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Archives: March 2005
How to buy a car
This blogger has analyzed every possible financial factor related to buying a car. It's pretty impressive.
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Archives: March 2005
More about adjustable rate mortgages
My previous entry was an attempt to understand why people are taking adjustable rate mortgages in the current realtively low-interest-rate climate. Well, a wire story out today confirms my conclusions--both about the reasons for people taking out ARMs and the their dangers:
Some 36.6% of mortgages, including refinancings and new purchases, had adjustable rates last week, the Mortgage Bankers Association said Wednesday. That's up more than 3 percentage points from the prior week and 9 percentage points from a year ago...
With the average rate on a one-year, adjustable-rate mortgage at 4.39% and housing prices continuing to rise in many areas, buyers seeking to keep payments low are opting for ARMs. But some economists warn that homeowners might run into trouble if interest rates are higher and their payments rise when their fixed-rate period ends, typically in one to seven years.
That could also cause problems for the economy if consumers, whose spending accounts for more than two-thirds of U.S. economic activity, are forced to pinch pennies to pay mortgages, or to default.
"While ARMs buy home buyers some relief in housing affordability in the short run, the longer-run implications ... can be negative," says Celia Chen, director of housing economics at Economy.com.
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Archives: March 2005
Adjustable rate mortgages
A while back, I was reading about the supposed housing bubble when something caught my eye: if interest rates start to go up significantly, people with variable rate mortgages might be in trouble, as their mortgage payments would increase.
I thought to myself: with interest rates as low as they have been the last couple of years, who has a variable rate mortgage? As I understand it, when interest rates are low, you should get a fixed rate mortgage, so you can lock in a low interest rate for the long term. If interest rates rise, you've got a good deal. Conversely, the only time you should get a variable rate mortgage is when rates are high. You wouldn't want to lock yourself into a high rate (with a high fixed rate mortgage) if interest rates start to fall.
So, I did a little research. It seems that a lot of people are getting fixed rate mortgages in order to get VERY low payments at least for a few years. As this article explains, many mortgages offer a very low fixed rate for five years, then they go variable after that.
Who would want such a loan? Someone who has a shorter-term view than I have. Apparently, lenders are using these types of loans to help people buy more expensive homes than they could necessarily afford with a fixed-rate mortgage.
When considering such a loan, the article says you should ask the following questions:
- What is the interest rate caps on the loan?
- How much can the rate rise when it adjusts the first time?
- How much could it rise over the life of the loan?
- How much would your monthly payments be at the highest rate?
If you don't think your income will increase or if you think you'll be in your home for longer than 15 years, you may not be a great candidate for these types of loans.
I just wonder how many people really think too much about whether they can afford such a loan in the longer term. If they don't, then they are the people who might get into trouble when mortgage rates rise.
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Archives: March 2005
Pre-nuptial credit check
This article in the Fort Wayne Journal Gazette advises couples to examine each other's credit scores and reports before getting married, as part of a general goal of learning to talk about finances sooner rather than later.
Seems creepy, but the motivation is a good one:
"Unfortunately, we don’t always talk about financial issues. It’s so unromantic," said Sheryl Garrett, a Kansas financial planner and author of Just Give Me The Answer$.But romance can be quickly extinguished, too, if one partner’s financial troubles spill over onto the other. David Diggs, a family lawyer in Baltimore, said money is the root of 80 percent of the divorces he handles.
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Archives: March 2005
Credit counseling scams
Late night TV is littered with ads for credit counseling, many of which emphasize that they are 'non-profit'. I've long assumed that if they were truly public service agencies, then they wouldn't be advertising on late-night TV.
More recently, my suspicions were confirmed: I heard that most of these companies are indeed out to make a buck. This article from the Federal Trade Commission offers advice on not getting scammed by credit counselors.
Here are the FTC's warning signs:
If you decide to respond to a credit repair offer, beware of companies that:You could be charged and prosecuted for mail or wire fraud if you use the mail or telephone to apply for credit and provide false information. It's a federal crime to make false statements on a loan or credit application, to misrepresent your Social Security Number, and to obtain an Employer Identification Number from the Internal Revenue Service under false pretenses.
- Want you to pay for credit repair services before any services are provided;
- Do not tell you your legal rights and what you can do-yourself-for free;
- Recommend that you not contact a credit bureau directly;
- Suggest that you try to invent a "new" credit report by applying for an Employer Identification Number to use instead of your Social Security Number; or
- Advise you to dispute all information in your credit report or take any action that seems illegal, such as creating a new credit identity. If you follow illegal advice and commit fraud, you may be subject to prosecution.
Under the Credit Repair Organizations Act, credit repair companies cannot require you to pay until they have completed the promised services.
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Archives: March 2005
Personal bankruptcy case study
This article on MSN Money, offers advice on how to survive personal bankruptcy. In that, it is like gazillions of other articles on the web.
What differentiates this article from the pack, however, it that it incorporates a case study of a couple going through bankruptcy, including their actual financial numbers. It's great that this couple allowed the reporter to write this article. It puts a real face on a difficult situation.
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Archives: March 2005
Marketing credit cards to students
According to this article, the Washington state legislature is considering a bill that would restrict the marketing of credit cards to students at state universities.
I agree that aggressive credit card marketing--not just to college students--is a problem, but I'm not so sure that restricting the marketing is the right solution. If we're going to talk about regulating credit card companies, I would like to see more attention given to interest rate caps and restriction of policies that result in higher fees and raised interest rates.
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Archives: March 2005
The one true credit score
These days, consumers are advised to periodically get and examine their credit reports and credit scores from the big three credit reporting companies (TransUnion, Experian, and Equifax).
But as this article points out, the credit scores that the three companies give you will be different, and the scores may also differ from the score a prospective lender gets when they pull your scores from these companies.
According to the article, the primary reasons for these differences are:
- Each company uses a different, though similar, scoring formula. So even with identical data, each company might give you a slightly different score.
- Your credit score changes as the reporting companies get new information on you.
Main | The one true credit score »
Archives: March 2005
'Stated income' mortgage loans
If you don't believe that your credit score is all that matters, check out this article on stated income mortgage loans:
For people whose credit is good enough, "stated income" loans work much like this. Consumers pay slightly higher interest rates for such loans, but bankers are making more of them than ever.At the end of the refinancing boom in late 2003, lenders started looking for new ways to boost business, and stated income mortgages, and related "low documentation" loans, were one solution. Lenders learned over the past decade or so that credit scores are the best predictors of whether a borrower will pay back a loan, so stated income loans are not as risky as they might sound.
I'm not sure why you even have to tell the lender an income, because basically, they'll give you a mortgage based solely on your credit score (FICO score). Seems like kind of a contradiction to me: your credit score is high enough that they lender feels secure doing this, yet the borrower clearly would only seek this type of loan if their finances has some detail that might be riskier (like being unemployed). But note the key phrase in that quote: "Consumers pay slightly higher interest rates..."
Here are some other pages about stated income loans. NOTE: I have no idea how reliable they are:
- http://www.interestonlyloans.com/stated_income_loans.html
- http://www.loanshoppers.net/stated.htm
- http://www.freddiemac.com/sell/factsheets/alt_stated_income.htm