 2002

$55,307

In 2003

$69,513

Average new home equity loan

In 2002

$40,253

In 2003

$58,054

Sources: Federal Reserve Board Survey of Consumer Finances; Consumer Bank Association 2003 Home Equity Study; Freddie Mac

And beware of predatory lenders, he says, who charge excessively high interest rates and fees. They typically target people in financial need and the least able to afford costly loans.

Experts recommend that you don’t spend the money on things like starting a business, stocks and other investments, retiring your children’s debts or on fast-depreciating items like SUVs. Use it instead to solidify or improve your financial situation—create an emergency fund, pay off high-interest credit cards, fix up your home, or make a down payment on a new one.

Mary Caughey, 57, recently paid off the remaining $102,000 on her mortgage with some savings. Doing so freed Caughey, digital access coordinator for the Oregon State University Libraries in Corvallis, of an $879 monthly payment on her 1,200-square-foot ranch home.

More important, Caughey says, owning her home free and clear boosts her sense of security. If she needs money for home improvements and "occasional indulgences," she will tap the equity in her home rather than touch the principal in her retirement accounts.

She says she will open a home equity line of credit, or HELOC, which is granted by a bank, credit union or other financial services company and functions like a checking account.

HELOCs provide a specific amount of credit—on average 75 percent of a home’s value minus remaining mortgage debt—sometimes for a specific period of time. The borrower does not pay interest until money is withdrawn. HELOCs still offer relatively low interest rates—now around 3 percent. They often have no or low closing costs and flexible payback options. The interest paid on loans is usually deductible from federal income tax.

Shop around before signing up for a HELOC, says Steve Wightman, a financial planner in Lexington, Mass., because interest rates and other terms vary widely.

If rates go up, the interest on unpaid balances will go up—and so will the amount you owe.

While low rates have boosted the popularity of credit lines, there are other ways to tap home equity as rates rise:

Home Equity Loans

These are sometimes called second mortgage loans. The homeowner receives the money in a lump sum and repays it, usually in 10 to 15 years. Unlike a line of credit, this approach lets the borrower lock in a fixed interest rate, with regular, predictable payments. The rates are generally higher than those on first mortgages but lower on unsecured debt, such as credit card debt. Interest is generally tax-deductible.

Mortgage Refinancing

When interest rates are low, many homeowners refinance their mortgage to reduce their monthly payments. Many also get cash. According to the Federal Reserve, in 2001-2002 about half of homeowners who refinanced "cashed out" an average of $26,700. Fifty-one percent of them used the money to pay off debts, 43 percent used it on home improvements, and 25 percent on travel, education, health care or living expenses.

But the costs (for, say, title searches and appraisals) of refinancing can add up to thousands of dollars. So if your main goal is to get cash, this is probably not the best option.

Reverse Mortgages

People 62 or older who need money may want to consider a reverse mortgage. This type of mortgage allows you to trade your home equity for cash in one of three forms—a lump sum, a line of credit or a series of regular payments.

It’s best suited for those who plan to stay in their home throughout their lives—the mortgage is due when they move out—but need extra emergency funds or dependable income.

Joan F. Beach of Alexandria, Va., was receiving monthly Social Security payments of $800. "I couldn’t make ends meet," says the 74-year-old widow. Beach got a reverse mortgage on her house, which was appraised at $390,000 and owned free and clear. "Now I am getting a monthly check of $1,000," she says, "and I am living high on the hog."

Reverse mortgages are guided by complex rules and, like refinancing, can have high closing costs. Experts suggest borrowers seek professional advice in determining if withdrawing equity is a sound financial move.

Selling a Home

Many homeowners get a big infusion of cash when they sell the home they raised the kids in and downsize to smaller quarters with lower or no payments.

One retired couple in California, who did not want to be identified, lost 70 percent of their retirement accounts in high-tech stocks. So they decided to sell their $410,000 house and buy a new one, mortgage-free, for about $270,000. The profit is helping pay their bills.

"This was a tragic case," says the couple’s financial planner, George Middleton of Vancouver, Wash. But without the equity in their home to fall back on, their story could have been a lot worse.

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