Category Archives: Finance

How to Escape Your Mounting Credit Card Debt Financial Situation

Posted on October 13, 2008 | 4 Comments

Like we talked about in our previous post Consumer Debt Worst Offenders: Banks, Advertisers, and Advisors, there’s a lot of financial entities out there more than willing to help you part with your money. It’s big business and consumers are getting hit with the worst of it. So what can we do to not be a financial victim?

The best option is always prevention. The easiest way to live free of debt is to not get into debt in the first place. Even if you’re already up to your neck in debt, there are ways to climb out and ways to reduce the amount of debt you currently have – you just need to have the right strategy.

Always pay the full balance of your credit cards each month when you receive your credit card statement. Otherwise, don’t use your credit cards! If you think you’ll be unable to pay the balance off in full when you get the statement in the mail, then you don’t need that item or service you were thinking of buying. If you think you won’t be able to pay off the balance yet you still feel that pressure inside you wanting to buy that item ask yourself what’s more important, your financial future or more stuff in your life?

If you aren’t disciplined enough yet to be able to pay your full credit card balance each month and not spend more than you can a month on credit then there’s only one option for you. Grab a scissor, take all your credit cards, cut them into miniature pieces, and throw them in the garbage. Just keep that one emergency credit card mentioned in the previous article and throw out the rest.

If you’re deep in debt, you know you won’t pay off your balances each month, yet you don’t want to cut up your credit cards then the reality of the situation is that you’re heading straight down the path to financial disaster. You have to be able to stop this vicious cycle of credit card indebtedness.

The way to getting control of your credit card spending is to learn to associate your present negative financial situation to the virtual slavery of credit card debt. Take out your wallet or purse, pull out all your credit cards and lay them out in front of you. Realize that these credit cards are like keys locking you into a virtual cage of financial prison. Visualize all the negativity that these cards have brought into your life due to faulty spending habits. Remember the debt that these credit cards have caused; remember the huge monthly payments that seem to keep growing and growing. Grab the nearest scissor and cut these cards up. This is the first step toward financial freedom.

Once you’ve destroyed your credit cards, find yourself a no-fee credit card with great rates so you can start on your new financial strategy of Pay-It-In-Full. Now you can transfer as much of your old credit card debt into this new card and take advantage of the usually very low fees for the first year or so (sometimes you can even find no interest credit cards that offer this for the first twelve months). This can significantly drop your credit card monthly payments and allow you to start paying down the total balance as well as everything you used the card for in that month. This allows you to pay more of the principal and less of the interest. Just be aware that this is a true transfer and not a cash advance which usually carries high interest rates.

There are also many credit cards out there that offer great rates if you use that company’s services or products. For example, the Health Care One Mastercard allows users to save from 20% to 40% on health care and physician visits, the Amazon.com Rewards VISA Credit Card gives you points that can be redeemed for gifts (including flight tickets, airline miles, hotel stays and more), and uStudent Credit Cards offers credit card matching for students to get credit cards that meet their needs.

Cashback bonuses can also sometimes be a big incentive to use a particular credit card that you know you’ll be paying in full anyway when the statement comes. The Discover Business Card gives you 5% cashback bonus on office supplies, 2% cashback bonus on gas and up to 1% cashback bonus on all other purchases. Another credit card with an interesting premise is the Discover Motiva Card that pays you a full month’s interest for paying ontime and with no annual fee.

Whenever you’re applying for a credit card make sure to read the fine print and never sign up for a credit card when you don’t understand the terms. Call the company and find out directly from the company representatives.

Bottom-line in improving your credit card financial situation is self-discipline. Only order a new credit card when you’ve paid off your old ones via balance transfer. Once you’ve done this, cut up the cards and cancel the account in writing with a subsequent phone confirmation.

Keep yourself disciplined and you, not the credit card companies, will be in control of your finances.

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Consumer Debt Worst Offenders: Banks, Advertisers, and Advisors

Posted on September 27, 2008 | 9 Comments

One of the biggest problems of this century is consumer debt. There’s never been a time like the one we’re in right now when families have such a financial burden hanging over their heads.

The truth is that 75% of Americans are in debt – with an average debt in the household of $35,000! It gets worse – Americans owe $2,000,000,000,000 (that’s 2 trillion dollars) in non-mortgage consumer debt. That amounts to about $7,500 in consumer debt for everyone in the United States. With 500 million credit cards issued by banks to Americans, there’s more than $600 billion in credit card balances out there. Of course this isn’t just an issue for Americans, it’s a world-wide challenge we’re facing here. Most people think the only way they can get out from under their massive consumer debt is by hitting the lottery or somehow inheriting a huge amount from a long-lost rich relative. Problem with the lottery is that lottery odds are about 18,000,000 to 1. Compare this to 4 golfers hitting a hole-in-one on the exact same hole – the odds of this are only 17,000,000 to 1.

Most people are out there feeling so strangled by their debt that they feel like the ever-rising mountain of debt they have will never disappear. A lot of people feel like their drowning – and that they’ll paying bills and consumer debt payments till the day they die or they hit bankruptcy, only to start the cycle again. If you’re in this situation, this doesn’t have to happen, but you have to act now!

If you’re in a debt situation, what you need is a systemized plan to pay off your debt. It may take you a few years to pay it all off if you have a lot of debts and loans to pay off – but just imagine how good it’ll feel to go to sleep knowing you won’t have to worry about your bills anymore or owing money to other people. You only have to think about your regular expenses like food, insurance, and utilities – and you can spend your income the way you want to, not the way your creditors want you to!

Imagine that sense of freedom you’ll have once you’re out of the virtual slavery of consumer debt. You’ll have the freedom to buy what you want, when you want, however you want.

There are many reasons why average people like you and me get locked into the destructive cycle of consumer debt. In fact, it may surprise you to know that there are a lot of people on this Earth whose job description includes getting people into debt. Now, I’m not saying at all that these are bad people, that they’re trying to get you in debt for malicious reasons, or anything like this. But just understand that the organizations they work for make a profit by getting people into debt. You don’t have to be a victim – you just need a strategy.

These people wanting to get you into debt are three, with a neat acronym to categorize them: BAA. Just like the sound of consumers constantly consuming products like sheep, the sound “BAA”. This stands for:

  • Banks (and Lenders)
  • Advertisers (Marketing)
  • Advisors (Financial Advisors)

Banks

Banks are in business because they make money. They make this money by doing everything they legally can to make a profit – with no regard to your own personal best interests. The lending industry is based on this – of course, individual bank tellers or bankers are usually great people – but the business itself revolves around pure profit. This profit by banks and lenders is attained through major interest charged to you and the little fees that gnaw at you little by little. The goal is to get you to be a debt slave to them. It’s all about the monthly payments on a regular basis from you to them – and then from your heirs when you pass away.

Credit cards are a huge money-maker for banks. They’re given to you with small monthly payments on purpose. This is so you’ll never pay your cards off. It’s in the banks best interest for you to never pay your credit cards in full. If you only pay the minimum payment every month, the average credit card would take 15-20 years to pay in full. Even worse is that you’ll end up paying about 4x what the item originally cost, due to the high credit card interest fees. Think about this one: a brand new LCD television costs $1500. You purchase it from a local consumer electronics store with a minimum monthly payment of $30 a month with an interest rate of 20%. This means it’s going to take you 9 years to pay this off if you pay the minimum every month. Of course, that TV set isn’t going to be worth anything near than $1500 and will most likely not even be functioning while you’re still trying to pay it off. It’s also going to cost you more due to the interest – you’ll have paid $3243.24. That’s the power of the bank using small monthly payments with a high interest. The moral is this: be careful when banks try to seduce with low first year credit card interest rates or easy monthly payment financing.

Residential real estate debt is one of the biggest debt burdens on families today. Most households take out 30 year loans on their home. This is great for the low monthly payments. However, know that the typical homeowner moves every 7 years on average. The worst time to be paying your mortgage is in the first few years, as the borrower is paying almost 100% interest. The longer your mortgage, the more the amortization schedule favors the lender in the first few years of your loan. The way you can win is by reducing the length of your mortgage – this increases the amount you’re paying on the monthly payment that’s going to the principal instead of the interest. If you’re going to be taking on a mortgage make sure to run the numbers to see how much you’d be paying monthly on a fixed 15-year loan term as opposed to a fixed 30-year loan term.

Advertisers

Most consumer advertising is made for one thing: to get you to need whatever it is being advertised. It’s everywhere. You turn on the television, the non-stop McDonald’s commercials are there. You turn on the radio, you hear the commercials telling you the perfect gift for your husband or father on his birthday is a Rolex watch. You open the newspaper and you see the ads for the latest sale at the local Lexus dealership.

A lot of times, these ads really make you think you need – desperately – that item that’s being advertised. How about the slogan: “Charge it!” Of course, everything has the “flex pay” option, with “easy monthly payments”. Almost all commercials for luxury commercials base themselves on a few psychological topics. These center on making you feel “lesser than” or “not as cool” if you’re not using that company’s products (think the PC vs Mac commercials). Or they base themselves on the premise of: “Don’t you deserve this item? You’re worked hard enough, reward yourself with this!” It’s all about consume, consume, consume and spend, spend, spend and want, want, want.

What you want to do, if you want to live without debt in your life, is to only buy what you can pay for in cash. What you can actually afford. Don’t fall for the “flex pay easy monthly payment plans”.

Advisors

Financial advisors, generally speaking, are salespeople. Many times these financial advisors are in worse financial situations than the clients they work for! A lot of the advice these advisors give their clients is the same regurgitated material that’s handed out to them by big companies and it’s the same misinformation given for years. For example, don’t be fooled into thinking that your mortgage is a pure investment and is an asset. Sure, the equity is extremely valuable. But I find it hard to accept that something is an asset when you have these huge monthly payments with massive interest! Over the course of your mortgage, this ‘investment’ is costing you big if you purchase your home without having a solid financial foundation in place. Don’t be fooled that the tax benefits are great on getting a huge home loan – no consumption debt is ever a good thing.

I’ll give a piece of advice that’s usually contrary to what most financial advisors suggest – and I know there’s going to be people that disagree with me. The first thing you should do when you get any sort of surplus cash is to pay off your consumer debt. You do not have the luxury of storing 3-6 months of emergency funds in your bank like most advisors suggest. Once you get your consumer debt under control, then you can take the safe route. But if you’re struggling with mountains of debt it makes no sense to hold a reserve fund. If you want to feel safe, keep a credit card that has no annual fee and keep it just for a true emergency – but make sure to only use it in case of emergency. Remember that financial advisors usually work for big corporations so you can guess what’s top priority for them – yes, profit is number one, not you. These advisors are usually getting big commissions for recommending you to their company’s products.

The point is to make conscious buying decisions. Don’t let other people control your financial future whether directly or indirectly – you always have full control over the direction of your personal finances.

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Inside the Reverse Mortgage: Is It Right for You?

Posted on August 5, 2008 | 2 Comments

Are you a senior citizen homeowner or know one personally? Do you consider yourself “house rich” but “cash poor”?

There’s been a lot of talk on television, radio, and print about the power of reverse mortgages. Some people say it’s the cure to your financial troubles. Other’s say that reverse mortgages make your financial problems even worse. So who’s right? Is a reverse mortgage really the answer for seniors?

You may remember my previous post on the topic of reverse mortgages titled Reverse Mortgages: How Much Money Can I Receive. I covered a question posed by one of my readers and I talked about the 3 parts of the reverse mortgage formula, what happens if you outlive the reverse mortgage, and some helpful tips – I suggest you read that post to get some background on reverse mortgages.

Is a Reverse Mortgage the Correct Option for You?

Calculator Image: Talking Clean About Reverse Mortgage Leads to Money

To keep it simple, reverse mortgages may be a helpful option if you’re at least 62 years old, you need tax-free income without any monthly payments, and you plan to stay in your home for at least 5 years.

The reverse mortgage is a mirror image opposite of an amortized mortgage which would require you to make monthly payments over 15-30 years. The reverse mortgage actually pays money whenever it’s needed by you – plus, you don’t have any repayment obligations unless you sell the house or condo, you move out for more than 12 months or you pass away.

Now, if one of those 3 events happen (selling, moving out, death), the reverse-mortgage principal and accrued interest matures and must be paid in full. If you pass away, then your heirs have one of 3 options:

  • They can pay off the reverse mortgage and keep the equity that remains
  • They can get a new mortgage loan to pay off the reverse mortgage
  • They can sell the home

Mythbusters: Reverse Mortgage Ownership

I’m going to mythbust a common thought about reverse mortgages right here. Many people think that the reverse mortgage lender owns the home. This is not true! Your lender, if you do a reverse mortgage, can never force you to sell or move out of your home. Reverse mortgages are non-recourse. A non-recourse debt is a secured loan that has been secured by a pledge of collateral, typically your home, but for which you are not personally liable. So if you default on this loan, the lender/issuer can seize your home (the collateral), but the lender’s recovery is limited to only your home. Let’s say your property is insufficient to cover the outstanding loan balance. Well, that’s tough luck on the lender as you are not personally liable.

Reverse Mortgage Eligibility and Age Advantages

You’re eligible for a reverse mortgage if you, as the homeowner, are at least 62 years old. If you’re going to have a co-owner, then that person must also be 62, otherwise your residence will not be eligible unless that under-62 person signs a quitclaim deed conveying their interest to you. Reverse mortgage eligibility is always based on the age of the youngest co-owner.

If you’re of a mature age, then your advanced age may be a advantage for you as a borrower. Your life expectancy will determine the amount you can receive. An 85-year-old homeowner will almost always receive a larger reverse-mortgage payment than a 62-year-old would.

Reverse Mortgage Choices: Monthly Payment, Lump-Sum Payment, and Credit Line

If you decide to go with a reverse mortgage, you have 3 ways to receive your money:

  • Credit line for future borrowing (not available in Texas)
  • Lump sum payment
  • Lifetime monthly income (also known as tenure)

You can select a combination of any of these three options. For example, one-half lump-sum payment, one-fourth credit line, and one-fourth monthly payments. You also have the freedom to change your choice just by calling up the loan servicer.

Reverse Mortgage Details

Keep in mind that a reverse mortgage, due to its nature, has a growing balance. This is due to the accrued interest and principal advances. Thus, it is recorded legally as a first mortgage.

If your home already has a first mortgage on record, then you can pay that off with a reverse mortgage lump sum payment. However, if your existing first mortgage plus any liens on the home such as a home equity loan or IRS tax lien exceed 40% of your property’s market value, then your property will not likely be eligible for a reverse mortgage.

The cash you’ll receive from a reverse mortgage depends on several factors and eligibility criteria:

  • Age of the youngest homeowner (minimum 62 years old)
  • Adjustable interest rate when the reverse mortgage is originated (reverse mortgages always use adjustable interest rates)
  • Lender’s appraised market value of the home
  • Lender’s maximum mortgage limit

Reverse mortgages are not available for you if you are currently in bankruptcy proceedings and your property must meet minimum standards.

Reverse Mortgage Lenders: How Much You Can Get With Each

FHA has the lead in this with over 90% of the reverse mortgage market controlled by them. But if you go with FHA know that their lending limits are very low! If you live in an expensive high-end community you will likely be very disappointed with what they’ll give you. FHA does have higher lending limits available through the Fannie Mae “Home Keeper” reverse mortgage program – up to $417,000. Fannie Mae (FHA) also has a “reverse mortgage for home purchase” program where you can buy a home as a senior citizen and you won’t have to make any monthly payments.

The Financial Freedom Plan (FFP) might be the best choice for you if you need higher lending limits. Their “jumbo cash account” reverse mortgage has no maximum limit.

Whichever way you decide to go with reverse mortgages, talk it over with your co-homeowners, your possible heirs, and a respected legal professional so you know your options.

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Posted in Buyer Tips, Finance, Real Estate Investing

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