The Reverse Mortgage Scam

As our population ages, there seem to be more offers for reverse mortgages. A reverse mortgage is a loan that allows senior citizen homeowners to access the equity in their home in the form of payments from the lender. The loan is then paid back when the owner dies or sells the home, or leaves for more than a year (such as to a nursing home).

This seems like a nice insurance policy for younger homeowners knowing when they reach a certain age they can then tap their equity without having to make payments for it. But the real costs of these mortgages is the fact that the homeowner most likely won't be able to pass the home along to their heirs, since the home will have to be sold off to pay off the debt of the reverse mortgage. If the heirs want to keep the home, they'll have to pay off the debt themselves. A home that may have been in the family for generations could be lost.

Borrowers are still required to pay insurance and property taxes, and may be in default of the reverse mortgage if they fail to do so. However the payments received from the reverse mortgage can be used for this purpose, or for any purpose.

Reverse mortgages tend to have higher costs associated with them, because the bank is taking a risk that the property market will not tank and that the house will still be worth something when it is time to sell. Although these fees have recently come down, they can still equate to 2% of the home's value. The borrower will also be paying higher costs when the loan is to be paid off because of compounding interest. The lender charges interest on the payments it makes, and adds to that balance each month. This saps the home of equity that the borrower or their heirs might have taken advantage of.

Its better not to borrow, but if an older homeowner really does need to borrow, there are much better products available. A simple loan or line of credit would be a better way to capitalize on a home's equity without sapping it through compounding interest.

Is Refinancing Right For You?

Refinancing is the process of paying off an old debt by creating a new debt. It is most typically used with mortgages. When is refinancing the right move, and when is it not?

Refinancing typically is beneficial to a borrower when they are getting a significantly lower interest rate. Refinancing a debt of $100,000 at 8% to 4% would save the borrower $477 a month. But even this type of refinancing can be a bad decision under certain circumstances. A $100,000 debt that is going to be paid off in ten years should not be refinanced into a new thirty year loan. Although the payments may be lower, the borrower will end up paying twice as much thanks to interest, even if the interest is at a lower rate. With only ten years left, the borrower is probably not paying a large percentage of interest with each payment, meaning they are paying down their principal debt and building equity. The borrower would be better off focusing on paying off the debt. The banks encourage refinancing so the borrower will always be making payments. They also tend to charge fees when they refinance a loan. These fees can eat up the savings of a refinance. They may charge origination fees, appraisal fees, title fees, and closing fees.

Some borrowers choose to refinance their mortgage into a line of credit. This can be dangerous since interest rates are usually variable, and if the borrower uses the line of credit, it is putting the debt against the home. Using the line of credit for buying a car or vacation is a risky purchase when using your home as collateral. With interest rates at their lowest in history, there's a strong chance interest rates could climb significantly in the future, especially if the Federal Reserve feels a need to fight inflation.

Some borrowers will refinance all of their debt into one easy payment. This can be a good idea if the borrower will have a much lower monthly payment, but the borrower needs to close those other accounts, or risk getting into more debt. What might have seemed like a good idea could cost them their home.

Its A Brand New Car!

So much fuss is made over the new car models this time of year with all the auto shows going on. There's lights and models and all kinds of professional reviews on the new cars. Dealers will try to convince you that you need the most recent model because of the latest gizmos and technology. But is it worth buying a new car when new vehicles usually fall as much as 20 percent to 25 percent after they are sold, even if has all the latest and greatest gizmos inside?

With the exception of ancient hard to find collector cars, cars are depreciating assets. They lose value over time, and lose their greatest value as soon as they are driven off the lot, at about 20%. The second year isn't much better, as they lose 15% or so in value.

Buyers of new cars often have hefty payments even if their interest rates are a little lower. The banks will make a lot of money off of interest payments for 4 or 5 year loans. Some buyers might even find themselves owing more than the car is worth, making it difficult to sell if need be.

Banks especially like to lease out vehicles, because the borrower will make large monthly payments and then turn the car in after a set number of months, usually thirty-six. Then the lessee will have to either sign a new lease for another new car, or buy one. Many will choose a new lease as they like the idea of having another brand new car. This can keep customers making a car payment indefinitely, which the bank would love.

What proponents of new cars love the most isn't the fancy gizmos or the new car smell, but the fact that they can expect to get many years out of the car before it starts to have any problems. They argue that this reliability is worth the extra cost, because they know their car will work, and they won't have to spend any money on repairs.

Repairs can be an issue with used cars, but a car with low mileage that was maintained well can be a great bargain for a buyer. They generally will last a long time before they start to have problems. Vehicles with forty thousand miles and under make great used cars. And as newer cars are being built to last longer, cars with even higher mileage can be good deals so long as they were maintained well.

Unless a buyer is mechanically inclined, they should avoid buying 15 year old junkers that could break down at any second. These cars will end up costing a lot more in repairs then they are worth.

In the end, the regular maintenance of the vehicle is what makes all the difference. Even a brand new car that isn't maintained well will break down early. Regularly scheduled oil changes and other scheduled maintenance should always be performed, either by the owner or a trained professional. 

Rent Or Buy

Common wisdom tells us that it is better to buy and own a home than it is to rent. The theory goes that mortgages have the same payment and that after they are paid off, the homeowner is saving a lot of money per month, plus has equity in the home.

What common wisdom doesn't tell us is that homes can often become money pits. Rehabbing or refurbishing rooms can get expensive and time consuming, and doesn't always build value in the property. Some people just aren't very handy, and so repairs are often done by professionals at inflated prices. There is also land maintenance to consider if the property has land. Property insurance is always higher than renter's insurance, and there are also property taxes that have to be paid. Property taxes have to be paid even after the mortgage is paid off, and can go up if the property's value goes up. The homeowner is also responsible for all utilities, which are sometimes covered in rental agreements.

Many who don't like to do maintenance might opt for a condominium which is basically an apartment that is owned, or a townhouse which is a small house usually connected to others in a row. Both of these home types work in what is called an association, which collects monthly maintenance fees in return for taking care of various services, such as lawn maintenance and garbage removal. The maintenance fees have to be paid monthly in addition to any mortgage on the home, and depending on the association can be quite high, especially when compared to an all inclusive rent that is paid by apartment dwellers.

Experts argue that when you pay rent you are lining someone else's pockets, which is true, but when you buy with a mortgage you are lining the bank's pockets for up to thirty years. Not to mention all the other bills you are responsible for.

One of the biggest disadvantages to owning a home is that if you need to move, you need to either sell it or rent it out. Selling in a hurry can be tough, especially in a down market. Renting out isn't an easy task, since landlords are responsible for all the repairs to the property, and for collecting rent from sometimes reluctant or unable tenants.

Apartment renting gives the greatest flexibility to those who might need to move for whatever reason, especially if the renters get a month to month lease. The tenant can move whenever they want, are not responsible for repairs (unless they caused significant damage), and often have heat and water paid for by the landlord. These alone can save the tenant so much that it makes renting better than owning.

In the end, whether it is better to rent or own really depends on the individuals involved. If someone wants to settle down or start a family somewhere, owning a home might well be the better long term option. But for someone who is just starting out in their adventure as an adult, or isn't sure if they want to stay in the area they are in, renting offers significant advantages.

You Pay How Much?

Since banks aren't able to make as much revenue from real estate deals and their risky speculations as in the past, they have turned towards charging their customers extra fees. Many banks are introducing financial products, like checking accounts, savings accounts, and loan products, that have 'super-low fees', but these same products are available for no fees at all, and have been for some time.

If you're paying a monthly fee for your checking or savings account, you're paying too much. These products are available for free. You probably don't realize just how many banks are even in your area, so if you do some research, you'll find one that will offer you the same account types for free. Certain additional features, such as debit cards and overdraft protection, should be available for free as well.

Credit cards are offered by just about every bank. Interest rates vary widely, as well as application, annual and late payment fees. Anyone with good credit should demand a card with no annual fees and a low interest rate. Why accept fees when you can have the same card for free? Customers shouldn't accept fees just because a credit card offers reward either, since many cards also have free reward programs. And if the card is rarely used, the fees would likely be more than any rewards gained anyways.

Banks are even starting to charge long time customers who previously had free accounts. If a customer has received a letter from the bank informing them they'll be charged for their account, then the customer should go to their local branch and ask to speak to either a manager or an account representative, and explain to the bank that they will take their business elsewhere if the bank doesn't restore their previously free account. They should explain to them that if that's how they reward loyalty, they will take their loyalty to the bank's competitors. The threat of closing your account is usually enough to get what you want, and what you deserve. Never forget that its your money, not the bank's, and you shouldn't have to pay to use it.

The Thirty Year Bamboozle

The typical mortgage that home buyers take out is the 30 year fixed rate mortgage. This means that they will make fixed payments on their home for thirty years. Is this a good thing?

The only real advantage to a thirty year mortgage is that payments are lower, and the borrower knows what they will be each month. Experts say that the home owner can then use the money they've saved on payments for investments that make a nice return. The problem with this theory is when the market crashes, as it is prone to do, the person who put their money into the markets loses out. Instead of having less debt on their home, they have a portfolio which is losing value.

The main disadvantage to the thirty year loan is the thirty years of payments it will take to pay off, and the amount of interest that is paid to the banks over those thirty years.

If a buyer gets a $200,000 loan for thirty years fixed at 5.5%, the monthly payment will be $1,136. This will amount to a total payment of $408,808 over the thirty years, of which $208,808 was interest. So over the course of thirty years the borrower will pay back twice what they borrowed, negating a large portion of any equity built up over those years. Compare the same $200,000 loan for fifteen years at 4.5% (interest rates are typically lower on fifteen year loans), and the payment is now $1530. That's an increase of $394 per month, but with 15 years less of payments. The total that will be paid by the borrower will be $275, 398, which is $133,410 less than what was paid by the thirty year loan. Not only are the savings substantial but the home is paid off in half the time, freeing up the borrowers to spend that money on other things.

Another issue with the thirty year mortgage is the fact that very little to no equity is built up in the property over the first ten years or so. Taking the above example of $200,000 at 5.5%, in 10 years the borrower will have made $136,320 in payments, but will still owe $164,703, and will have paid $102,108 of interest. Even after twenty years, the borrower will still owe $103,980, or just over half of the principal balance!

There is one way to lessen the sting of the thirty year loan's interest payments, and that is to make additional principal payments every month. Just adding $100 to the above example's payment, making the payment $1,236 per month, will take approximately six and a half years off of the payments, and save over $40,000 in total interest paid. Extra principal payments are far more effective when made in the earlier stages of a loan as that is when principal reduction is at its least. But it still takes longer to pay off the home and almost twice the interest is still paid when compared to the fifteen year loan term.

The obvious reason why banks want to push the thirty year loan is the huge increase of interest they will receive for the loan. But another, less obvious reason, is home value inflation. By lowering payments, banks can convince borrowers that they can buy more house, or that they can bid a higher price for a home they are interested in. This causes prices to go up, which in turn make larger loans for banks, which in turn make more interest. If everybody stuck with a fifteen year loan, then payments would be higher, which means that borrowers would not offer as high of a price. This would be better for consumers but bad for the banks.

Buy Now, Pay Forever

Credit cards are handy. They are convenient little rectangles of plastic that fit in our wallets and allow us to be cash free. Most people have a credit card or two. Some people like to use credit cards for every day purchases like groceries and gasoline, whereas others only use them for emergencies or when they are short on cash. Both of these are fine, because how we pay them off is what makes all the difference.

Credit cards charge interest, and the amount varies greatly from person to person and even from card to card. Credit cards have an APR, or annual percentage rate, which is the interest a customer will be charged on their purchases, balance transfers, and cash advances calculated at an annual rate. So if a customer has a $100 purchase at 12% APR, they will pay $12 in interest for the year. What credit card users often don't realize is that banks will charge a minimum payment that is low enough to encourage the borrower to only make the minimum payment, so that the principal that is owed is not paid down. This allows the bank to keep charging interest on the same principal over and over. To be a savvy credit card user, you'll want to make sure you pay your balances off every month. You often won't pay a penny of interest if you do this. This is especially important if your interest rate is high. Some cards charge up to 30%!

You also should avoid the temptation of having more than one or two credit cards. Some consumers can have more than ten credit cards. This can make keeping track of your finances more complicated, and you risk missing a payment and then paying late charges and higher interest rates.

Always read credit card offers thoroughly. Banks and other credit card companies will often send out enticing offers that say 0% for the first six months, but then they will hit you with a huge APR once your introductory period is up. Watch out for annual fees and inactivity fees. Close accounts that charge these, as there are plenty out there that don't. Some credit card companies will send out checks that can be used to lock in lower interest rates, and these are worth using for larger purchases. Always read the terms that come with the checks to make sure you know what interest rate to expect.

Finally, watch out for cards that increase your limit automatically. This might seem nice, but its done to encourage you to borrow more. Avoid the temptation to spend beyond your means. You should be able to call the credit card issuer and tell them to restore your original limit. If your limit doesn't seem high enough, examine the reasons why and try to fix those instead. An increase in credit could cause more problems down the road.

Establishing or Repairing Credit

For most people, making a major purchase like a car or home requires getting a loan. Not to mention that many employers now check credit histories when evaluating job candidates.
Getting a loan requires having a good credit history, so that lenders can see you are not too much of a risk. This is especially true now that the lending bubble has burst and lenders are forced to go back to sensible lending practices. Many people may either have no credit, or may have tarnished credit and are not currently able to get a loan. There are ways to fix this though.

The first way is to get a co-signer for the loan. This lets someone with no or poor credit get the loan, however, the co-signer is legally responsible for the loan if the borrower doesn't pay, whether they ever use the collateral or not. Co-signing loans is more risky for the co-signer than anyone else, especially if they have a good credit score they wish to protect. Many relationships have been ruined with the co-sign method.

For those who don't want to ask their family or friends to co-sign, there are other ways to build up that credit score. None of them are instant like the co-sign, but they can help you to build your credit on your own without potentially ruining your relationships.

One method to establish or repair credit is to set up a savings account, and then getting a secured loan that is secured against the balance of the savings account. Generally the minimum for this type of loan will be around $2,000, but if you have a history with the bank, talking to a manager might get them to lower the minimum. Because the loan is secured against the balance of the savings account, the bank risks nothing, and also collects interest on the monthly payments. Note that you will not be able to withdraw your savings while you have a balance on your loan. Obviously it will take time to save up the $2,000 but it will be worth it if you finally have established your credit.There may be a temptation to pay the loan off right away, but that won't help your credit score, which is the whole point of doing it. Take at least a year to pay off the loan, and make sure every payment is on time or early. You'll pay a loan creation fee and interest every month, but it will be worth it when you have good credit. Installment loans also tend to carry more weight than revolving debts on credit reports.

Another method in the theme of using secured debt is the secured credit card. A secured credit card is one which you pay money up front that you wish to eventually spend via the card, and your available balance is updated with the monies you have sent in. The card issuer risks nothing since your payments are made before you are able to use the card. These cards are very easy to get and are great for starting or repairing a credit history. Again, you want to make sure you make all of your payments on time or early. There is usually a start-up fee for these cards, and some carry annual fees as well. Again, these fees are worth it if it helps you to get lower interest rates when you make a major purchase like a house.

Other tips for keeping your credit score high are to monitor your debt to income ratios, and also your total outstanding debt to credit limit on your revolving debts (credit cards). Keep these low to show that you can handle debt responsibly. Lastly, pay all your monthly bills on time every month. Its a great habit to have. Remember, its all about showing the lender that you are not a credit risk.

The Equity Scam

The Equity Scam

"Buy real estate now. Build equity!" We've all heard these statements by realtors, investment experts, and banks. You buy real estate now and over time you build equity in the property. But what is equity, really?

The simplest definition of equity is the difference between what someone owes on a piece of property and what it is worth. So, if a piece of property is worth $100,000 and the borrower (technically, the bank is the owner) owes $60,000, then the borrower has $40,000 of equity in that property. The borrower can then apply to a lending institution and get a loan on that equity, often up to the full amount of equity in the property.

So how is equity bad? Because it involves borrowing, and uses the home as a collateral. If the borrower defaults on this new debt for whatever reason, they are at risk of losing their home, even if they are current on their first mortgage. Also, if the borrower has to sell, they now have to sell at least at the price that covers both the first and second mortgage, which can be tough if the housing market is in decline, as so many homeowners have discovered over the last few years.

Some argue that equity is great because when you sell the home you have this lump sum of cash, but if the homeowner has sold their primary residence, they now need to find another place to live. Profits can quickly be eaten up in new mortgage and title fees for the new home, and by realtor fees in selling the old one.
This theory does work for those homeowners who decide to sell a large home and downsize into a smaller, less expensive home, but the average consumer wants to at least maintain their current standard of living. Banks know this.

Consumers who have overburdened themselves with credit card debt can often get a consolidation loan with a much lower interest rate by using home equity. The danger though is if the consumer hasn't learned any lesson, they run the risk of running up credit card debt again and again being overburdened. And banks know this.
The solution to this is for the consumer to develop good credit card habits by only using them when necessary, and by practicing sustainable purchasing habits. Only buying goods or services when they can pay for them in full up front is the best habit to have to stay out of credit card debt.

The one positive about equity is that it is there in case of a financial emergency, and knowing that can help relieve stress for many consumers. Far too often though, it is used unwisely, as in for purchasing cars or other depreciable goods, starting risky businesses, or paying for a child's college tuition (they have loans for that). Any time an equity loan is taken out, the borrower risks losing their home if they default.

If you must use an equity loan, use it wisely. Use it for an emergency. Don't listen to the banks, they want you to be borrowing forever. Focus on paying down your debt, not on adding more.

The Savings Scam

The experts tell us we should be saving for our retirement. They suggest we should have a savings account. Lets analyze this for just a moment, too see who it really benefits.

Current interest rates for savings accounts are at the lowest in history, at a paltry average of 1-2% This means for every $100 you give the bank to hold for you, you get back $1 or $2 PER YEAR. Meanwhile, the bank is lending out your money to others at 4% for prime mortgages, up to 12% for subprime, or risky, mortgages, and up to 30% for credit cards! The banks, even after all their expenses, are making huge profits off of your money, and rewarding you with only 1 or 2% PER YEAR. And some banks even have the nerve to CHARGE their customers for having an account with them.

JP Morgan Chase, for example, posted a $17.37 billion profit in 2010. $17 BILLION in profit, off of their customers' money. And how much of that profit is going back to the customers? That's right, none. Some of it will go to the shareholders, the majority of which are Wall St. and the Board of Directors. They thank you.

Lets look also at how long term savers get the short end of the deal, especially when interest rates are this low. The reason is inflation, which destroys any real growth savers might hope to see. If interest rates are between 1-2%, and core inflation is also at 2%, savers aren't realizing any real growth, and may even be losing real purchasing power in their savings. If interest rates for savings lag behind inflation rates, over the course of decades savers who thought they were doing the right thing are surprised to find out they don't have enough for retirement or making that big purchase.

So what can you do? One thing you can do is to deny the banks their easy source of capital. By closing our savings accounts, we let the banks know they need to offer more to get OUR money.  Demanding higher rates and no fees puts you back in control as the consumer. If you don't like the idea of closing your account, you can at least do some research and find out which bank will offer you the highest return. Remember, its your money, not the bank's.