Home Equity Loans Make Financial Sense

The optimum word in “home equity loan” is equity. Start with the fair market value of a home, subtract the mortgages (first and second) and any liens against the property, and what you have left is the equity. This equity can be used as collateral to secure cash in the form of a loan or mortgage. 

The amount borrowed is based on a percentage of the appraised value of the home. The percentage rate can vary from 75% to 125%. The length of the financing will also vary. The two main types of home equity loans are fixed rate loans and adjustable rate loans.

Fixed rate loan – provides a fixed amount of money at a fixed rate of interest, repayable in equal payments over the life of the loan. Fixed rate financing costs more in set-up fees and comes at higher interest than adjustable rate loans. But if homeowners stay put and interest rates go up, they will save money over a comparable adjustable rate loan. 

Adjustable rate loan – the interest rate goes up or down according to the index upon which it is based. Adjustable rate loans will have a cap on how high the interest rate can go. Usually called ARMs (Adjustable Rate Mortgages), this type of loan has lower up-front costs and starts at a lower interest rate than fixed rate financing. This means lower initial monthly payments. 

Putting home equity to good use
According to the Consumer Banker Association, the top ten reasons for getting a home equity loan are:

10. Vacation
9. Medical expenses
8. Business expenses
7. Household expenditures
6. Investment
5. Major purchase
4. Education expenses
3. Automobile purchase
2. Home improvement
1. Debt consolidation

Debt consolidation, the most popular reason people cash out their home equity, is a smart form of financing because of the money it can save. For example, say you owe $15,000 on a credit card that charges 17% interest. If you get a debt consolidation loan at 9% interest and pay it off in five years, you’ll save you over $30,000!

If you’re paying more than 15% interest on anything, you should seriously consider a debt consolidation loan. The right terms could drop your monthly payments by 35% – 50%, depending on interest rates, origination costs and tax consequences.

How To Get Out of Credit Card Debt

“Today, there are three kinds of people: the have’s, the have-not’s, and the have-not-paid-for-what-they-have’s. ~Earl Wilson”

Credit cards are truly one of mankind’s greatest inventions. Unfortunately it has also become one of mankind’s greatest curses.

Most credit card companies in the Philippines charge 3.5 % interest rate per month. That is about 42 % per annum. If you do the math, your present outstanding balances will double every 2 years. If you owe your credit card company P 10,000.00, in 2 years time it will become about P 20,000.00.

The best thing that you could do right now is to pay all your credit card debt immediately. That is if you have the money to do so. But what if you owe your credit card company P 100,000.00 or even P 200,000.00 what should you do ? What if you have multiple credit card debts? The following are probably the best steps that you could take in order to rid yourself of this credit card debt mess.

1.) Get a loan with a lower interest rate – Some lending institutions and even banks offer an interest rate of 0.99 to 1.5 % interest per month. This is much lower than what the credit card companies charge. If you can secure a loan with a lower interest rate, especially a diminishing one (Hard to get by these days, by the way if you don’t understand the difference between diminishing rates and straight rates or fixed rates this will be discussed in another post) use the loan to pay off your credit card debt, and resolve to never ever again use your credit card except if you can pay it within 30 days. That way you won’t be charge the monthly interest. By borrowing at a lower interest rate you will minimize your losses due to interest. If you can borrow from somebody at 0 % interest (A rich old uncle perhaps), that would be so much better. If you have several credit card debts, borrow enough to pay all of your credit card debts. This way you can focus on paying only one debt and one interest rate. In financial planning this is better known as “debt consolidation. “

2.) Secure a balance transfer – Most credit card companies have a wonderful feature called “Balance transfer.” When you transfer your balance from other credit cards they will only give you .99 percent interest per month. This is already a steal deal. Balance transfer are payable in certain terms like 12, 24 or 36 months. So let’s say you owe your PS BANK Master Card P 100,000.00. If you have another credit card with let’s say CITIBANK and your credit limit with CITIBANK is also P 100,000.00, you could transfer your balance from PSBANK to CITIBANK. Instead of 3.5 % interest per month, Citibank will only charge you 0.99 % per month (About 12 % per annum). What Citibank will do is that they will add the monthly interest and then divide that with the term that you wish to avail of. For example of you wish to pay off your debt within a year the computation would be: interest times principle + principle divided by 12. So that would be 12 % x P 100,000.00 + 100,000.00 / 12 = 9,333,33. You will only have to pay P 9,333.33 per month. If you say that you will just pay P 9,333.33 per month at 3.5 % per month anyway that is based on “diminishing interest” (This means that your interest goes down if your principal goes down)as opposed to paying a “fixed interest” you will still end up with P 14,822 in debt at the end of the year. If you pay a fixed interest of P 9,333.33 at the end of the year you will end up with zero credit card debt. (I would love to post the table I made, but unfortunately I cannot do it here so just email me if you are interested)

But if you pay only the “minimum” per month, what will happen to your credit card debt ? You will see that at the end of 12 months you still owe your credit card company P 92,585.00. (This will be discussed in a different post) That is why it is not wise to pay only the “minimum.”

There are several things to remember about “balance transfer”:

1.) Balance transfer is subject to approval by your credit card company.
2.) The maximum amount you can avail of for balance transfer is your credit limit. Let’s say you have P 100,000.00 and you used up P 50,000.00 more or less you can balance transfer about P 50,000.00. However take note, this is not guaranteed. This is still subject to approval by your credit card company.
3.) Make sure you pay the fixed monthly installment. In our illustration above, pay the P 9,333.33 religiously, otherwise it will be made subject to the 3.5 % monthly interest. Don’t be tempted to pay only the “minimum” since you will be charged with 3.5 % interest over and above the 0.99 % interest. (This is double jeopardy !)
4.) It is advisable not to use your card when you are using it for balance transfer in order to avoid confusion and to make sure that you can make a priority to pay the installment for balance transfer instead of paying other credit card debts.
5.) Resort to balance transfer only when you cannot avail of the first option. The first option (Get a loan with a lower interest rate) is still the best.

Refinancing with Home Equity Loans

If you have lived in your home for a reasonable amount of time, you may be considering refinancing.

Refinancing can be done in a few different ways. One of the most popular recently has been the home equity loan.

A home equity loan is a loan used to pay off your existing mortgage at a lower rate.

Also, when refinancing with a home equity loan, you have the option of liquidating some of the equity you have established in your home through monthly mortgage payments and appreciation.

Lets suppose you owe $125,000.00 on the mortgage to your home, but your home is worth $200,000.00. This means you have $75,000.00 worth of equity that you can liquidate.

Realistically, you could get a home equity loan for $150,000.00, pay off your existing mortgage, and have $25,000.00 left for home improvement, a new car, college tuition, etc.

Home equity loans also come in the form of a line of credit, better known as a home equity line of credit.

The difference between a home equity loan and line is that the line comes with a variable rate, which means it will adjust with the prime rate, so be careful when deciding.

The home equity credit line can also be re-tapped once it has been partially paid off, or paid off in full, which makes for much convenience.

Before deciding on how you want to go about doing your refinancing, be sure to educate yourself as much as possible about the mortgage industry.

Also, shop around for the best rate and program that fits your needs and budget. The mortgage industry is a competitive one, so let them fight for your business. Good luck.

Refinancing With Cash Out

If you have lived in your home for a reasonable amount of time and have acquired equity through appreciation and monthly mortgage payments, you may be considering liquidating some of that equity by refinancing with cash out.

Refinancing with cash out in laymen terms simply means to refinance your existing mortgage and borrow some of the equity in the home to be received in a lump sum at the closing table.

People refinance with cash out all the time and for a variety of reasons. The number one reason being to get a lower rate on their mortgage. The cash out scenario you can use for all sorts of reasons. Such as debt consolidation, buying a new vehicle, home improvement, college tuition, family vacation, etc.

If you are seriously considering refinancing with cash out, you may want to consider shopping around for a mortgage. By shopping around you can compare rates, and fees.

Also, be sure to educate yourself as much as possible. Take the time to learn as much as you can about the mortgage industry, so when the time comes to dealing with a loan officer you will have a strong grasp on your options.

Once you are done educating yourself, you will be able to track down a mortgage company to assist you with your cash out refinance.

Once you begin your search, don’t limit yourself to one company, talk with up to four at the very least. Allow them to assess your scenario and do inform them that you are shopping around.

By letting the loan officer know that you are shopping around, it will be in their best interest to offer you their best rate to prohibit you from going to their competition.

Essential Tips on How to Get a Credit Card

Banks and their marketing associates and divisions are vying with one another to capture a thick slice of the “credit card pie.” Offers by phone and mail of free credit cards, pre-approved credit cards, cards with special bonanzas, money back schemes, low introductory rates, and umpteen other perks pour in tempting you everyday.

A credit card is just a form of borrowing that does not come free. Credit terms, interest rates, fees and more can lay a stress on your bank balance. Credit cards are a temptation to spend now and pay later. What invariably happens is that people spend more than they can handle.

Informed consumers must always weigh carefully the pros and cons and compare different options before deciding on a credit card.

Before you decide find out

The advantages of a credit card are that it is a safe alternative to cash. Prevents loss as well as theft of cash. Using a card wisely can build a good credit history which helps when you need a loan or subsidy. It is useful in emergencies like accidents, urgent hospitalization, and unavoidable circumstances like natural calamities and so on. It grants a breather and gives you time to pay the bill. Some memberships offer travel or accident insurance to the card owners at no cost. They also offer privileges like discounts at restaurants, shopping malls, and holiday packages. 

The other side is that you can get carried away and live beyond your means, ultimately falling into debt.

To be eligible you need:

  • To be at least 18 years old.
  • Have some income or the backing of credit worthy parents.
  • Have an operational bank account.
  • A telephone.
  • A good credit rating. Your monthly expenses must not equal or exceed your income. Ideal expenses must account for approximately 50% of your income.
  • To get a Visa or Master card your income must exceed US$ 12,000 a year. Or, you need to apply for a secured credit card where you pay upfront a certain amount of money as security deposit.

There are many kinds of credit cards to choose from. Unsecured standard and classic cards are those with a credit limit of US$ 2000 and generally charge higher interest rates and offer lower or less favorable terms than the platinum and gold cards. Unsecured platinum and gold cards are for people with high credit ratings, and the limits for these cards are between US$ 2000 to US$ 100,000.

Here are a few links that will give information and opportunities to apply for cards online:

  • Visa at www.usa.visa.com/?country=us&ep=v_gg_new provides information, gives tips, and has listed a number of financial institutions that offer Visa cards and a wide range of services. One can apply for a card online.
  • MasterCard International at www.mastercard.com/index.html is comprehensive with information, advice, and options of choosing and applying for a card online. They have an online form which when filled will give information of which card would be ideal and a channel which provides instant comparison of various card options.
  • CreditCards.com at http://www.creditcards.com/ has articles, FAQs, a site map, and online application channels.

Tips:

  • Pick a card because it has the lowest APR.
  • Pick a card because all its terms and conditions have been carefully vetted by you. Read the fine print.
  • Never pick a card because it is free for a year or life.
  • Do not choose a card because it offers a low introductory rate.
  • Do not choose a card because it has a cash back policy or great rewards programs.

Choose wisely and live debt free.

5 Tips for Repairing Bad Credit

Almost all of us are fond of overspending! We buy things we don’t really need. Once we see something that catches our eyes, we automatically buy it – often without even thinking if we still have money or not.

People usually do this in order to please themselves. And lots of them have their own credit cards as a reserve once they run out of cash. They tend to spend a large amount of money in order to serve their caprices or to make them feel better about themselves. Unfortunately, this never really works, and it causes more damage than it cures.

Almost everybody has a credit file, maintained by a credit reference agency. Many people have bad credit facts on their files, such as defaults and bad payment history. This means that when these people apply for credit, such as loans, mortgages, credit cards, car finance or even for a simple bank account, they may be turned away. 

Sometimes these people are not even aware of their credit information and credit files, which cause them to have a bad credit. 

Having bad credit can adversely affect every aspect of your life. A low credit score means severe financial limitations and difficulties. As if this is not enough, you will also have handfuls of credit councilors and other so called money managers trying to take even more from you with their debt consolidation plans that promise to “cut your payments in half”, “save you thousands”, or our personal favorite – “get you out of debt with the click of a mouse”. 

If only our computer mouse had the debt relief magic that those bad credit spam emails promise. Although getting out of debt can’t be done with a click of a mouse button, it’s probably not as difficult as you think.

If you are in this kind of predicament, it is imperative for your financial stability that you do everything you can to repair it.

Now, you might be thinking exactly what is bad credit repair?

“Bad Credit repair” is a common term often used to describe a systematic process of rehabilitating an individual’s creditworthiness, or financial credit reputation. 

It is a process that you can carry out yourself, and sometimes the steps you can take are simple. However many people find credit repair a difficult and discouraging procedure. 

This process is usually initiated by obtaining copies of your credit report, reviewing the credit report for errors, omissions, and misleading information, and requesting corrections to such information by means of a formal dispute. 

If you are worrying too much about your credit, conquer that feeling! No matter how bad your credit is, you can take the following steps to make it better:

1. Pay all of your bills on time. Decide if you have the income to meet all of your obligations. Remember, late payments (payments that are 30 days late or more) have a negative effect on your credit rating.

2. Lessen the number of credit cards that you have. This will reduce the tendency to overspend. Contact your creditors about your plan and close your other accounts. 

3. Avoid bankruptcies. Bankruptcy may not the end of the world but it will be with you for years. It will stay in your credit report for at least years and hamper your ability to get credit in the future.

4. Request in writing that your creditors reduce the credit limits on your accounts to lower your amount of available credit.

5. Monitor results and stick to your plan. Review your file every few months to make sure that any errors that you have disputed have been corrected. After a period of time inquiries will no longer count against you provided you haven’t been applying for credit. 

These steps can help anywone with bad credit. If you are in that situation, don’t be troubled. Bad credit can almost always be improved or corrected. JUST:

  • avoid overspending
  • establish a realistic budget
  • get out of debt now
  • build a financial cushion
  • read and understand your credit report
  • get mistakes on your credit report fixed
  • get positive information added to your credit report
  • negotiate with creditors

Set up your plan and stick with it!