This Way To Debt

Mortgage Financing Made Easy

I.  Lending Guidelines

Understanding Credit

There are three C’s of lending: credit, capacity and collateral.  This section will focus on credit.  You must understand what lenders are looking for in order to qualify you for a loan.  How you pay your bills makes a big difference in the programs you qualify for.  More importantly, it affects the interest rate you are charged.  It is called risk based pricing.  Banks and other lending institutions charge higher interest rates for customers with “spotty” credit.  For example, a person who always makes their payments on time and has a reasonable amount of credit available will get a lower rate than someone who pays their bills late and has too much revolving debt.  Most important is your payment history on mortgage loans and other installment loans.  Read on to learn more.

Installment loans differ from revolving accounts in how the contract is written.  A car loan is an installment loan.  It has a fixed repayment period with a consistent monthly payment.  Credit cards are considered revolving loans.  They do not have a set payment amount.  It varies to the amount of your charged balance.  It has a maximum allowed, or credit limit.  The payment is calculated based on the interest rate and current balance in any 30 day cycle.  Understanding the difference will be important in helping you assess your credit profile.  A mortgage loan in most cases is an installment loan.  We will discuss revolving mortgage accounts or lines of credit later in the book.

It is easier to obtain a copy of your credit report today more so than ever before.  I recommend that everyone take advantage of the free options available.   Periodically checking on your credit file helps to ensure no one is fraudulently using your credit information.  You will be able to see what trade lines (companies) are reporting to your credit file.  Any liens or judgments that may have been filed against you will report.  If you have ever filed a bankruptcy, that information is public record and reports to all three of the major credit reporting agencies in the country.  Medical collections can also be seen.  It is important for you to know what information lenders are reviewing in order to make a lending decision based on your loan request.

Most companies report their loan records to credit reporting agencies.  Utility companies and some smaller institutions such as credit unions, may not report.  Lenders typically review the last twelve months of your payment activity.  They will look to see how many late payments you have had during that time.  What a lender considers late, and that which is reported, is greater than 30 days past due.  For example, if your mortgage payment is due on June 1^st, it would report as 30 days delinquent as of July 2^nd.   Many people juggle which payments to make within their monthly budget.  I strongly recommend that you pay your bills in this order:  mortgage, other installments (car), revolving, medical, and collections last.  Let me explain why.

A collection account is one that reached a point of default where the lending institution writes it off as a loss.  Other collection agencies by the “paper” or loan and begin to make collection efforts to make their money.  Most collection agencies will settle for a lesser amount if negotiated properly.  Because the debt has already reported to the credit bureaus as a charge off or loss, the damage is done.  The collection agencies may report the debt again on your credit report.  Paying that last makes sense.  Focus on maintaining what is most important, shelter and transportation.  Your consistent payments efforts are what lenders call, a history.  Having a history of late payments tells a lender that you will probably pay late in the future.  Therefore, they price your loan higher for that risk.  A proven payment record gives the lender confidence you will pay your loan back on time.  You have a proven history of payments.

Consider how many trade-lines you have reporting and what the high credit limits are.  If you have open revolving accounts and you are not using them, close them.  This is important because from a lenders perspective, that is less available credit.  A lender considers what your capacity for additional debt could be.  If utilized, it could affect your current ability to pay.  We will discuss your ability to pay in the debt to income section.  Having revolving credit cards with high credit amounts tells a lender you could choose to charge that much.  If the account is closed, the trade-line will only report the history of your payments, but show you no longer have access to additional debt.  You can’t charge any more.

If you decide to co-sign for someone, recognize that the loan will affect your personal credit.  It will report on your credit file just as your own debt would.  If the person you co-signed for doesn’t make the payments on time, it will report as delinquent debt and can damage your credit.  I am sure you have all heard about your credit score.  It is a scoring model to help lenders assess credit and the risks involved with each consumer.  Most models consider the higher your credit score, the better your credit worthiness.  There are several different models, the most common is FICO.  There are thousands of factors that affect your FICO score.  A credit inquiry is one of them.

When you fill out an application for a loan, it reports as an inquiry.  An application is almost automatically followed by the lender “pulling” your credit report.  That means they must assess your credit history and allow the lender to make a lending decision.  The inquiry will report whether or not you are approved for the loan you were applying.  A lender considers credit inquiries with an implied risk.  The more you are “shopping” the more credit exposure you could take on.  If you have multiple inquiries, but no resulting trade lines, that is another inherent risk associated with your credit profile.

A thin credit file is not always good because it doesn’t establish an ability to pay.  If nothing reports to your credit file the lender has no way to know how you will pay in the future.  It is important to establish credit trade-lines even if you don’t need to.  For example, if you have an option to purchase a large appliance on a same as cash option, take it.  It will report as a trade-line and allow you to make monthly payments.  You may be able to afford to pay cash, but if you need to build a credit file, this is a great way to start.  As well, applying for credit cards is not a bad thing.  Having one or two cards that you can use, but can afford to pay off monthly, will help you to establish a history of credit and payment activities.

In summary, a lender will review your entire credit profile when making a lending decision.  You represent low risk when you have made all your payments on time and don’t have too much debt available to you.  On the other hand, you are a risk if you have shown an inability to make consistent monthly payments or have allowed a debt to be written off as a loss.  Bankruptcies are a whole story in themselves that will not be addressed in this publication.  Finding a way to handle debt and pay it off in half the time is what United First Financial can do.  Be mindful of the damage a late payment can have on your ability to qualify for a loan or get the best rate available.  Your history will determine your future.

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Tags: banks, credit, credit reporting agencies, Debt, fico score, loan, mortgage

Why does it take So Long for Me to Pay off My Debt?

Debt is a part of our everyday lives. Are world goes on because of debt. Since the beginning of time, we have made a system, to have things that we couldn’t afford, and set up a debt payment to pay it back. Weather is was a horse or a house, we find a way to get it and pay for it on time.

If I were to buy a home, the bank would give me a loan to purchase that property, and issue me a mortgage. This word mortgage comes from two root words, “mort”, comes from the Latin word meaning dead or death, and “gage”, means a pledge to forfeit something of value if the debt is not paid. So this mortgage is literally a death pledge. If I don’t pay my mortgage, they will take my home, or something of value. If I pay my mortgage the pledge is dead also. Either way, through the payment or nonpayment of the mortgage, the pledge is a dead pledge.

Now homes are not as valuable as they once were. Back in times past you might be able to barter something else of value, like one of your children, or an animal, but today we are much more sophisticated.

The beginnings of a mortgage system have been found, as early as 1190. English common law included a law that would protect a creditor by giving him an interest in his debtor’s property. According to this law, the mortgage was a conditional sale. Although the creditor held title to the property, the debtor could, in the event the debt wasn’t paid, sell the property to recover his money.

Doesn’t sound like things have changed too much today!

We live under a free enterprise system called capitalism.  Capitalism is an economic system in which wealth and the means of producing wealth are privately owned and controlled, rather than state owned and controlled. The one downfall of capitalism that can bring the whole structure down is greed. We are seeing plenty of that right now in our economy, and many think that we are heading to a socialistic society, where the government controls and runs everything.

If I have a 30 year mortgage, for 200,000 dollars, at a 6% interest rate, your payments will be 1199.10 a month. Now, let’s examine how this exactly works.

Mortgages today are designed specifically to benefit the bank. They are set up so that all the interest that you pay the bank will be made in the front end of the loan. The loan is top heavy with interest, and that interest belongs to the bank, not you. This is no accident. The bank makes sure that they will make their interest off the loan, before you make any payments to the principle. And there is a lot of interest for the bank to take. There is a name for this interest. It’s called compound interest.

Your mortgage is a closed end loan. It is interest which is working for the bank and not you. When you closed on your home, you were given an amortization schedule. This schedule is a schedule of every one of your payments to the bank, from your first one to the last one. If it is a 30 year mortgage, it will be for 360 months, a fifteen year mortgage will be 180 months. It will show you the amount of your payment that goes to interest, and the amount that goes to principle for every month that you have this mortgage. This schedule cannot be altered or deviated from. You must make every payment, as scheduled, on the date it is scheduled for. Usually there will be a late charge added to those payments that are late.

But what if I came up short one month and could not pay the full payment. Could I ask the bank to let me pay just 1100 dollars this month? Well, I could ask them that, but they would say no. The full amount is due every month and they will take nothing less.

Just as your mortgage is an example of a closed end loan, your credit card is an example of an open end loan. If you were to go out and charge up 500.00 dollars on your credit card, but when that credit card bill was due, you paid the full 500 dollars, how much interest would you pay on that credit card? If you said, none, you are absolutely right. You would pay zero, because the interest that you pay on a credit card is simple interest. It is figured on the average daily balance that you carry on that card. No balance, no interest. You can make as many payments that you want on your card. You can move money in and out of the balance; there usually are no limits as to how many times you can do this.

Interest is a part of our everyday lives. It’s everywhere, and it is what makes our economic system move. Interest can work for you or it can work against you. Albert Einstein said, “Compound interest is the eighth wonder of the world. Those that understand it, earn it, and those that don’t, pay it.” The banks certainly understand it and have been using it since they first existed. They get you and me into a death pledge, (mortgage),  that many of us are unable to get out from under. Today, one in every ten homes is vacant because someone was unable to fulfill their pledge to the bank and lost their home.

Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e., interest is compounded). A loan, for example, may have its interest compounded every month: in this case, a loan with $100 principal and 1% interest per month would have a balance of $101 at the end of the first month.

Another example of compounding interest is this; what would you rather have, one million dollars or a penny doubled every day for the next thirty one days? Take your time…. Grab your calculators…. Give up?

After thirty one days you would have, ten million, seven hundred thirty seven thousand, and four hundred eighteen dollars, and twenty four cents.

Now back to our 200,000 dollar mortgage. It will take you twenty one years before you make it to the half way point of your mortgage. Twenty one years of your hard earned money going to the bank. After twenty one years of payments, you will still owe the bank 100,000 dollars. Do you think the bank understands how compound interest works? They do and you pay them interest, lots of it. As a matter of fact, after thirty years of monthly payments to the bank of 1199.10, your death pledge, oh, I mean your mortgage; will have cost you 231,677 dollars. That’s why it will take you thirty years to pay that mortgage off. Your 200,000 dollar mortgage will have cost you 431,677 dollars by the time it is all over. You will have bought one home, but you paid the bank for two. That just doesn’t sound right to me.

Our economy is changing. The more we understand how debt and interest work, the better we will be able to secure our financial situation, and learn to live debt free. Yes this is a fact that thousands of Americans are learning and living debt free, through United First Financial.  How about you? Continue to follow this blog and we will discuss ways to achieve this goal. The good debt that you should have, and getting rid of the bad debt and the interest that goes along with it. Instead of paying interest, let’s start using interest to our advantage and our benefit.

Financial institutions want to keep you and me in debt. They don’t want us to learn how money really works. They don’t want you to know how compound interest works, because the longer they can keep all of us in the dark about money, the more of yours they get to keep.

As you can see, interest is a very much needed element in our economy today. We pay it, and we earn it but it is what keeps our economy working. As consumers, or entrepreneurs, we all need to learn every aspect of what interest is, and how it works. It can be the defining line on whether we succeed or fail.

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Tags: bank, Capitalism, Debt, economy, home, interest rate, mortgage