Archive for Money Management

Top 10 Tips For Buying Your First Home

Buying your first home is a major milestone and it is important that you acquire as much information as possible before taking this big leap. While my clients generally ask me questions about improving their credit and getting a lower interest rate, this outline covers the entire process to, hopefully, make it an enjoyable and stress-free experience.

1. Be Prepared & Knowledgeable – Sign a contract with a buyer’s agent who is familiar with the area in which you want to buy a home; independently search your local MLS and realtor.com; and find a mortgage broker who inspires confidence and has a solid reputation.

2. Getting Pre-Approved – Before you actually visit any homes, research and select a lender such as Quicken Loans, AmeriQuest, or Wells Fargo. After you have chosen the one that is right for you, get pre-approved to determine your price range and show potential sellers that you are a serious buyer, which can also increase your bargaining power when you find your dream home.

3. Understand Your Loan – There are various types of mortgages, 30 year fixed, 15 years fixed, 5/1 ARM, 3/1 ARM, etc., that you need to be familiar with before you can sign on the dotted line. While a 15 or 30 year fixed mortgage with 20% to 25% down is the best option for most first time buyers, I occasionally advise some people to do an 80 / 10 / 10. 20% down may seem excessive and unexpected, but paying 20% down or more towards the note allows you to avoid the PMI (Private Mortgage Insurance) cost that can be expensive and useless.

As a general rule, avoid exotic loans so you don’t need to worry about fluctuating costs from month to month and changing interest rates. If interest rates plummet from what you signed up for, in many instances you can refinance.

4. Preparing Your Credit – While everyone knows that their credit score will be an important element in determining their mortgage payments, most do not follow a few simple tips for improving their score in the months leading up to the closing. First, make sure you keep the balance on your credit cards under a quarter of the total line of credit. Also, avoid large purchases or transfers that might appear out of the ordinary. And finally, pay off debts such as student loans that may be keeping your score down.

5. Gather Data – Your lender will generally require 2 years of tax returns, a year of bank statements, W-2’s and 1099’s from the past 2 years, and a list of your current debts such as car and student loans. By having these prepared before they ask for them, you can save yourself a lot of time and avoid unnecessary stress.

6. Learn The Local Market – Many realtors will offer you “comps” on recently sold homes in your area of interest. Be sure to look over these carefully, particularly the asking price of the homes, what they sold for, and the price per square foot. With this information in hand, you can submit a more competitive first offer and come across as a serious buyer.

7. Compare Lenders – After your offer is accepted, I strongly suggest using the quick, easy, and free services of LendingTree to compare interest rates for your mortgage. While you may have found already found a trusted lender for your pre-approval, there is no guarantee that he will give you the best rate. One thing you can do, however, is take the best rate you receive from LendingTree and discuss this rate with your local bank and trusted lender. With this bargaining power, you can determine who really wants your business, get the best possible interest rate, and save the most money in the long run.

8. Avoid Pricey Closing Costs – As you narrow down your list of mortgage lenders and receive some great quotes on interest rates, ask for a good faith estimate so you can estimate your closing costs. Although many individuals overlook these one-time, up-front costs, they can add up quickly and are an important element in selecting a lender who is right for you.

9. Get an Inspection – When your offer is accepted and it seems that the process is almost over, do not get too attached and believe that the home is already yours. Although it can be a major stumbling block in the negotiations, you absolutely need to have a qualified inspector look for termites, pests, foundation problems, and numerous other things that cannot be seen when you stroll through a home. Sometimes the inspector will only find minor problems, but other times there are extremely expensive issues that may make your purchase impossible. Under any circumstances, you cannot skip this step.

10. RELAX – It can be expected that this major milestone is going to be somewhat stressful considering the major investment and lifestyle change you are making. However, it should also be fun so take pictures of the homes you like, both inside and outside, and write notes about each place you see. At the end of the day, if you follow the above steps and listen to your heart, you are bound to be one happy homeowner.

Good luck and happy house hunting!

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The Most Common Credit Problems

After taking a few days off, I want to discuss some of the problems and situations I encounter on an everyday basis as a non-profit credit counselor. In general, there are two types of individuals who seek out my services: the extremely poor who are in a relatively large amount of debt and the middle class who have leveraged themselves into a whole world of debt.

In the former group, most individuals have accumulated around $2,500 of debt that increases monthly as they fall behind on their credit card, rent, and car payments. Since credit cards are the most lax about payments, allowing you to pay a minimum rather than the entire balance, this is generally where I see this group of people fall behind. And as they pay interest rates in the high teens, falling behind for only a few months can add up quickly.

To remedy this situation, I typically teach individuals to be more responsible by giving them certain texts and pamphlets in addition to one-on-one counseling. I also advise them to refinance an asset or get a bank loan with a lower interest rate than their credit card so they can pay off their debts and start anew. As an excellent short term option, most individuals will be able to save a relatively large amount of money from the lower interest payments.

For those in the middle class earning around $120,000 annually, the problems are essentially the same as those earning less except the debts are on a much larger scale. Luxury cars, interest-only mortgages, private schools for the kids, and an overwhelming credit card balance can easily lead to a $40,000 debt, which gradually accumulates on a few credit cards as cars and other monthly bills are never truly paid off.

To help these people that are swimming in debt, I also offer one-on-one counseling where we discuss which assets can be refinanced, such as a car or a home. Another possible solution for many individuals is to look into a tax-deductible HELOC (Home Equity Line of Credit) with a much lower interest payment than their credit cards. Although may of these problems can be solved by paying off high interest debts and using a little creative refinancing, education is essential to making sure that this issue does not arise again.

If you feel like you are treading water or sinking in debt, consult a credit counselor to discuss your options and gain some valuable insight into your overall financial situation. It is one meeting that could not only turn your credit situation around, but also your entire life.

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Avoiding Payday Loans

Thank you all very much for the tremendous response from my first credit tips article. I never expected it to get on digg and I hope a lot of you learned a few new things or will at least get rid of some bad credit habits.

Another common problem that I encounter on a daily basis has to do with payday loans. While these may appear to be a quick and easy way to get money for rent, bills, credit cards, etc., the first loan is simply the start of a cycle where you are continually further and further behind on your payments and in need of even more money. Before you know what has happened, you are left in a downward spiral of overwhelming debt.

In most instances, my clients only need a few hundred dollars to pay their bills, so they head over to a cash advance store and put up their future paycheck in return for a no credit check loan. However, things start to get a little sticky when you discover that this place is charging an exorbitant interest rate, sometimes as much as 25% for a two week advance. To put this into perspective, if you borrow a rather modest $200, you could end paying upwards of $50 for this “quick and painless” loan. And once you have paid off your bills and repaid the loan, you may see that you are still a little short on cash due to the unexpected interest payment, so you need to take out another loan. Well, there goes another $50 dollars, meaning you just paid $100 in interest for a one month loan of $400.

Although throwing away $100 a month will not affect the livelihood of most individuals, the people who are taking out these cash advance loans are usually making minimum wage and working hard to make ends meet. It may appear that these operations are taking advantage of the low-income earners plight, but the government has said payday loan stores are not predatory and fulfill a crucial role for some people. I wholeheartedly disagree with this considering that I have seen first hand how it can destroy a family’s life.

To avoid the steel trap of payday loans, there are a few alternatives that I regularly recommend to my clients. Instead of the 300% or so interest you may pay for a cash advance over the course of a year, try taking out an advance on your credit card, which probably charges under 20% yearly interest. While the interest rate is still extremely high, you can save more of your hard-earned money and put it towards better uses. Other options to consider include asking friends and family for a loan in writing (create a contract) or trying a local credit union, which may be able to help you out with a more reasonable interest rate.

If you are not able to come up with the money on your own, a few last resort methods should be attempted before ever stepping foot in a payday loan store. In some instances your employer will give you an advance paycheck, as long as this is a first time or extremely rare request. Also, you can even contact the companies to whom you owe money. In some instances, the company will allow you to pay a little late to ensure that you do not go deep into debt and can continue to make payments to them in the future.

When a payday loan seems like the only solution to your problem, take a step back to consider your situation and determine how you got into it. Do you need the loan because of bad credit, no credit, lots of debt? While each individual’s problems are different, it is always important to plan for the future and set aside money in advance so you can avoid this difficult and stressful situation. For tips and advice on how to track and budget your money, consider visiting a non-profit credit counselor such as myself. With their advice and your hard work, you can avoid payday loans and break out of the cash advance cycle.

Good luck!

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