Thursday, August 18, 2011

Should I Buy a House Because the Rates Are So Low?

By: John Ulzheimer

Home values have plummeted across the county. Mortgage interest rates continue to hover between 4 and 5%, a historical low. Both seem to suggest it's a good time to buy a house. So is now the time to pull the trigger on a new mortgage?

There are a few things you should consider before you start looking for a house. First, how comfortable would you be if you were to become "upside-down?" That means you would owe more on the home than it's actually worth.

Property values continue to fall and there's really nothing to indicate they will stabilize anytime soon. Point being, you might be buying on the way down rather than at the bottom or even on the way up. Today some 28% of homeowners are in that same position and trust me, most of them wish they weren't.

Second, don't buy a house simply because the rates are low. Too many people are focusing just on the interest rates and that's a bad idea. Remember, when you borrow $250,000 to finance a home, you still owe someone $250,000. Just because the loan has a very low interest rate doesn't make you any less in debt than someone who has a horribly high interest rate.

If you're going to buy a house then do so because you want the home, you love the neighborhood, the school district is good, or you're tired of renting. Don't do it just because the rates are low. Think of the low rate as being the cherry on top, not the ice cream on the bottom.

Just because you're hearing advertisements for incredibly low interest rates it certainly doesn't mean that you'll actually qualify for those rates. You better have killer FICO credit scores and you better have them at all three of the credit reporting agencies. Remember, mortgage lenders pull all three of your credit reports and all three of your FICO scores and then use the middle of your three scores on which to base their decision.

And finally, you may have to pony up a 20% down payment to get those really low rates. The world of mortgage lending has changed dramatically since the end of 2007. There are no more "liar loans" (when you would tell someone how much you made and nobody verified the accuracy). There are no more "110 LTVs" (loan that were 110% of the appraised value of the home). Sanity has worked it's way back into the mortgage lending environment, which means better credit is required and income has to be, well, real income.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.

Wednesday, August 10, 2011

Majority of Americans Do Not Have Money Available To Meet An Unplanned Expense

This article is courtesy of the National Foundation for Credit Counseling.

The National Foundation for Credit Counseling's (NFCC) July online poll revealed that 64 percent of Americans would utilize a source other than their savings account to satisfy a $1,000 unplanned expense.

The largest number of close to 2,700 respondents, 36 percent, said they would tap their savings account to fund the unplanned expense. Utilizing rainy day funds for an emergency is exactly why a person saves, to protect them against the unknown. However, the remaining 64 percent are in a much different situation, living on a slippery financial slope.

"Without adequate savings, consumers have poor resolution choices when an emergency arises," said Gail Cunningham, spokesperson for the NFCC. "People often say that can't afford to save, but the truth is that they can't afford not to."

The survey revealed that to resolve the problem, 17 percent of respondents indicated they would borrow the money from friends or family. Asking those close to you for a loan can be awkward, and potentially negatively impact the relationship. Further, it can lead to "serial borrowing," with the borrower always leaning on someone else to solve his or her financial problems.

Perhaps even more troubling is that another 17 percent said that they would neglect existing obligations in order to satisfy the emergency need. This option can easily snowball out of control and have serious consequences. Skipping the rent or mortgage payment and neglecting to pay credit cards or loans will cause late fees to be added to the debt, putting negative marks on the credit report, resulting in a lower credit score. Well-meaning individuals who are already living on the financial edge may never be able to catch up, exacerbating the problem for months or years down the road.

The next highest number of responses was in the category of selling or pawing assets, with 12 percent choosing this option. Disposing of unwanted or unused items can be a positive way to raise funds. However, no one ever wants to be in a position of having to sell items at a bargain basement prices out of desperation. If you have items you can do without, the time to liquidate is when you're in charge of the sales price, putting the proceeds into a savings account.

The resolution options of taking out a loan or obtaining a cash advance from a credit card were each selected by the least number of respondents, nine percent. The low number of individuals choosing these categories could indicate a lack of access to credit, which might be a good thing, as taking on new debt would put stress on existing obligations, the last thing someone in a financial crisis needs to do.

"Selecting any option other than taking the money from savings should be a red flag," continued Cunningham. "If saving money has always seemed out of reach, there is no better time than now to get to the root of the problem and protect yourself, your family and your financial future."

If you need help finding hidden money in your budget, reach out to a trained NFCC Certified Credit Counselor at Family Services, Inc., a NFCC Member Agency serving South Carolina. To be automatically connected to the NFCC Member Agency closest to your, dial 800.388.2227, or go online to www.DebtAdvice.org. For help in Spanish, call 800.682.9832.

The July poll question and results are as follows:

If you needed $1,000 for an unplanned expense, where would you turn to find the money?

  1. Your savings account= 36%

  2. Take out a loan= 9%

  3. Borrow from friends or family= 17%

  4. Cash advance on your credit card= 9%

  5. Disregard other monthly expenses= 17%

  6. Sell or pawn assets= 12%

Note: The NFCC's July Financial Literacy Opinion Index was conducted via the homepage of the NFCC Web site (www.DebtAdvice.org) from July 1-31, 2011 and was answered by 2,667 individuals.

The National Foundation for Credit Counseling (NFCC), founded in 1951, is the nation's largest and longest serving national nonprofit credit counseling organization. The NFCC's mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services. NFCC Members annually help over three million consumers through close to 800 community-based offices nationwide. For free and affordable confidential advice through a reputable NFCC Member, call 800.388.2227, (en EspaƱol 800.682.9823) or visit www.nfcc.org. Visit the NFCC on Facebook: www.facebook.com/NFCCDebtAdvice, on Twitter: twitter.com/NFCCDebtAdvice, on YouTube: www.YouTube.com/NFCC09 and on their blog: http://financialeducation.nfcc.org

Tuesday, August 9, 2011

Downgrade Your Debt

This article is courtesy of Feed the Pig. Copyright 2011 American Institute of Certified Public Accountants.

Credit and debt are two of the nation's hot topics this year. And, as you may know, the two are closely related. Last Friday, Jme McCoy asked via Facebook, "In trying to pay off credit card debt, is it better to pay off the highest interest card first or the highest balance card first?" Here is the answer, along with other tips for managing your credit and debt.

  • Minimize interest. In general, if you have more than one credit card, you want to pay off the card with the highest interest rate first. Pay the minimum payment due to your lower interest rate card(s) and then put the rest of your payment resources toward the card with the highest interest rate. This strategy will help minimize your interest expenditure.

  • Max it out. You payment, that is. You should always try to pay more than the required minimum payment. Often the minimum payment due is barely more than the finance charges that month, which means consistently paying the minimum can lead you to carrying your balance for years and barely putting a dent in it.

  • Think before you close. When working to get out of debt, many immediately want to close their credit cards once they are paid off. Although it can hurt you to have too many credit accounts, cancelling a credit card could negatively affect your credit utilization rate, a major component in the calculation of your overall credit score. Your credit utilization rate is the amount of credit you are currently using in comparison to how much you have available. If you close one credit card while still carrying a large balance on another, it can actually lower your credit score, since you appear to be close to maxing out your total available credit.

  • Know your limits. Most credit card companies report your balances and payment history to credit reporting agencies, but some may not report your credit card limits. When your credit limits aren't reported, as is sometimes the case if you have no-limit credit cards, your scores may drop. This is because without knowing your credit limit, most credit scoring models don't know how to accurately calculate your credit utilization rate; the lower your credit utilization rate the better.

Remember the sooner you pay off your credit cards the better. Check out this Credit Card Pay Off Calculator to help determine what it will take to pay off your balance, and what changes you can make to meet your repayment goals. Visit http://www.feedthepig.org/ for more money saving tips.

Learn how to you can downgrade your debt through Family Services, Inc.'s Debt Management Program by clicking here.