Consider This Before Taking Out A Debt Consolidation Loan

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Consolidating debt is about more than combining your current debts into one loan — you’ll have to step back and change your financial habits in order to be successful.

Debt consolidation can look like a great fix for your financial woes, but it may not be the solution you really need.

Debt consolidation is the process of refinancing multiple balances into a single loan. You can take out one loan for the total amount of your current debt, then repay your existing debts with the funds from the new loan. Finally, you’re left with just the new loan to repay.

A debt consolidation loan can help make life a bit easier, reducing the amount of loans and debts you need to track. Making a single payment each month may even save you money in the long run if you can get a lower interest rate than your existing loan rates, and it can help you avoid sweeping a few bills under the rug (raise your hand if you’re renting in Boston, MA, or another pricey market and have felt the burden of a hefty rent in addition to student and car loans).

However, these benefits aren’t guaranteed, and what you save on your interest rate may be canceled out by origination fees and other charges. Consider these factors and be prepared to change the way you spend money before you consider a debt consolidation loan.

 

Debt consolidation won’t necessarily make things easier

The idea behind debt consolidation is a good one. You get to roll all your debt into one loan to focus on and repay. It makes your financial life simpler and may help you pay less on what you owe if you can get a lower interest rate.

But it doesn’t always work out this way. “I’ve worked with plenty of people pre- and postbankruptcy over the years,” says Jason Reiman, a certified financial planner. He’s the founder of Get Financially Fit!, a company based in Tucson, AZ, that helps people with their finances. “A leading indicator of bankruptcy, in my experience, is debt consolidation.”

Reiman says that consolidating loans (with the exception of student loans) usually provides you with a short reprieve. It’s often followed by taking on new debts outside of the ones you’ve already consolidated. Why do people do this? “Debt consolidation typically doesn’t produce the expected results simply because of mindset,” Reiman says. “As humans, we resist change and discomfort.”

And changing your financial habits to not rack up more debt after consolidation can be really uncomfortable. You must change how you behave with your finances, and that could mean going without the luxuries and the standard of living that caused you to get into debt in the first place.

Be prepared to learn and understand how you spend money

“Debt consolidation can look OK mathematically, but it has a tendency to ignore the emotional and psychological aspects,” Reiman says. And those factors do matter as much as — or more than — the numbers.

Your mindset and behavior are at the heart of any financial issue. While a debt consolidation loan can help some people, it won’t do anything for you if you’re not committed to changing your internal thought processes and switching up your spending patterns.

Reiman says that for any solution to be effective, you need to start with the real cause of the problem. Ask yourself a few important questions. “For example,” he suggests, “how did I get into this heavy debt situation in the first place?”

So if debt consolidation isn’t the answer for you because it doesn’t address the root of your financial troubles, what is the solution? Reiman offers one exercise to try. “Get out a piece of paper and a pen,” he says. “Divide the paper into four quadrants: physical, spiritual, mental, and financial. Jot down your thoughts and actions over the past three to five years which may have prompted you to add more debt to your life.” Reiman says we will remember times when things seemed to happen outside of our control. But by taking a look at how we thought and felt at that time, we can see patterns in how we acted and reacted.

“The purpose of this exercise is to help uncover the counterproductive actions,” he explains. “Only when you know how you arrived at your current situation are you able to make solid choices about changing it for the better.”

Clean up your finances before consolidating

If you feel that a debt consolidation loan is an important step in your journey to financial success, make sure you do everything you can to eliminate opportunities to create new debts in the future. Cut up your highest-interest credit cards and use a budgeting system you can stick to. Start building an emergency fund or a savings account with a cash reserve you can draw on if something comes up that your monthly budget can’t handle.

Then sit down and make a plan for how you’ll repay your consolidated loan. Will you cut back on your spending to help make those payments and avoid further debts? Will you work to earn more so you have more cash flow to put toward debt repayment?

Consider other options

Remember, a debt consolidation loan is only one strategy for repaying what you owe. “The process of eliminating small debts one by one, and achieving these small wins, is invaluable,” Reiman says. And he stresses the importance of simply having a plan and tracking your progress.

“If you have multiple debt accounts, consider using a free program like powerpay.org to crunch the numbers,” he says. The site will help you craft a plan of action that most likely doesn’t include consolidation. You can also use various debt payoff strategies, like the debt avalanche or debt snowball, to help you make progress.

“Get accountability and coaching and be open to change,” Reiman says. “It’s difficult but possible.” Your current level of debt might seem insurmountable, but don’t get overwhelmed. Take a deep breath, consider your options, and make a plan. Then dive in!

 

Posted by Kali Hawlk on Trulia

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Why Getting Pre-Approved Should Be Your First Step

In many markets across the country, the amount of buyers searching for their dream homes greatly outnumbers the amount of homes for sale. This has led to a competitive marketplace where buyers often need to stand out. One way to show you are serious about buying your dream home is to get pre-qualified or pre-approved for a mortgage before starting your search.

Even if you are in a market that is not as competitive, knowing your budget will give you the confidence of knowing if your dream home is within your reach.

Freddie Mac lays out the advantages of pre-approval in the My Home section of their website:

“It’s highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.”

One of the many advantages of working with a local real estate professional is that many have relationships with lenders who will be able to help you with this process. Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding “your credit, debt, work history, down payment and residential history.”

Freddie Mac describes the 4 Cs that help determine the amount you will be qualified to borrow:

  1. Capacity: Your current and future ability to make your payments
  2. Capital or cash reserves: The money, savings and investments you have that can be sold quickly for cash
  3. Collateral: The home, or type of home, that you would like to purchase
  4. Credit: Your history of paying bills and other debts on time

Getting pre-approved is one of many steps that will show home sellers that you are serious about buying, and it often helps speed up the process once your offer has been accepted.

Bottom Line

Many potential home buyers overestimate the down payment and credit scores needed to qualify for a mortgage today. If you are ready and willing to buy, you may be pleasantly surprised at your ability to do so as well.

Posted by The KCM Crew

What You Really Need To Qualify For A Mortgage

 

A recent survey by Ipsos found that the American public is still somewhat confused about what is actually necessary to qualify for a home mortgage loan in today’s housing market. The study pointed out two major misconceptions that we want to address today.

1. Down Payment

The survey revealed that consumers overestimate the down payment funds needed to qualify for a home loan. According to the report, 36% think a 20% down payment is always required. In actuality, there are many loans written with a down payment of 5% or less.

Below are the results of a Digital Risk survey done on Millennials who recently purchased a home.

2. FICO Scores

The Ipsos survey also reported that two-thirds of the respondents believe they need a very good credit score to buy a home, with 45 percent thinking a “good credit score” is over 780. In actuality, the average FICO scores of approved conventional and FHA mortgages are much lower.

Below are the numbers from the latest Ellie Mae report.

Bottom Line

If you are a prospective purchaser who is ‘ready’ and ‘willing’ to buy but not sure if you are also ‘able,’ sit down with someone who can help you understand your true options.

Posted by The KCM Crew

Should You Buy a Home While Carrying Student Debt?

Financial experts give their two cents on managing both student debt and a mortgage.

It’s challenging for first-time buyers to break into the housing market as rents keep rising and the inventory of low-value homes remains scarce in most areas. Add thousands of dollars of student debt to the equation and potential buyers may assume they simply cannot afford to buy. Recent data showed that home buyers who completed at least a bachelor’s degree are minimally affected by their student debt when shopping for homes.

Check out some tips from personal finance experts about acquiring mortgages while carrying significant student loan debt.

If you had student loan debt, what was your payment strategy to get rid of it?

I used the debt snowball method to pay off my student loan debt. In 2005, I still owed $13,000. Since my loans were serviced through Sallie Mae, I took advantage of the 1-year forbearance to pause my loan payments so I could aggressively pay off smaller loans that we owed. While the interest still accrues during the forbearance period, I was able to focus on clearing up other debt faster. After the year passed, I was able to start paying off my student loan with more traction. It only took another year and a half to retire the remaining student loan balance. — Toni Husbands of Debt Free Divas

Personally, I was lucky enough to make it through undergraduate and graduate school without accumulating any student debt. My wife, however, accumulated between $10,000 and $20,000 in student debt from going to a small private college for her undergraduate degree. Once we got married, I “married” her student debt as well. Currently, she still has around $11,000 in student loan debt. To manage the payoff, the first thing we did was to call the loan administrator and request a lower interest rate, which they did to our surprise without any problems. Currently, the interest rate is only 3 percent annually, which equates to $124 per month. At this level, I do not feel that much of a hurry to pay it off. Instead, it is more along the lines of a low-interest home mortgage, which we are paying off at the required rate, but no more. — Jacob Irwin of My Personal Finance Journey

If you’re still carrying student loan debt, what is your financial plan to eliminate it?

Slow and steady! — Heather Jarvis of Ask Heather Jarvis

I currently hold quite a bit of student loan debt — over $85,000 — but I like to think that my resolve is tantamount to the balance. When I first graduated, I had nearly double that amount to pay off. But by making the pay-off my first financial priority and sending over $1,700 to pay it down every month, I was able to make a sizeable dent in that number quickly. I also cut out spending elsewhere to have more to send toward my loans whenever possible. This meant limiting meals out, having multiple roommates rather than living alone, and forgoing cabs in favor of public transportation. — Mario Bonifacio of Debt Blog

If you’re a homeowner, did you have student loan debt at the time you bought? How did that impact your purchase?

We didn’t let the student loan debt hold us back from buying a home, but we also purchased a home that easily fit into our budget instead of purchasing a home that stretched our budget. — Katie Brewer of Your Richest Life Planning

We purchased a condo while I had an outstanding student loan balance. The pre-approval process takes into account your debt-to-income ratio when determining the amount you’re able to borrow. Those purchasing a home without outstanding student debt should ensure that their monthly payment does not exceed 25 to 30 percent of your monthly income. We started with a small condo with very affordable monthly payments and assessments that allowed us to have breathing room in our budget to address our outstanding debt — including my student loans. — Toni Husbands of Debt Free Divas

The student loan debt did not impact our purchase much at all, since the home we wanted to buy was very affordable based on our income. For us, I do not believe it would have been better to pay off the student loan prior to buying a house, since our debt was fairly low, carried a reasonable interest rate, and does not tie up a large portion of our monthly income. — Jacob Irwin of My Personal Finance Journey

In hindsight, would it have been better to pay off your student loan debt before or after your home purchase?

One thing I would do differently would be to focus on repaying my students loans aggressively as soon as I graduated from undergrad. Instead of taking on car loans and living in high-priced apartments, I could have been much more aggressive as a single person with no children. Instead, I was comfortable with the idea of paying the minimum amount for the full loan term because that was the normal approach to dealing with debt. — Toni Husbands of Debt Free Divas

If you’re not a homeowner, is your student loan debt prohibiting you from buying?

I don’t believe that my student loan is prohibiting me from purchasing a house, though I may have been able to contribute a down payment fund by this point if it weren’t for my student loans. I still feel like both my personal and professional life are in limbo, and at this stage I feel like renting is the smart choice for my situation. I’m currently contributing extra money toward both my 401(k) and my personal IRA account each year and I could instead allocate some of that money towards a down payment if purchasing a home was one of my priorities. My student loans have definitely put the thought of even saving for a home on the backburner, but it was also not a priority of mine to begin with. — Debt Hater of From Debt to Dreams

What are your tips for folks carrying substantial student loan debt?

The single most effective way to get rid of student loans while saving and building wealth is to live below your means. When you start significantly upgrading your lifestyle, you lose flexibility with your budget. — Katie Brewer of Your Richest Life Planning

Maintain a positive attitude. The best plans and the most sophisticated math in the world don’t mean a thing if you make yourself miserable and give up. Second, make a budget. Knowing where you spend will help you make meaningful cuts and not beat yourself up over meaningless cuts (like single-ply toilet paper or bad Q-tips). Lastly, put together a sensible timeline of how quickly you might be able to pay off all your debt. Having a timeline can change the way you look at your debt; whereas hundreds of thousands of dollars might seem insurmountable, you know that December 2019 will definitely arrive and can therefore plan the months leading up to it. — Mario Bonifacio of Debt Blag

First, use the federal government to your advantage. It offers programs to consolidate and, in some cases, even forgive student loans. Sadly, not everyone knows about them. For instance, a relatively new program is called Pay As You Earn, or PAYE for short. It actually caps the monthly federal student loan payment at 10 percent of your discretionary income. Second, don’t stop paying. The same government that offers helpful programs can also garnish your wages, take a portion of your Social Security benefits, and confiscate tax refunds. Call your loan servicer and ask about your options. But be careful of student loan repayment scams. Only deal with reputable organizations that have excellent reviews and a Better Business Bureau rating. Third, get creative. For instance: volunteer with organizations like AmeriCorp. They offer loan forbearance (which means you don’t have to pay on the principal or interest while working). After your service, you receive a monetary award you can put toward your loan. — Howard Dvorkin of Debt.com

What advice do you have for prospective home buyers limited by their student loan debt?

Build a strong credit history by making your payments on time. Improve your debt-to-income ratio by paying down credit cards and other consumer debt. Balance your competing goals of paying down debt and saving for a down payment. — Heather Jarvis of Ask Heather Jarvis

Don’t let student loan debt hold you back from buying a home. It is important to make sure that you don’t take on more than you can handle, but it’s also important to balance student loan debt with other important financial goals. Make sure you purchase a home that allows you some room in your budget to focus on other goals. — Katie Brewer of Your Richest Life Planning

For anyone looking to buy a home and carrying loan debt, I would say that it is all about balance as with most things in life. You need to set your goals and figure out what is important to you. Are you OK with stretching your student loans out a few more years in order to save for that down payment? Or does the student loan payment need to be eliminated so that you have breathing room in your budget for a mortgage? It may be best to pay off your student loans as quickly as possible (especially if they are high-interest loans), and then switch your focus toward purchasing a home. If you do have any outstanding credit card debt, I would advise you to pay that off before even starting to save for a down payment. If you have sufficient income to pay off your student loans a little slower and buying a home is a priority for you, start shifting some of that money toward your down payment instead. If you come up with a sound financial plan and make sure that you can afford the monthly payments, I don’t feel that there’s any reason that a student loan will prevent you from owning a home. — Debt Hater of From Debt to Dreams

Posted by Tali Wee on Zillow

Mortgage Rate Changes Over the Years-Lock in Now!

Some Highlights:

  • With interest rates still around 4% now is a great time to look back at where rates have been over the last 40 years.
  • Rates are projected to go up a full percentage point by this time next year according to Freddie Mac.
  • The impact your interest rate makes on your monthly mortgage cost is significant!
  • Lock in a low rate now while you can!

Buy Your First Home, Even Without “Perfect” Credit

Purchasing your first home is no small event, and first time homebuyers often wonder if they have what it takes to be approved for a mortgage. This chart gives you a breakdown of the average credit scores that have been approved over the years and gives you an idea of the growing ability for Americans to secure a loan.
Need Perfect Credit

Is an Assumable Mortgage a Good Idea?

Looking for an alternative to a traditional mortgage?

Is an Assumable Mortgage a Good Idea?

An assumable mortgage is a loan that allows a buyer to take over a seller’s current loan, typically with no change to the terms or interest rate.

When interest rates are low or falling, borrowers aren’t interested in taking on a loan with a higher interest rate than what a broker could offer.

But, if you’re purchasing a home with an established loan at 3.75% and mortgage rates have risen to 5.5%, you may want to consider an assumable loan.

Why consider an assumable mortgage

The top benefit to assuming a loan is a lower interest rate than you could get by applying on your own. In addition, your closing costs will be reduced. You’ll still have to pay some fees for the loan qualification process.

If you’re assuming an FHA loan, you won’t need to pay upfront mortgage insurance costs—just the ongoing mortgage insurance payments for the life of the loan.

One other advantage of an assumable loan is that you’ll be paying only the remainder of the seller’s loan.

Some simple math gives you a good example: if a seller borrowed $200,000 for their home purchase in 2011 at 4.2% with a 30-year loan, their monthly principal and interest payments are $978. If you were to borrow $200,000 at 5.2% with a 30-year loan, your monthly principal and interest payments would be $1,098.

In addition, because the seller has already repaid the initial three years of the loan, you would only need to make payments for the remaining 27 years of their loan. The sellers will have paid down $24,562 in interest after three years of payments.

By assuming the loan, you’d save $43,268 over the 30-year loan thanks to the difference in interest rates—plus the interest that the owners have already paid ($24,562)—for a total savings of $67,830.

Assumable mortgage options

Conventional loans are rarely eligible for assumption—most typically require the loan to be paid in full when the property is sold or transferred to another owner. VA and FHA loansare eligible for assumption, but there are a couple of additional requirements:

  • FHA and VA loans both require the borrower to be approved for the loan.
  • VA loans allow a non-veteran to take over the loan, but the sellers are still responsible for the loan if the new borrower defaults. If a veteran assumes the loan, the sellers are not responsible for the loan after settlement occurs.

Obstacles to an assumable mortgage

Before you run out to capitalize on someone else’s favorable loan, realize that a loan assumption isn’t always on the table.

In addition, you’ll typically need significant cash or to take out a second mortgage if the current home price is more than the remaining mortgage.

For example, if the sellers have made three years of payments as in the example above, their remaining principle due is $189,353. If the home appreciated in value and you buy it for $250,000, you’ll need extra cash as your down payment in order to assume the loan.

Alternatively, you can make a smaller down payment and finance some of the additional cost with a second loan, but be aware that second mortgages are more difficult to qualify for and typically have a higher interest rate than a first mortgage.

A good lender will help you decide whether a loan assumption or a traditional finance makes the most sense for your home purchase.

This post was originally published by  on realtor.com. See it here.