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

Dealing With Emotional Factors Leading To Debt

Why Does It Take So Long For Me To Pay Off My Debt…And
How Can I Speed It Up?
There are many reasons why your debt seems to be ongoing for a lifetime. Many of the
following reasons may be familiar to you, things you have said to yourself, your
spouse or others. Perhaps you will see something here that will trigger a new thought
pattern in the approach to becoming debt free.
What’s Your Plan?
Most people, although well intentioned, have absolutely no plan for becoming debt free. They
may occasionally pay an extra $10, $20 or more on a particular debt thinking what a large
difference that will make. That is a good move but it’s the perfect example of the
proverbial drop in the bucket.
A good plan includes many components. Some, and I repeat myself, some of the components
are:
· Determine the amount of discretionary income you have to work with each month.
· Know every detail about each debt you have. Some of these details are the rate you
are paying on each debt, whether the debt is revolving or installment in type, balance
on each debt, length of time or payments remaining on each debt and whether the debt
has a fixed rate or is an adjustable rate. This will be discussed in later chapters.
· Determine a strategy. Which debt is first, 2nd and so on until you are debt free. This is
computed using Factorial Math. This requires a computer program or a plan that
includes Factorial Math within that program. This will be discussed in later chapters.
· Get educated on strategy. Debt payoff strategies are not “one size fits all.”
· Find out where your mortgage fits into your plan since interest is calculated in a
different manner than your other debt.
· Think “long term.” You didn’t get into debt over night and you certainly won’t be able
to get out overnight.
· Increasing income and reducing outgoing fits will help you but certainly is not
enough to bring the results you are searching for. It is a component of a good plan,
not the total answer.
It’s enough to make you want to drop your pencil, put away your calculator and go
outside in the sunshine and feel the fresh cool breeze on your face isn’t it.
Unfortunately, that’s what most people do. They give up before they ever get started. Therein
lies the problem with why most people don’t have a plan today.
It’s just the way it’s supposed to be.
Our first experience with debt comes to most of us between the ages of 16 and 18 years of
age. It’s called “our first car.” Although we may have a job after school and during the summer
there just isn’t enough income to pay cash for the car and insurance coverage. After all, if I
were to pay cash I might have to save for a year or more to get enough money to pay for both
the car plus a year’s insurance. After all, there are clothes to be bought. There’s money
needed for fun and trips and all around good times to maintain ones social status. What if the
car breaks down? I’ll need money for repairs.
Enter Mom and Dad or the Grandparents who either co-sign or front the money for the
car. Often times, Mom or Day will take on the loan assuming that we will honor our word and
make regular payments each month. What quite often happens next is a scenario many of
you may already have experienced so I won’t go into that here. Even if you haven’t
experienced it yet you still know what comes next.
So here we are age 16 to 18 with our first debt. We make the first 3 payments on time then
something comes up and we need the money and skip the 4th payment. Our payments start
getting sporadic and so it goes until we either get the car paid off or Mom and Dad just
give up and pay it off.
Now we’re 21 or older and we have our first credit card. We manage to maintain that card
somehow and we get a 2nd card. As we get older we acquire more cards. We marry, increase
the joint incomes and get more cards and more cars and more stuff for the happy
home (plus babies) and one by one the debt mounts.
Years pass – we decide “Hey, we don’t need all these payments, all this debt” but we
rationalize that we are, after all, doing what everyone else is doing so that’s just the way it has
to be. “We’ll pay everything off when we get the raise or the better job.”
When 5 to 10 more years have passed we then resign ourselves to the fact that being is debt
is simply the way everyone lives their lives and we will be in debt forever after all, how could
we possible get all this debt paid off. It’s just the way it’s supposed to be.
Let me say that there are ways to accomplish complete debt freedom without sacrificing your
lifestyle.
Availability of Credit
Until recently, the availability of credit was a contributing factor to why we rack up so much
debt. For most of our lives we’ve come to expect one or more envelopes in the daily mail
offering us additional credit cards or some type of additional credit. You passed on some and
accepted others. Over the months and years the credit cards in your wallet or purse grew to a
surprisingly high amount along with your available credit.
Some obtained new credit to help manage and pay for existing credit going down a road with
the brick wall at the end. At this writing, credit is difficult to obtain. We are forced to utilize and
live on the credit we have. Some people with equity lines have had their lines frozen. We now
need to manage more payments with the same or less amount of income, not a pretty
sight.
The thought of becoming debt free sometimes becomes hard to imagine when one is juggling
so many payments. I would like to tell you that you should remain hopeful, do your
research, and watch for more information from us regarding the methods and
possibilities for becoming debt free. If you are motivated and persistent you can live a
debt free lifestyle.
Should you be offered new credit, do not accept it. The thought of new credit may seem to be
helpful at first but just remember; new credit was a contributing factor in bringing you to where
you are today.
I trust my bank.
Oops! “When we really needed that new car our bank or credit union gave us our very own
great low interest loan. They really did us a favor!” If that’s not what you said, I would guess
that it is what you thought at one time or another. You may or may not have actually needed
that new car. I say that simply for your consideration. You may have needed it; then again,
you may have simply wanted it.
In any case, the bank or credit union thought it was a good idea so let’s do it, right. I’ve been
there. Perhaps we all have. Its so easy. Lending institutions have slowly convinced us
that debt is normal and just a part of being a good American.
We are bombarded with ads for more debt through TV, newspapers, the Internet and by mail.
There’s so much media coming at us constantly we begin to believe that it’s “normal” to be in
debt for most, if not all our lives.
It’s our responsibility to look beyond the advertising at the big debt picture and begin
perhaps even with baby steps to filter this out. This is one of the first steps to acquiring a
mindset that it really is possible to be debt free.
Principal and Interest
Compound Interest, simple interest, amortization, fully amortized, and many other financial
terms will not be discussed in detail here. There will be some discussion of these in other
chapters but just a reminder, our purpose is to leave you with the hope and the
knowledge that it is possible to live debt free.
In a perfect world, what if you could cancel all the interest off of all your debts? Every
dollar you paid would reduce principal. How long would it then take you to pay everyone off?
It sounds great doesn’t it? We all know that it isn’t a perfect world but, what if you could
cancel forever a large portion of your interest charges on your debt. How great would that be?
Hold that thought as you read the rest of this book.
We Need Help!
Think back from your elementary school days through college. How many of the students
were really good at math in any given math class. Not many right. Formulating a plan for
becoming debt free is a struggle for the best of us, even those who have always
thought they had the gift of mathematics.
Without a computer and the proper software it is impossible or nearly impossible for the
average person to devise a plan, work that plan on a monthly basis is such a way as to stay
on target for becoming debt free. Going back to school won’t get it done. Buying a book won’t
get it done. Neither will listening to the financial media gurus. While all this good information,
very little of it ties together for you, so you remain stuck, head in hands with a figurative
question mark above your head.
Do we have the answer? Well, yes we do. In fact, there are several ways which we will
share with you. We will also share the ultimate strategy that we have found to work in the
fastest way possible. First, we will break down debt and all that it entails. Then, we will give
you a better understanding of debt, what it is, how we arrive at a life of servitude because of
debt, but most of all, we wish to give you hope and instill the knowledge that you don’t need to
spend the rest of your life suffering under that debt servitude. Don’t worry. We will offer you
the solution. We wouldn’t want you to be left in the dark. Just hang in there and keep
reading. You’re already making progress by thinking about your problem in a new light.
OK, I got all that. So what do I do next?
At this point we want you to simply understand that you don’t have to remain in debt for
the rest of your life. There are ways to become debt free with grace and ease without
disturbing your lifestyle to any great extent.
In order to adopt this way of thinking you will need to accept what I like to call a Paradigm
Shift. Think about it. We are asking you to go from thinking, “debt to the grave is normal,” to “I
can live most of the rest of my life debt free.” Wouldn’t you call that a Paradigm Shift?
So, start imagining your life debt free. What would you be able to do with the income you
are receiving right now if it wasn’t all going out the door to pay off your debts? How
would it feel to have the peace of mind that comes from owning your own home free and
clear? It’s OK to start thinking this way because we are going to show you how to realize
those dreams in less time than you probably think.

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Tags: car, credit, credit cards, Debt, job, mortgage, school

What You Should Know About Interest

What You Should Know About Interest

Interest is compensation to the lender for forgoing other useful investments that could have been made with the loaned asset. These forgone investments are known as the opportunity cost. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. The amount lent, or the value of the assets lent, is called the principal. This principal value is held by the borrower on credit. Interest is therefore the price of credit, not the price of money as it is commonly believed to be. The percentage of the principal that is paid as a fee (the interest), over a certain period of time, is called the interest rate.

Interest is a part of our everyday lives. You can have it working for you or against you. Let me give you an example of what I am talking about.

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.

A mortgage for 200,000 dollars, at 6 % interest rate, for the next 360 months of our lives, requires a monthly payment of 1190.10 every month, but if I have some extra cash lying around, I could give that to the bank and ask them to put this extra money towards the principle balance of my mortgage. That would reduce my principle, thus adjusting the interest that I would have to pay. 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.

Ever hear of compounding interest? 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.

Compound Interest

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: assets, compensation, credit, interest, loan, mortgage, principal