The Debt Management Expert

Pros of a 30-Year Fixed Mortgage

With interest rates at a historical lows, consumers are racing to refinance their homes. In many cases consumers reach for the traditional 30-year mortgage. This loan locks in the incredibly low rates we see today for thirty years and in most cases gives the consumer a much lower payment than they had before. This sounds great because with rate where they are there is not much lower they can go and certainly over the next 30 years we should expect rates to rise perhaps even dramatically if inflation were to rear its head. It certainly sounds like the 30 year fix mortgage is a great alternative to any adjustable rate loan offer that will most likely result in higher payments and interest to consumers in the future.

Wow! Look at the Interest You Pay over 30 years

What many consumers don’t realize is just how much they pay in interest over the term of their loan. Let’s take a $100,000 loan at 4.25% interest rate (Interest rates will vary based on credit and other factors). Over the 30 year term you pay $77,098 in interest on top of the $100,000 you borrowed. That is a 77% premium to your original loan amount. If we take a bigger loan say $625,000 you end up paying a whopping $481,250 in interest which is the same 77% premium to your original loan amount.

The 15-Year Fixed Mortgage – A Simple Trick

Now if you don’t like the idea of paying your bank all that interest here’s a simple solution. Consider a 15 year fixed mortgage. There are two big advantages to a 15 year fixed mortgage. First, the term is half as long so you will pay less interest because of this time element. Second, many lenders offer lower rates on 15 year fixed mortgages so you will pay less interest because of the lower rate.  Let’s go back to our examples. The $100,000 loan for 15 years now has an interest rate of 3.4% (Again interest rates will vary based on credit and other factors but for many lenders you will see a nice difference). In this case over the 15 year term you pay $27,797 in interest, a $49,302 savings in interest. If we take the bigger $625,000 loan the interest you pay is now $173,730, a $307,520 saving in interest.

The Price you Pay to Pay off your Loan in Half the Time

The 15-Year fixed mortgage is a great way to reduce the interest you pay to banks but is still is not for everyone. There is a price you pay to reduce the interest you pay and to have your home free and clear in half the time. One of the down sides to a 15 year mortgage is that your payments will be larger on a monthly basis then the 30 year mortgage because you are paying the loan down in 15 years vs 30 years. So in our $100,000 example you pay $492 per month with the 30 year mortgage and $218 more a month or $710 with the 15 year mortgage. In our $625,000 example you pay $3,074 per month with the 30 year mortgage and $1,363 more a month or $4,437 with the 15 year mortgage.

Related articles

• Fixed mortgage rates hit new lows. Does anyone care? (csmonitor.com)
• Rate on 30-year mortgage down to record 3.91 pct. (sfgate.com)

Overview
Are you unsure of how to consolidate your debt and whether debt consolidation is the right approach for you? When you consolidate your debt, you take out a loan to pay off several other debts. This allows you to consolidate the money you owe into one payment and manage your debt more effectively.

Although credit is much harder to come by during these challenging economic times, there are still a number of ways that you can potentially consolidate your debt, such as:

• Credit cards debt consolidation: If you can pay off the balance during the introductory rate period, consolidating your credit cards makes a lot of sense. Make sure to read the fine print carefully before you take any action. Sometimes there are fees associated with the transfer. Also make sure you know when those promotional interest rates end.

• Home equity loans: If you are a homeowner with some equity established in the property, a home equity loan may be the perfect solution for you to consolidate your debt. While they are not as easy to obtain as before, the terms of a home equity loan are very favorable from lenders, with payments that are usually tax deductible. The terms of the line are variable or fixed and can often extend for 30 years. The only clear downside to consolidating your debt in this manner is that your collateral against the loan is the property you own.

• Retirement funds: Considered to be an option of last resort, the interest is rarely tax-deductible, though you are paying interest to yourself instead of the bank. If you are unable to pay it back to the fund within a specified period, you may incur taxes and penalties from the IRS.

• Whole life insurance: If you have a whole life policy that pays an annuity premium to you, you can borrow against its value. You have the option of paying or not paying it back, however if you do not repay the loan, it will be deducted from the total value, thereby of the premium, thereby lessening what those who inherit the value of your policy will receive.

• Credit union: Credit unions generally have lower fees and lower interest rates on loans. It is worthwhile to find out if you can join one.

• Nonprofit consumer credit counseling agency: “What they often will do is, rather than consolidating debt, you pay them a fixed amount and they pay it out to your creditors. It’s a kind of discipline that can be helpful. It’s enforcing a change in spending habits. For the person who is serious about getting out of debt, that’s a solution.”

• Primary lender: In the same way that you might approach your primary lender about a loan modification, you might also consider using the same tactics in this case to renegotiate the terms of your loan so that it is more favorable to you.

Should You Consolidate Debt?
Whether or not you choose to consolidate your debt is a personal decision that specifically depends on your financial situation. Debt consolidation offers many pros and cons:

Pros of Debt Consolidation
Debt consolidation should potentially save you money through lower interest payments and the likelihood of fewer late fees due to the reduction in the number of payments to distinct lenders. Debt consolidation should also help you to rebuild your credit score if you can keep up with the monthly payments due under the revised terms. Debt consolidation should also make it easier for you to organize your finances.

A debt consolidation loan could be helpful if you ran up your credit cards while you were in business school, or if you have a number of high interest student or car installment loans. This will allow you to roll this high interest debt into one manageable payment.

Cons of Debt Consolidation
Debt consolidation is not the right answer in every case. Debt consolidation does not provide a remedy for credit problems. You may have a difficult time finding a fair and reasonable interest rate. If the rate on your new loan is not any better than the rate you pay on your current loans, consolidating your debt would not make much sense.

It can also take longer to pay debts off. When you consolidate debt, you still end up owing the same amount of money. The main difference is usually the length of the term. This could leave you paying more in interest if the term is really long. The best way to combat additional interest payments is to pay down the principal on top of your monthly payments, but doing this may be beyond your means.

You should contact a financial advisor or accountant to evaluate the pros and cons of debt consolidation and whether the option is right for you.

Overview
Loan modification is a process whereby a homeowner’s mortgage is adjusted and both lender and borrower are bound by the new terms. The mortgage terms are adjusted because the borrower is unable to make payments under the original agreement or because the value of the property is worth less than the borrower owes on the mortgage.

When homeowners fall behind on their payments, they are faced with a few very tough choices: foreclose, deed in lieu of title, short sale or loan modification. Loan modification is the only one of these options that does not force the borrower to vacate their home. Loan modifications are designed with three basic objectives in mind:

• Offer proactive workout solutions designed to address borrowers who have the willingness but limited capacity to pay.

• Provide borrowers the opportunity to stay in their home while making an affordable payment for the life of the loan.

• Ensure investor interests are protected; loan modification must always result in a positive net present value outcome for the investor; the cost of the loan modification must be less than the estimated cost of foreclosure.

Banks will allow certain changes to be modified for borrowers who can document the ability to repay the loan in a reasonable and sustained manner. The most common loan modifications are:

• temporarily or permanently lowering the interest rate,
• reducing the principal balance
• ‘fixing’ adjustable interest rates
• adding an interest only option
• increasing the loan term (i.e., from 30 to 40 years)
• a forbearance agreement
• forgiveness of payment defaults and fees

… or any combination of these changes.

Loan modifications are designed with payment levels so that the borrower can consistently make his mortgage payment as well as pay his other bills. Mortgage payments within an arranged loan modification are not intended to consume an entire monthly budget. Lenders will generally take the homeowner’s entire budget into consideration i.e. car payment, cell phone, utilities, credit card payments, and other necessary expenses needed to live a normal life while still maintaining a reasonable mortgage payment. With loan modifications, the benchmark ratio for calculating a borrower’s affordable payment is 38 percent of monthly gross household income.

A loan modification is a negotiation between your modification company and the primary lender (a bank or other financial institution). Your modification company will present the lender with a proposal backed up by your documented income and monthly expenses, which includes both hard and soft expenses. Soft expenses are difficult to document. Your modified monthly mortgage payment is determined by the difference between your total income and your expenses.
Great! I know what a Loan Modification is now. Do I Qualify?

Until you go through the process it is difficult to say if you qualify. Ideal candidates have a number of the following characteristics:

• An interest rate above 6.9%
• Unaffordable Payements
• An Ajustable Rate Loan
• Are Deliquent on Payments
• Are Currently in Forclosure
• Have Negative Equity in their Home

A  no fee refinance refers to a loan transaction where the lender or your broker bears all the charges such as settlement costs, underwriting fees, title or escrow fees, processing fees, loan origination points, appraisal etc.

So the question is how do they do that? The truth about this type of loan is that the lender bundles all of these closing cost in your loan amount. This increases your loan amount which ends up increasing your payments over the life of the loan. Lenders by law need to dislose this by presenting you with what is called and A.P.R. The A.P.R. reflects the interest rate plus all of the closing costs and thus allows you to do a head to head comparison of various loan solutions. For instance a loan having an interest rate of 6% without fees included could have an A.P.R. of 6.5% once fees are included.

While you seemingly don’t pay these expenses up front, you do end up paying it when you repay your loan. A no fee refi has one big benefit which is that you don’t have to come up with the closing costs and you could save a good amount by lowering your payments if you can get a lower interest rate. That being said, pay very close attention to the fees being charged. Just because they are being rolled into the loan does not mean they do not matter. Negotiate to lower these fees when possible and question excessive sums. Use the A.P.R. as a guide to how much you are paying in fees. The further it is from the quoted interest rate the more in fees you are paying.