Student Loan Update – April 2017

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When I graduated in May of 2017, I chose not to think about my student loans. It was a hot humid day but people traveled from different states to come see me complete another milestone. I was juggling full time work and a part time MBA program right when my husband was settling into a new job. I had a lot to be thankful for and a number of people were proud of me. The Department of Education was going to grant me 10 years starting in December 2015 to agonize over student loans but I was never going to get another graduation day.

I picked up my diploma after the ceremony and I sat in the front seat of my husband’s car running my fingers on it back and forth as my parents sat in the back. I was pretty impressed with myself. Not in a gloating kind of way but more so in a “I actually did it…” Almost as if I couldn’t believe it.

The next day, things went back to normal and I decided that the honeymoon period with the diploma was over. Real world responsibilities required me to know what my balance was and what my monthly payments were projected to be. It was nothing that I could not afford but it was painful. Over $350 a month a and $40k+ balance. I could get a whole new car with that! I devised an aggressive pay down plan as follows:

  1. Start paying immediately rather than waiting for the grace period
  2. Apply all raises to the monthly payment and all bonuses to the balance
  3. Apply all tax refunds if any to the balance

3 simple steps. The toughest part was the discipline of not eating out as much as we would have liked and not splurging at the mall. However, 23 months later, that plan has worked so well that I am dancing for joy.

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In case you are having trouble reading the small font, this says:

Current balance $11,641.17 & Due date 7/18/2020

While there are no guarantees, these numbers indicate that I am likely on track to finish paying the debt off by the end of the year if all goes as planned. That will be 8 years ahead of schedule. This is more than I could ever hope to achieve. When I said I was determined to pay and save myself an astronomical amount of money in interest, I was not joking.

I am grateful for the discipline I have that allows me to focus on long term independence goals rather than instant gratification. I’m also thankful that I have a supportive husband who understands my goals and can see my vision for our family. Some people would have valued the high life over a debt free life and it could have been a source of friction. Instead, he trusts my judgement and is happy delaying a little bit of gratification in favor of peace of mind.

Dear DOE, thank you but no thank you. I will decline your offer to take a 3-year hiatus from my obligation. You’re going to collect these payments and you’re going to like it. But better yet, you will set me free.

 

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Savers Rejoice!

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Your time has come. After nearly a decade, long suffering frugal people are on track to be rolling in the though again. Not exactly, but pretty much. Sorta… Yesterday, the Washington Post reported that the Federal Reserve raised interest rate by another 0.25%. Just to be clear, the FRB does not set interest rates. However, their rates drive consumer rates because Fed rates are often used as a benchmark for overall market interest rates. Although rates on deposit accounts are not going to go up as quickly as borrowing rates, us savers are one step closer to escaping the 0% interest rate of money market accounts.

In case you were thinking that 0.25% is small, I’m going to put this in perspective for you. The first rate hike since 2007 was in 2015. The next one was in 2016 and this hike is following 3 months later. This could potentially be setting the ground work for 2 more rate increases this year. The interval between hikes is shortening.

For those of you who are still borrowing, especially those who still have ARM on their balance sheet, be careful to not get caught with your pants down…

Applying for a Mortgage: The 5 Cs

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I talk a lot about real estate, but we all know real estate is expensive. There are few, if any, of us with the capabilities of buying real property with cash. Even some of the people who are in a position to do it, choose to leverage their net worth and maximize their purchasing power using borrowings. In a consumer-driven society, lending is king and that is why something as minor as a 25 basis point shift in interest rates is a news headline and a stock market mover. We hear about rates, banks and borrowers. Everyone talks about how you have to have a good credit score and some type of down payment. However the discussion usually does not expand beyond these points.

I have put a little guide together that might give you a better understanding of why they request the documents they do. But most importantly, it helps you prepare your finances so you present yourself as the type of borrower they wish to lend to.

Credit: The first thing the lender will do is look at your credit history to determine if you are “credit worthy”. In the simplest of terms, they will look at your credit score and history. These 2 things will tell them whether or not you pay your bills on time, every time. This will help them decide if they even want to move forward without or if the risk is too great that you will turn out to be a problem borrower and will default, leaving them holding the bag.

Capacity: This evaluates your ability to take on any additional debt and pay on time. This is what they mean by “debt-to-income ratio”. You may be very good at paying all your bills, but if you are breaking even every month, you are likely not able to continue meeting all your financial obligations should you take on more debt.

Collateral: Also known as “protection”, collateral is something that you own but a lender puts a claim on it, as a way of protecting their investment. The law allows them to take possession of that asset to offset any loss from you not paying your debt. In real estate, the asset used as collateral is the very property you’re buying. In rare cases where the loan is more than what the purchased property is worth, you can use another property as a second piece of collateral.

Capital: That is usually liquid assets that you may have. Primarily they want to see that you have the ability to give a down payment or at the very least pay your closing costs. If the purpose is to get an investment property, they want to see a few months worth of reserves should you have vacancies. It’s also a way to evaluate whether or not you have other sources to tap and make payments if you were to ever lose your job.

Condition: This is the purpose of the loan. Some loans are higher risk than others depending on their purpose. Not all real estate loans are created equal. A loan for a residential building will have a better interest rate than a loan for a strip mall because of the risk involved. A used car loan will also be more expensive than a new car loan. Whether it’s an equity line or a purchase or refinance will also matter.

I hope this will give you a better understanding and some of the information you need to prepare for a successful mortgage application.

We Need to Talk Money

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Depending on who you ask, you’ll get a different answer. However, I think that the financial education gap in this country may be a symptom of how many people don’t talk about money. While your money is your business and you aren’t required to share your financial situations or decisions with others, you could be missing out on a wealth of information by being too secretive.

I got a call last week from someone who wants to buy a house. He wanted to share the good news with me that he spoke to a lender who told him if he had $5-6,000 he could get a mortgage. I’m not going to address the fact that he only has about $5-600, because there are more pressing matters at hand. Pressing matters like a mortgage lender offering him a $0 down payment loan which will leave him paying ridiculous PMI. The fact that his credit is terrible after a string of bad financial decisions (2 cars repo’ed, a previous short sale, student loans in default, etc.). The lender’s willingness to push him into a house he can’t afford etc.

The reason why this lender was able to sign him up for this potential disaster is because he chose not to utilize the resources in his circle to help him figure out whether or not this is a good venture. He knows I work in real estate, have a graduate degree, has banking experience and that I am good with finances. He also speaks to both my mother and I regularly as he is a family friend. Nonetheless, he chose to be secretive about his plans until he had set everything in motion.

I think people might have this misconception that their acquaintances “want to know their business.” I’m not advocating for people to start giving out their social security numbers and debit card pins to anyone who sends them annual Christmas cards, but there has to be a balance of finding a few people we can trust to give us sound advice. The reality is, unless you’re really rich, few of your close friends care or are looking to or even have the ability to do harm with information they might have about your financial moves. But because we are taught that it is improper to talk about money, we don’t share knowledge, resources and compare information.

Personal finance has become a dirty topic and mostly a pretense. Everyone is content projecting unrealistic images of their financial situation. The would rather talk to a stranger whose financial interests conflict with their own well-being because they never have to see that person again. Discussing money matters becomes more about keeping up appearance than making good decision. That is why people carry expensive purses containing maxed out credit cards and drive expensive cars that will be repossessed soon.

Why You Should Check Your Credit Report

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If you have not figured it out by now, your credit history is extremely important. Credit has transformed from something financial institutions used to determine if you can be trusted with their money, into something everyone else uses to assess your character. Here are some (unexpected) uses of your credit report:

  • Insurance Companies: They are now checking your credit report to determine what your risk appetite is. They’re also using it as a character assessment tool which they use to influence your premiums, however small. While the use of this varies from company to company, chances are you won’t know until it’s too late.
  • Current Creditors: We expect people we are requesting loans from to check our credit reports. What we don’t anticipate is someone who already claimed to have trusted us to check in after a financial commitment has been made. However, they’re definitely looking in on us. They use information to determine if there have been any additional debt added and what our behavior has been (i.e. delinquency at other financial institutions). The uses of this information will depend on what they find. It could be used as a marketing tool (additional offers) for good behavior or a punitive tool (credit card interest rate goes up or credit limit gets inexplicably reduced) when they detect potential issues.
  • Jobs: I don’t know if this is a product of the millennial generation being over educated for open positions, or a result of the recession that flooded the market with unemployed people looking to fill very few slots, but it appears that companies are really going out of their way to reduce the pool of candidates. In the 9 years I’ve been out of college I have never been a candidate for a position that did not require a credit check, other than retail. The requirements were always: background check, references, credit check and drug test. References and drug testing were not always required, but background checks and credit checks were always consistent.

With all these parties reviewing or requesting your credit report for purposes other than borrowing and/or large purchases, why would you want to risk not being fully aware of any adverse information that might show up? The sooner you find something negative, the better you can respond, either to defend yourself or to take corrective action. Here are the reasons why you should check your credit report regularly:

  • Time sensitive: Changes to your credit report happen relatively quickly. All it takes is 30 days for a bad payment to show up on your account and it’s there for 7 years. Your score, your history and your risk profile can change very fast as a result of 1 negative data. The sooner you are aware, the faster you can address it.
  • Mistakes: Some of us have common names, others are simply victims of a fast typist who transposed a few digits on the social security section of a form. Either way, errors on your credit reports are actually not rare and can lead to having your character brought into question, while it’s really the OTHER Erica Smith who is a total crook and won’t pay her credit card bills.
  • Identity Theft: How would you feel if you worked really hard to build your credit for 3 years to buy a car only to realize you’re already overdue a very expensive car loan but you don’t have a fancy ride? Picture this… someone steals your identity, takes a loan under your name, rerouting the mail to a different address so you never got the mail. They have also conveniently not made a single payment since they drove off the lot. This is the worst kind of mistake you can have on your report. Because you’re not just proving they have the wrong social security number, which is easily verifiable. You have to prove that someone who tried really hard to pretend they are you, were not actually you. You’re stuck clearing your name, proving that you are not responsible for these purchases or credits and you aren’t a con artist looking to get one over on your creditors.

The Bondage of Debt

Would you agree that debt is modern day slavery? Sure, there are some stark differences. For example, in most cases, one chooses to go into debt rather than being kidnapped and forced into it. Furthermore, there are no threats of corporal punishment and you don’t live in squalor. However, you work to hand your money over to another entity and if you’re severely indebted, you may have to make a choice between eating and remaining current on your obligations. You can be humiliated publicly should your home or car get repossessed to be sold off at auction. Your family can end up homeless. You may have difficulty finding work, because some potential employers are now including credit checks as part of their background screenings.

You’re probably thinking that you can be “emancipated” through bankruptcy, however, bankruptcy will only eliminate some unsecured debts. Your real estate will be foreclosed upon, your cars/RVs/bikes, etc. will be repossessed and your student loans cannot be discharged under any circumstances. Knowing this, are you comfortable piling on more debt? If you are still struggling, have you resolved to get out? If you broke free, what’s your plan for staying free?

Some will say there is a difference between good debt and bad debt. I don’t think there’s such a thing as “good” debt. You still have to pay it back, and you have to pay back more than you borrowed. The only good debt is an interest free loan. Let me know where they’re giving those out so I can get one. What you have is necessary debt and worse debt.

Necessary debt, which I’m too cautious to characterize as good, is the kind of debt that you have to take out because you can’t afford something on your own, but it’s ok, because it will (hopefully) make your life better. For example, borrowing money to develop a skill, get a degree or certificate has the ability to increase your earning potential. Furthermore, while your payments will eventually fade away, your education and/or skill can never be taken from you. So you spend 10 years paying for an income generating product (degree) that you’ll use for 40 years. It’s very similar for a house. You buy a home that you will hopefully live in for the next 30-40 years, and while it may go down in value, you’ll always need a place to stay so you might as well set yourself up for some fixed payments.

Bad debt is pretty  much everything else. How much is your car worth after you’ve paid it off? Will it ever generate income? Does it have a 40-year lifespan? How about a new pair of shoes or a flat screen TV? What do these things really cost after interest and other fees? Do you really want to be at the mercy of someone else over a few little trinkets? Do you want to be told what to do with your money when your check comes in? Because, that’s exactly what happens when you are in debt. To avoid repossession or a black mark on your record, you allocate that money to repayments. This form of bondage, while more mental than physical, is just as damaging. Finances drive a lot of the divorces in our country. People kill themselves and their whole families when they can’t pay their bills. I wonder how many people would think twice before borrowing if they weighted all these factors.

I have given myself 2 years to pay off the $35,000 I owe on my MBA. While there’s nothing I can do about my mortgage, my husband and I have an understanding that we will not charge anything to our card that we can’t afford to pay off at the end of the month (we love those points, so I don’t think we are going to get rid of plastic in the near future). We work hard for our money and want to keep it.

Are you willing to swear off debt? If so, what’s your game plan?

“Use this one simple trick, banks HATE it!”

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I can’t be the only person who has seen those ads around the Internet. Usually they’re referring to mortgages and as a result, they’re one of the most successful click-baits. Why? Because whether you own or rent, housing is usually your biggest expense. And if you made the mistake of buying too late in life, you might be one of those people who is worried about retiring or even dying with mortgage debt. This means that articles or services promising to teach you about how you can eliminate that debt as quickly as possible will get your attention.  Unfortunately, many of these people are also trying to sell you something. Well, I’m not, and today, I decided that I was going to make sure you never have to click on those links again, by telling you these “simple tricks banks HATE!”

Before I start, let me highlight the importance of eliminating mortgage debt.

  • Housing is not just a huge expense, it’s also a necessity. You’ll always need a place to live, and given the way rent and housing prices are, if you can have a roof over your head for only the cost something as relatively marginal as property taxes, you are doing better than most.
  • You’re less likely to lose your house if your debt is paid off. Think about how many people lose their houses to banks because they couldn’t afford the mortgage, versus house many people lose their house to a tax lien.
  • It’s one of the few things you can guarantee will pass on to your heirs. The building might fall apart, but barring an environmental crisis in your immediate area, the land will always be there. If you can help it, don’t pass on debt.
  • Depending on houshing type, location and maintenance costs, it could become a good source of income. (More later on how I became an accidental landlord.)

The “tricks”

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With these reasons in mind, the point is to pay off your mortgage as quickly as you can. The following methods will help you achieve that goal. Some of these rely on good habits and discipline. Others rely on a windfall and some rely on your type of financing. You may even do a combination of them to see which one suits you best.

  1. Your terms are key. Do you have a 30-year mortgage or a 15-year mortgage? What’s your interest rate? If you have a 30-year mortgage, you will be in debt for twice as long and you will pay more in interest. You’ll also have a much lower monthly payment. What about your rate and down payment? If you have great credit (740+), steady employment and a low debt to income ratio, you’re almost guaranteed the best available rate. This means you’re paying as little as possible on your debt and may be able to own for as much or even less as you would rent (depending on your local housing market.) And of course, the more you put down, the less you have to borrow. So the key to borrowing cheaply for a shorter period, really starts before you get a loan. It’s about cleaning up your credit, saving as much as possible and choosing the mortgage that is right for you.
  2. But what if you already bought a house? Fret not. You can always refinance. Those who bought back in 2005-2006, were borrowing money at ridiculously high rates. Although I didn’t have any money to buy a house at that time, in 2007, I had a CD that was paying me 5%. If you know anything about banking, you can try to guess how much mortgages were. If not, you can look up historical mortgage rates and get confirmation right here. So what would a smart person have done in 2012 if they bought a house in 2006? Assuming they kept their credit clean and continued to qualify for great rates, they would have refinanced their mortgage to a 15-year mortgage at 2.5% and NOT TAKEN ANY EQUITY OUT. What would that achieve? It would have not only sliced their rate in half, but also their term. This would have probably kept their mortgage payment close to the same but they would be out of debt in before 2030, instead of after 2036. If you think about how much you pay towards your mortgage (or rent) every month I want you to multiply that by 72. This is all the extra money they could save, reinvest or use toward something else over the course of 6 years.
  3. At the same time, some people just wanted a break. Many of us really over extended ourselves when we bought homes before the bubble. This means we wanted relief from our high payments, not to keep them the same. Good news! You can also refinance to another 30-year mortgage. You do the same thing above: apply for a new rate, don’t borrow against your equity but keep your 30-year. You don’t get a 2.5% rate, but you might have been able to get 3.5%. Anyone looking at houses now might find it hard to believe, but these rates were definitely available as recently as 2012. I got my house in 2013 and I have 3.75% fixed. But ultimately, going from 5-6% to less than 4%  reduces your monthly payment amount. The biggest benefit is that you can continue to pay the difference towar your principal balance IF you can afford it. But if a bi expense comes up and you need that money for something else, you can reallocate your finds accordingly. You are not bound to the bank to make the higher monthly payments on their schedule.
  4. But what if you already have a great rate and refinancing makes no sense? Well I have a “one simple trick” for your situation too. Before I go into it, let’s remember this basic principle of time: 12 months and 52 weeks in a year. Say your mortgage is $1,000 a month. You can pay $1,000 a month so $12,000 a year ($1,000 x 12 = $12,000). Or you can pay $500 every 2 weeks, so $13,000 a year (52/2 = 26 payments, $500 x 26 = $13,000). It’s like magic! So it’s like making one whole extra payment a year. You can also achieve this same result by making your payments as scheduled, but for the last payment of the year, making an extra payment and applying it to your principal. You can also take the extra payment and divide by 12, and add that number to your principal every month. (In our example this would be $1,000/12 = $84, monthly payment = 1,000 + 84 = $1,084). This can and should shave years off your mortgage. Will it be 6-7 years? Probably not. But if you can save 2-3 years or even 1, that’s 12-36 payments you don’t have to make. That’s money you don’t have to pay interest on. That’s 1-3 years of worry free living.
  5. What if you can afford extra payments on a regular basis? Take advantage of windfalls. This doesn’t require any math or the same discipline as making extra payments, and it doesn’t even rely on you having good credit. The point is to take any and all unexpected monies and put it towards your house.  Gifts, inheritance, bonus, lotto winnings, tax returns, that $100 bill you found in the parking lot of the grocery store, etc. As long as you weren’t relying on it as s regular source of income, if it comes in, pay your debt.

Here you have it: my 5 “one simple trick” to pay off your mortgage faster. But remember, you must assess your own situation individually. If you get a condo, they may not have association dues or they may not include your homeowner’s insurance. Not everything works for everyone. So don’t come back here trying to sue me if you didn’t like your results lol. I am a big fan of the banking calculators. You can them on bankrate, zillow, etc. While they’re great at giving you a snapshot of your mortgage, be careful, because they don’t always included all your housing costs. You can even use them to test some of my theories.