Prism Money
Shedding light on personal finance
Need a loan? 4 tips to improve your debt health
You’re young, ready to start a family and make the most significant investment of your life — the purchase of your first home. You’ve saved for a sizable down payment, but have you assessed your debt health?
The Great Recession has driven home the perils of plastic dependency, yet the average credit card debt per household in the U.S. is $14,750, according to CreditCards.com. And, in March alone, there were 144,657 consumer bankruptcy filings, up 41 percent from February’s total of 102,686.
“Right now, in this economy, credit is essential to getting a mortgage. There are different kinds of mortgages, but credit is a huge factor, along with the value of the property and your income,” says Tracy Becker, author of the Credit Solutions Kit and founder of credit restoration company North Shore Advisory.
Debtscore.com — a free financial tool developed by oweing.com — is designed to take the guess work out of assessing your debt health and help “borrowers understand for the first time how much debt is appropriate for their age, income and educational level.”
Warren calls for accountability in consumer agency
Elizabeth Warren, a Harvard law professor and the engineer behind the new Consumer Financial Protection Bureau (CFPB), laid out her blueprint for making the new consumer agency accountable to consumers during a speech on Friday.
Prior to the financial crisis that began in 2008, oversight for consumers was scattered among seven tangled government agencies “with gaping holes in oversight,” Warren told attendees at the Society of American Business Editors and Writers 48th Annual Conference at Southern Methodist University in Dallas. “A single regulator with a clear mission is more accountable,” she said.
Warren used the words “account” “accountable” and “accountability” at least 20 times in her prepared remarks and during the question and answer session with reporters. “Accountability means someone can be held responsible to failure,” she said.
The role of the agency is to police mortgages and credit cards and try to curb predatory lending and abusive card accounts. While the consumer agency will fix some basic structural problems in those areas, the CFPB cannot block other government agencies from doing their jobs.
Homeowners, don’t be fooled by this foreclosure scam
Looming foreclosure can be one of the scariest times for any family down on its luck. So, it stands to reason that crooks would design scams to target that vulnerability and try to squeeze whatever money these people who can’t pay their bills can scrape up.
The state of California has issued a warning about a scam that involves getting these vulnerable homeowners to pay fees up front with the idea of winning a lawsuit that will get them their homes free and clear. The cost to participate in this heavily marketed scam is $5,000.
The scam is particular elaborate since a federal ban went into effect earlier this year against requiring up-front payments to those offering mortgage relief. Rules being what they are, there is an exception to it — for lawyers. While the terms are a bit more specific than that, it opened the door to people supposedly working on behalf of lawyers to still preying on those whose homes are being foreclosed.
“Those who continue to prey on and victimize vulnerable homeowners have not given up,” the warning by Wayne S. Bell, chief counsel of the California Department of Real Estate, says. “They just change their tactics and modify their sales pitches to keep taking advantage of those who are desperate to save their homes. And some of the frauds seeking to rip off desperate homeowners are trying to use the lawyer exemption above to collect advance fees for mortgage assistance relief litigation.”
Hey Mitch… You need to do more than run a spell-checker over your text. That won’t find missing words. You need a proof-reader.
Are big down payments better for home buyers?
Ouch!
My friendly neighborhood blogger, Felix Salmon, took after me big time for my post about why it doesn’t pay to wait while you save up for a down payment. Here’s a sample: “Linda’s on a roll here and manages to come out with one of the most astonishing pieces of personal-finance advice I’ve seen.”
My astonishing advice? You’re better off getting into a house now, while mortgage rates are near historic lows and housing prices are down sharply from their highs. Instead of spending five or more years paying rent and accumulating a down payment, borrow more now, and keep your savings for yourself.
Sorry, Felix, I stand by my piece. Remember, my job is to write about what’s good for the consumer, not the bankers and brokers. And, for a young person who wants to own a house, the numbers say it’s better to squeeze together your 3.5 percent down payment and lock in a 30-year fixed rate loan now, at 4.87 percent (with deductible interest).
Agreed with all of the above criticisms. I considered the poll and could not rightly choose any of the answers. It is a poorly framed question.
From the original article, Linda appears to be asserting that a family which cannot afford to save more than $250/month should stretch to purchase a home with a low downpayment. That is insanity!!! At least in the short term, home ownership demands a greater cash flow than renting. If somebody cannot afford to save more than $250/month, then they absolutely do not have enough financial flexibility to support a house. That path leads to default and foreclosure within five years.
The situation is somewhat different for a family with greater financial resources. A household in a stable situation that is able to sock away $1000/month (on top of the rent they are already paying) is not taking a huge risk if they choose to buy — as long as they still have $500+/month free cash flow after buying. As recent history has starkly demonstrated, you need a LARGE margin of safety for homeownership to make sense.
Nobody knows whether market prices are headed up or down. They are below their recent bubble-highs, but still well above where they were a decade ago (while the economy has stagnated and most families are in a more tenuous financial situation). I could imagine them rising again in some markets, but I could just as easily imagine them falling another 10% to 30%. Shiller takes that position.
Anybody buying today needs to be comfortable with the possibility that they will be underwater five years from now. That isn’t necessarily a terrible thing if you are happy to live in the home for 30 years, but it becomes VERY difficult to move (and sell) in such a situation. And once you sell, you lose the benefit of the low-rate mortgage.
Thus I would encourage a family to purchase now if:
(1) They intend to live in the house for at least ten years and possibly much longer.
(2) They have sufficient financial flexibility to support the cost of ownership AND save an additional $500+ dollars a month.
(3) A secure job situation (or as secure as anybody can be today).
Three simple criteria, none of which made Linda’s articles. *IF* you meet those criteria, then you can consider whether it makes sense to put up a larger downpayment, keep a large emergency fund, or put the money into (tax-sheltered) retirement funds. Any of those three alternatives might make sense depending on your personal situation.
Saving up for a big down payment? Sucker! (Corrected)
Remember the Red Queen’s warning to Alice? “It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast.”
That must be what it feels like to be saving up for a down payment on a home these days. Washington policymakers are entertaining several proposals that would raise the minimum down payment required for loans backed by Fannie Mae and Freddie Mac. Lenders are raising their own minimum cash requirements — the average down payment on new loans for home purchases is now around 27 percent, according to the Mortgage Bankers Association of America. Meanwhile, the Federal Housing Administration, the chief source of low down payment loans, is raising the fees it charges folks who only have minimal amounts of cash to the table.
Trying to save just the standard 20 percent? That could take you 14 years if you’re an average middle-class family looking for an average middle-class house, the Center for Responsible Lending reported recently. If you save $250 a month, it would take nine years to save a 10 percent down payment and six years to save a five percent down payment.
And that doesn’t seem to pay. If you think about the cost of paying rent for five or more years, you may be better off jumping into a home with a low down payment now. That’s true even if you have to spend more money on fees and mortgage insurance to get one of those low down payment loans. While nobody can predict interest rates with certainty, it seems unlikely that the mortgage terms you’d face down the road would be as favorable as they are now, with the Federal Reserve holding short term rates close to zero, and the government still backing loans via Fannie Mae and Freddie Mac.
By the way, if you consider the implications of what I wrote above, you will quickly realize that the average household cannot afford to buy the average house. To me, that implies that housing prices still have a long way to fall.
So why would anybody be in a rush to stretch their finances, risking bankruptcy and the loss of all their savings, to purchase now? There are worse fates than renting for a few years.
What you need to know now about credit scores
Consumers may think they know all about credit scores, but they don’t, a key advocacy group has found.
“The bad news is that consumer knowledge has lagged behind recent changes in the credit score marketplace,” Stephen Brobeck, executive director of the Consumer Federation of America, told reporters on Monday, Feb. 28. The Consumer Federation joined with VantageScore Solutions, a credit scoring company, to survey consumers’ current knowledge about credit scoring. On average, consumers scored a barely passing 60 percent.
Lenders, landlords, employers and insurance companies all use these automated scoring systems to assess the riskiness of their potential customers, so having a low credit score can cost you an apartment, an insurance policy, a mortgage loan, or several thousands of dollars in higher interest costs. But the whole credit-scoring scene has been changing, because of better technology, more competition, and a punishing economic slowdown that has affected the scores of many, if not most borrowers.
The consumers surveyed were largely unaware of just how much a bad score could cost them. For example, a borrower with a bad credit score could end up paying more than $5,000 in extra interest on a $20,000, 5-year car loan, according to the survey. Want to test your own knowledge? Check out the survey, posted on a new site, CreditScoreQuiz.org.
An aid to avoiding being defrauded at worst, or making a bad credit assessment at best.
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Credit Reference Agencie
Real estate: First-time homebuyer basics
Dennis Lee, 26, is a model first-time homebuyer. Recently married, he and his wife, Dana, have financially secure jobs as a youth minister and accountant, respectively. They have good credit scores, and have been studying property price graphs and charts in their local San Francisco Bay Area for months.
With enough cash for a 20 percent down payment, and ample time to look, you would think Lee would be excited to take advantage of a probable bottoming of the market in 2011. Not exactly. “It’s a little overwhelming,” he says.
Cheaper prices and low interest rates make now a good time to invest in bricks-and-mortar, but with all the talk of tightened credit and foreclosures, knowing where, when and how to buy can be tricky.
Where and when to buy First, the bad news: “The process is more expensive, there are more hoops to jump through, and not as many good properties out there,” says Justin McHood, of mortgagecommentator.com.
Thanks for giving basic tips to first time real estate buyer. I am rickotton and i am also doing the business of real estate for long time.
Kill the mortgage deduction and give it to entrepreneurs
Somehow I don’t think President Obama had the home-mortgage interest deduction in mind when he mentioned the U.S. tax code before the U.S. Chamber of Commerce this week.
Yet winding down and eliminating this write-off for homes would be good for business. It’s unfair, doing nothing to revive the housing market and can be put to better use shifting it to entrepreneurs to create jobs.
Most of the job creation in the U.S. economy comes from small businesses, which typically have no public shareholders to sate and are not primarily interested in fattening pay packages of overpaid executives.
The home mortgage deduction needs to go because it doesn’t make housing less expensive, either. If anything, it makes homes more expensive because the subsidy inflates prices. Most homebuyers don’t even itemize to take advantage of it. Nixing it would make homes more affordable.
In a way, the deduction counteracts property taxes so that it is a wash, figuratively speaking. If you remove the deduction, owning property becomes a losing investment, as you would have to gain 3% or more each year just to break even (taxes+insurance+repairs). I believe the sole reason for the removal of the deduction is to make home ownership a losing proposition for the middle class, thereby converting them to renters where real estate essentially is owned by the wealthy. Looks like we’re heading back to the 1600′s everyone.
Time to end the mortgage interest tax deduction
Alan Mallach is a senior fellow at the Center for Community Progress and a visiting scholar at the Federal Reserve Bank of Philadelphia. The opinions expressed here are his own.
This is part of an ongoing series on tax reform ideas. Where do you stand? Vote below and come back regularly to be a part of the national debate.
If someone proposed a tax “reform” designed to push house prices up and encourage buyers to borrow to the limit of their ability at taxpayers’ expense, it is unlikely that they would get much support. Yet that is precisely what the home mortgage interest deduction does.
The research evidence is in. No matter what real estate agents say, there is no evidence it encourages home ownership overall. When it comes to home ownership rates in developed countries, the United States is roughly in the middle of the pack, about the same as Australia and Canada, which don’t have a similar deduction. Italy abolished its deduction in 1992, and still has a much higher home ownership rate than the U.S.
This deduction is redistribution of income, plain and simple. The only middle class it benefits are those who already own; it does not benefit those middle class folks who do not own, and may never own. The latter are busy subsidizing those of us who do.
This deduction is also part of what has turned out to be a house of cards; an unsustainable practice that eventually bubbled and burst.I agree that phasing it out would be the right way to do it because slower change is less disruptive than fast, and catastrophic disruption is to be avoided.
An underlying theme in opposition to this proposed measure is the sense that what we are receiving we are entitled to. The thing is, every beneficiary of a subsidy feels the same way. It is hard to imagine that millions of renters will insist on continuing to subsidize us.
A solution to the mortgage mess?
If you thought the U.S. foreclosure crisis was ebbing, think again. Every passing week brings with it new tales of mortgage loan defaults, and allegations of foreclosure malfeasance on the part of some banks.
Mortgage loan defaults are actually on the rise once more, which begs the question: is there are better way to structure their financing?
Two mortgage researchers think they have a better solution. Professors Brent Ambrose from the Institute of Real Estate Studies at Penn State University and Richard Buttimer from the University of North Carolina at Charlotte propose a new type of mortgage which would automatically reset your balance and monthly payments based on your home’s current market value.
Simply put, if you bought a property at $300,000 in 2006 and four years later its estimated worth is $250,000, your monthly payments would adjust to the new price. Conversely, if your property value goes up again, so would the amount you owe, up until the original scheduled balance.
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