Saturday, September 20, 2008

What You Need To Know About Mortgage Loans

Majority of loans are unsecured. The amount charged against your credit card is an unsecured loan. The personal loan given by someone is an unsecured loan. The scholar loan you got for your college education is an unsecured loan.

However, there are loans which require some form of safety. This protection is a valuable property - a lot of the time, your house - which is yours. This is what we call as a mortgage loan. The idea is to attach this asset, the mortgage, to the approval of the loan. If you forget to pay the loan once it becomes expected and needed, the creditor can choose to foreclose the belonging to satisfy the said mortgage.

Why are mortgage loans needed by somecredit institutions? Simply, a mortgage lowers the perils that these lending institutions have to take on when extending loans to the borrower. With the mortgage included to the loan, the creditor can always utilize the same for the execution of the loan if the borrower becomes remiss in settling his debts.

Because the credit institutions will undertake lesser number of risks, they can extend mortgages with lower interest rates, which is usually the occurence with mortgage loans.

Additionally, lending companies can also extend loans including larger sums, because the mortgage will be there to protect thecompletion of the same anyway.

Foreclosure is the process of selling the mortgaged possession, where the proceeds will be applied to the approval of the loan. The selling characteristic of foreclosure happening comes in the mode of public sale where the starting amount is the appropriate selling value of the possession.

The most well-known means of mortgage loans is a home mortgage loan, where the borrower borrows funds to finance the acquitsition of a house. The house itself will function as a mortgage to safeguard the said credit. If the debtor fails to satisfy the loan after the lapse of the alloted period, the creditor will get the mortgage and foreclose the same.

Friday, September 19, 2008

Debt Consolidation - A Means Of Freedom?

Debt consolidation can offer an individual a greater sense of financial freedom in many ways. By taking out a loan to pay off others, monthly payments are reduced to one convenient payment, and the individual can lock into a fixed interest rate. For individuals who are dealing with multiple loans and large amounts of debt, debt consolidation loans can be a huge help to regulate debt payments.

The process usually entails a secured loan against something considered as collateral. For example, people often secure a mortgage against their house. The fact that there is collateral with the loan means that there is a lower rate of interest because the owner of the asset (in this case, a house) agrees to allow the forced sale of his asset to enable the repayment of the loan should he default on payments. With a lowered risk to the lender comes a lower interest rate for the borrower. Loans for debt are helpful in this way.

People often turn to debt consolidation once they have accumulated an excess of credit card debt, due mainly to the extremely high interest rates often associated with credit cards. People often develop high levels of credit card debt because they have made a habit of spending more than they are making. Someone who is willing to use their house or car as collateral for debt consolidation loans will often end up with a lower rate of interest and only one payment to make each month, creating a better financial situation to manage money more effectively.

Debt consolidation is not a cure-all. Once an individual has taken steps to recover financially, reasonable and proper management of a budget and credit cards is vital. The habit of overspending must be broken, or the situation will simply repeat itself. Credit debt consolidation can help, but only if the individual acts responsibly and curbs the urge to spend indiscriminately. Self-discipline is key to remaining debt free.

The companies that offer the consolidation of debt are well aware of the mass appeal of their service. Because of this, they have devised ways to ensure that the debtor pays the loan back. A percentage of these types of methods are ethical, while a fair amount of them will not be. These companies make the bulk of their money by charging higher-than-usual interest rates, so be wary.

As evidence of their sometimes-tricky way of dealing with those who are in debt, some consolidation companies will often wait to intervene until a couple or family is close to losing their house or car. The individuals faced with debt will usually agree to pay any rate of interest - no matter how high - if it means that they can hold onto their valued assets.

For those laboring under a mountain of credit card debt, debt consolidation loans can be a viable solution. Although there are a few debt consolidators who are dishonest and want to take advantage of those in financial crisis, the majority of companies are legitimate. They offer valid solutions and plans to help people recover financially. If you are one of the many people dealing with unmanageable debt, debt consolidation might be for you.

If you have continually struggled to pay your credit card bills on time, consider using debt consolidation to simplify the process. Certain companies are able to combine your debt into one single debt, thus enabling you to focus your time and energy elsewhere. If you are tired of the creditors and collection agencies calling your home, you should see if you are a candidate for debt consolidation. Thousands of people have benefited from the assurance that their bills will be paid on time and that they will be paying a lower rate of interest. If this is something that would help you get back on your feet, click here: Ultimate Debt Relief Guide and at Credit Card Debt Relief and at Debt Relief Companies

Wednesday, September 17, 2008

Debt Management Tips

debt money management

Personal loans can offer individuals a way to have the funds for an array of uses. Some are necessary while others are for pure enjoyment. With personal loans it`s critical to understand the financial obligations that are attached to them. Too often, individuals access money quickly then struggle to repay it. You may be unable to pay off your personal loan if you do not have a decent budget in place.

An area where many individuals get into trouble with personal loans is debt consolidation. Within a year most people who use personal loans for this find themselves in even worse financial shape. This is because they have not altered their spending habits any. The result is they charge their credit cards up to the limit and now have those payments to make again as well as a personal loan payment. They may soon find they are drowning in the swimming pool of debt.

Enrolling in a debt money management plan may be a great alternative for you to help you meet your financial obligations. Most debt management plans involve working with your creditors to reduce interest rates as well as working with the individual to establish a realistic budget and work to change spending habits.

The first step in the process is to do some research on the debt management programs available. Find out how long they have been in business and check for any reports from customers with the Better Business Bureau. Once you have chosen one, call to discuss your situation with them and schedule an appointment. You will need to bring statements for all of your bills as well as verification of your income.

With a debt management counselor you will discuss your monthly obligations. They will work with your creditors to reduce the interest on your debt. This will reduce your monthly payments. You will then make one monthly payment to the debt management agency. They will then disburse the funds to your creditors. You will continue to get monthly statements from your creditors for your records.

It is important that you understand you can’t use any of your credit cards that you place into a debt consolidation management program. Keeping that in mind, you might want to choose one with a very small limit that you pay separately. You will avoid making any additional charges on that credit card unless it is an absolute emergency. You will want to discuss this with your debt management counselor.

Most creditors are willing to accept the terms of a debt management program because it shows you are accepting responsibility for your debt. They want to recoup the money you owe so this is a very realistic way for that to happen. Most debt management agencies have policies in place about missing payments. Generally, if you miss two payments in a row they will drop you from the program. It is important you notify the debt management agency if you are having difficulties with making a payment.

While getting credit can be easy, it can be a long time until you are able to repay and fix your credit. If your personal loans and other debt have spiraled out of control, contact a debt management program to see if they can help your situation.

Thursday, May 25, 2006

Debt vs Equity Financing

A brief overview of the basic types of financing may be helpful to understanding which options might be most attractive and realistically available to your particular business. Typically, financing is categorized into two fundamental types: debt financing and equity financing.

Debt financing means borrowing money that is to be repaid over a period of time, usually with interest. Debt financing can be either short-term (full repayment due in less than one year) or long-term (repayment due over more than one year). The lender does not gain an ownership interest in your business and your obligations are limited to repaying the loan. In smaller businesses, personal guarantees are likely to be required on most debt instruments; commercial debt financing thereby becomes synonymous with personal debt financing.

Equity financing describes an exchange of money for a share of business ownership. This form of financing allows you to obtain funds without incurring debt; in other words, without having to repay a specific amount of money at any particular time. The major disadvantage to equity financing is the dilution of your ownership interests and the possible loss of control that may accompany a sharing of ownership with additional investors.

Debt and equity financing provide different opportunities for raising funds, and a commercially acceptable ratio between debt and equity financing should be maintained. From the lender's perspective, the debt-to-equity ratio measures the amount of available assets or "cushion" available for repayment of a debt in the case of default. Excessive debt financing may impair your credit rating and your ability to raise more money in the future. If you have too much debt, your business may be considered overextended and risky and an unsafe investment. In addition, you may be unable to weather unanticipated business downturns, credit shortages, or an interest rate increase if your loan's interest rate floats.

Conversely, too much equity financing can indicate that you are not making the most productive use of your capital; the capital is not being used advantageously as leverage for obtaining cash. Too little equity may suggest the owners are not committed to their own business.
Lenders will consider the debt-to-equity ratio in assessing whether the company is being operated in a sensible, creditworthy manner. Generally speaking, a local community bank will consider an acceptable debt-to-equity ratio to be between 1:2 and 1:1. For startup businesses in particular, the owners need to guard against cash flow shortages that can force the business to take on excess debt, thereby impairing the business's ability to subsequently obtain needed capital for growth.

Caution
Exercise caution when making equity contributions of personal assets (cash or property) to your business. Usually your rights to that contribution become secondary to the rights of business creditors if the business goes bad. Alternatives to outright transfers of capital to the business may be secured loans or "straw man" transactions (you loan money to a third-party relative or friend who then loans the funds to the corporation). The insider then takes a secured interest in the property.

Sunday, May 14, 2006

The Pros and Cons of Debt Consolidation Loans

You are swimming in debt. You have 4 credit cards maxed out, a car loan, a consumer loan, and a house payment. Simply making the minimum payments is causing your distress and certainly not getting you out of debt. What should you do?

Some people feel that debt consolidation loans are the best option. A debt consolidation loans is one loan which pays off many other loans or lines of credit.

I'm sure you've seen the advertisements of smiling people who have chosen to take a consolidation loan. They seem to have had the weight of the world lifted off their shoulders. But are debt consolidation loans a good deal? Let's explore the pros and cons of this type of debt solution.

Pros
  1. One payment versus many payments: The average citizen of the USA pays 11 different creditors every month. Making one single payment is much easier than figuring out who should get paid how much and when. This makes managing your finances much easier.
  2. Reduced interest rates: Since the most common type of debt consolidation loan is the home equity loan, also called a second mortgage, the interest rates will be lower than most consumer debt interest rates. Your mortgage is a secured debt. This means that they have something they can take from you if you do not make your payment. Credit cards are unsecured loans. They have nothing except your word and your history. Since this is the case, unsecured loans typically have higher interest rates.
  3. Lower monthly payments: Since the interest rate is lower and because you have one payment vs many, the amount you have to pay per month is typically decreased significantly.
  4. Only one creditor: With a consolidated loan, you only have one creditor to deal with. If there are any problems or issues, you will only have to make one call instead of several. Once again, this simply makes controlling your finances much easier.
  5. Tax Breaks: Interest paid to a credit card is money down the drain. Interest paid to a mortgage can be used as a tax write-off.

Sounds great, doesn't it? Before you run out and get a loan, let's look at the other side of the picture?

Cons

  1. Easy to get into further debt: With an easier load to bear and more money left over at the end of the month, it might be easy to start using your credit cards again or continuing spending habits that got you into such credit card debt in the first place.
  2. Longer time to pay off: Most mortgages are the 10 to 30 year variety. This means that rather than spend a couple of years getting out of credit card debt, you will be spending the length of your mortgage getting out of debt.
  3. Spend more over the long haul: Even though the interest rate is less, if you take the loan out over a 30 year period, you may end up spending more than you would have if you had kept each individual loan.
  4. You can lose everything: Consolidation loans are secured loans. If you didn't pay an unsecured credit card loan, it would give you a bad rating but your home would still be secure. If you do not pay a secured loan, they will take away whatever secured the loan. In most cases, this is your home.

As you can see, consolidated loans are not for everyone. Before you make a decision, you must realistically look at the pros and cons to determine if this is the right decision for you

The Pros and Cons of Leveraging

The word "leveraging" frequently raises red flags. Often, the only time the public hears of leveraging strategies, is when a strategy has failed... at times spectacularly. Because of the largely negative press, it is often forgotten that if used properly leverage can be quite advantageous.

What is leveraging?
Simply put, leveraging is borrowing to invest. The most familiar use of leverage is using a mortgage to buy a home. In return for a down payment you receive funds to purchase an asset that would otherwise be too expensive. The hope is that the home will appreciate in value, and when you sell you will be able to realize a profit over what you bought it for (including interest payments).

This is the principle behind leveraging. You gain access to a larger amount of capital and hopefully earn a return high enough to make a profit. If your investments perform well, the use of leverage can greatly magnify those returns. This of course is the appeal.

The downside...
Of course, there is some risk. Just as gains are magnified, so are losses. As well, increases in interest rates may also cut into your profits or add to your losses. It is important to enter into any leveraging strategy with these risks in mind, and take steps where possible to lower the risk level. For example, investing in a well diversified portfolio will help guard against losses and enhance returns. Choosing a fixed-rate loan over a variable rate will also protect you against rising rates.

There are a number of ways that average investor can benefit from leveraging:

Investment loans: This is leveraging at it’s most basic. You use borrowed funds to invest with the hope that returns outpace the interest on the loan. In Canada, you can deduct the interest paid on loans for certain investments, which make this strategy much more appealing, and reduce the effect of interest rates eating into your returns.

RRSP loans: When you borrow to invest in your RRSP, you get two advantages. First, you get the tax deduction for the larger RRSP contribution. Secondly, the growth of your investment is tax-sheltered within the RRSP which will enhance your returns.

Universal Life Insurance: The tax-advantaged status of Universal Life makes it an excellent vehicle for a number of leveraging strategies. Check out the Retirement Income Maximizer and Investor Plus strategies on my website for examples of how you can benefit.

Is Leveraging for You?
Leveraging strategies range from the basic to the very sophisticated and involve varying degrees of risk. Whether or not you could benefit depends on your financial situation, goals and comfort level with taking on risk. It’s definitely not for everybody.

The Pros and Cons of Borrowing To Invest

Investors who do not have a great deal of available cash often borrow money to make investments. This strategy is called leverage, and can actually help to increase your returns under the right circumstances. It is important to understand, however, that while leverage can help to boost returns, it can also magnify losses.

Borrowing to invest through a stockbroker is called buying on margin. Typically, you are allowed to borrow up to fifty percent of your investment on margin. However, you must maintain that 50 percent level. Therefore, if markets go down you may have to put more money into the account to cover a "margin call". Another popular means of leveraging is using a line of credit or personal loan to invest. In this case, you have to be very sensitive to the fact that you are putting the collateral behind the line of credit or loan (possibly your house) at risk if the value of your investment decreases substantially.

Here's an example of how leverage can magnify your returns in times when markets are increasing:

You have $1000 to invest. You borrow an additional $1000, so you have $2,000 to invest. You invest the entire $2000 in 200 shares of ABC Co. at $10 per share. Three days later, the market value of ABC Co. surges to $12 per share, leaving you with a hefty profit of $400, less interest costs. That's almost a forty percent rate of return on your original $1000 investment, compared to the twenty percent rate of return that you would have achieved had you invested without borrowing.

This amplified rate of return is the reason many investors are attracted to the practice of leveraged investing. Investing on margin when markets are going down, however, can also increase your losses.

Consider the previous example, except that the market value of ABC Co. now decreases to $8 per share. If you were to cash out your investment, the rate of return would be minus forty percent. Compare this to the twenty percent loss that you would have sustained had you strictly invested your own money. In addition, if you were borrowing on margin, you would now be faced with a margin call, or request by your broker to add money to your account to make up the shortfall in your account.

Investing with borrowed money can be a very effective method of improving your investment returns, as long as your investment goals and objectives are being met. If your risk tolerance level is high enough to include leveraged investments, you might want to review the following tips before investing on a loan:
  • Borrow only an amount you can afford to pay back
  • Keep a financial cushion to see you through declines in the market
  • Keep an eye on interest rates and inflation - increased rates can cut into your returns
  • Know the consequences of using collateral as security for you loan
  • Understand the tax consequences of margin profits
  • Make sure the investment meets your objectives and risk tolerance levels

Wednesday, May 03, 2006

Home equity or refinance: Which is better for you?

Looking to refinance your first mortgage and take cash out at closing? There may be a better deal for you.

When the prime rate is below the average rate charged on 30-year fixed mortgages, consumers looking to tap their home equity may find it cheaper for them to get equity loans or lines of credit. Besides costing thousands of dollars less in closing costs, the rates on these loans may be lower than first mortgages.

Before rushing out to a lender, though, consumers should take stock of why they're borrowing and which loan makes the most sense for them. While home equity loans and lines of credit are currently attractive, they still aren't always the best option.

Pros

  • In most cases, borrowers can deduct the interest on loans up to $100,000 on their taxes.
  • The loans carry lower interest rates than credit cards and unsecured personal loans.
  • They can be used for lots of things: debt consolidation, home improvements, tuition, medical costs, emergencies and big-ticket items.

Cons

  • If you default, you could lose your home, your biggest asset.
  • Such loans can be a risky spending tool for younger homeowners who are not established in their careers and have less experience owning a home and managing money.
  • The loans can be risky for older homeowners who would be tapping their nest egg close to retirement.
  • Credit lines have variable interest rates, so monthly payments can rise, even if your income doesn't.
  • If your home's value drops, you can end up owing more than the house is worth -- a bad situation if you need to sell the house.
  • Using an equity loan to pay off debt might make monthly payments cheaper but could cost you more in the long haul, because you're taking much more time to pay off the debt.
  • You might not be able to lease your home during the term of your loan.

"It's good for someone who has to make a purchase and they know they're going to pay it off in a few years or they may want to move out in a couple of years," said Jim Cosman, managing director for consumer finance and executive vice president at Philadelphia-based Sovereign Bancorp Inc.

"But once you get a bigger dollar amount, the line starts to cross," he added. "If I need a longer time to pay this off in order to keep my payments reasonable, if I can't afford a five-year or 10-year repayment schedule, I may need to go with a mortgage."

First mortgage rates traditionally are the lowest rates around. Banks and loan investors feel the most secure with these loans because they have first lien position, which in English means they get first dibs on any money generated through foreclosure of deadbeat borrowers' homes.
When first mortgage rates are lower than equity loan rates, it usually makes sense for a borrower to tap equity by going through a so-called cash-out refinance. In that process, the customer refinances the first mortgage, increases the balance and receives the difference between the old and new balances in cash at closing.

The rate curve ballBut rates don't always behave normally. Sometimes, the interest rate market throws borrowers and banks a curve ball. When that happens, equity loans can actually end up being cheaper than first mortgages, even though most equity loans are riskier because they're usually in the second-lien position.

The reason lies in the way banks set rates on various home loan products. Most first mortgages are bundled into mortgage-backed securities, or MBS, and sold into the secondary market via Fannie Mae and Freddie Mac.

Because of this process, bond market traders and the MBS yields -- rather than any banker, broker, lender or even, to a degree, Federal Reserve Board Chairman Alan Greenspan -- control what happens with first mortgage rates.

Wall Street bond traders operate the same way stock market investors do. They're constantly trying to figure out what's going to happen next in the economy, not what's already taken place.
When the Fed cuts rates, it usually helps the economy recover. So bond traders start to drive mortgage rates higher in anticipation of an eventual recovery -- even though the Fed may still be cutting the rates it controls directly and the economy hasn't improved yet.

Home equity behaviorHome equity loans work differently, though. For one thing, banks have more say over the rates charged on those because they typically keep the loans on their books, rather than sell them off to third-party investors.

For another thing, banks use yields on shorter-term bonds, such as two-year or five-year Treasuries as a guideline for their equity loan rates rather than yields on long-term MBS. Those shorter-term yields are much more sensitive to the level of the Fed-controlled fed funds rate than they are to the long-term economic outlook.

As for home equity lines of credit, most banks set their rates based on the shortest-term market rate of all, the Wall Street Journal prime rate. It moves in lock step with the fed funds rate.

The Fed has raised short-term interest rates twice this year by a total of one-half percentage point, and is expected to continue raising rates. This is pushing rates on home equity lines of credit higher for both new and existing borrowers, as HELOCs carry variable interest rates.
But equity loans and lines of credit usually come without closing costs, so they can be $2,000 or $3,000 cheaper than first mortgages.

"It is relatively rare," said Vickie Hampton, associate professor of family financial planning at Texas Tech University in Lubbock, Texas. "But if you can get as much money as you need with good terms on a home equity loan as you can on a mortgage refinance, and you can get a rate that's attractive and lock it in, then that seems like a very wise thing to do."
The best equity candidatesSo who should go for an equity loan or line of credit rather than a cash-out refinance mortgage?

Consumers who plan to pay off their loans in a reasonable amount of time and those who don't need to borrow much money make good candidates. That's because banks offer their lowest rates on shorter-term equity loans.

Long-term equity loans tend to have rates that are higher than fixed-rate mortgages, even when the prime rate is low. And, customers who need $75,000, $100,000 or more will usually find they need loans with longer amortization schedules to keep their payments affordable. Most equity loans amortize over 10 years or 15 years, while many first mortgages amortize over as many as 30 years.

Customers who took out first mortgages during periods of extremely low rates may want to consider equity loans or lines of credit too. It doesn't make sense to refinance into a new first mortgage at a larger balance and higher rate and pay a couple thousand dollars in closing costs to do so.

"If you've got a favorable rate on a first trust deed mortgage, something in the 6s thereabouts or low 7s, you don't want to pay off a $100,000 mortgage to take out $20,000 and raise the rate on the whole amount," said Richard West, senior vice president and division manager at San Francisco-based UnionBanCal Corp. "You're much better off borrowing $20,000 and keeping the first mortgage.

"Each individual has to do the math and decide which way to go."
Customers willing to bet the economy will remain weak for a while may want to look first at equity lines of credit. If the Fed doesn't raise rates for a long time, the prime rate will stay low as well.

That's what happened between December 1991 and May 1994, when the prime rate remained below 7 percent and bottomed for many months at 6 percent. Someone who borrowed via a 30-year mortgage refinance at the beginning of that time period, by comparison, would have been stuck with an 8.25 percent interest rate.

Line of credit flexibilityBut even if that doesn't happen, lines of credit offer more flexibility than first mortgage refinances. Equity line borrowers only pay interest on what they borrow. If rates look like they're going to rise in a few months, they can pay off what they owe, then not carry a balance until the prime rate and the rates on their lines come back down.
Cash-out refinance customers get all their money up front and have to pay interest on the entire balances of their loans until they're paid off.

"The HELOC gives them a lot more flexibility," said Vijay Lala, executive vice president for product development and support at Calabasas, Calif.-based Countrywide Credit Industries, Inc. "It gives them what amounts to a flexible mortgage."

When borrowing with equity loans or lines of credit, borrowers should watch out for additional closing costs some lenders charge when those loans are in the first-lien position.
Banks agree to waive costs on equity loans and lines of credit because they don't have to perform many of the same closing and underwriting steps required on first mortgages. Many opt for computerized property valuations rather than full appraisals, for instance, and order title searches, but not new title insurance.

But when someone owns a house free and clear, there aren't any recent mortgage documents and safety checks to fall back on. So, some lenders go through the same steps they undertake on first mortgages and stick customers with the bill.