A few weeks ago, my friend Kacie was talking about how she’s changing up her plans on paying her car loan off early.  She was saying that she’d have to pay a 1% “prepayment penalty” for paying off the loan early.  I was so excited when I realized I could help her save that money instead of paying it. I hate that banks charge clients for paying off loans early.  That just seems so backwards to me.  Every time I get to the prepayment penalty line during a loan closing, I explain to my clients how they can get around the prepayment penalty.

Here’s how you can do it.  Say you’ve got enough money saved to pay off your loan in full.  The bank you’re using charges a 1% prepayment penalty.  Your remaining balance is $10,000.  If you go to the bank and ask for a payoff amount, they are going to tell you somewhere in the ballpark of $10,100.  ($10,000 principal balance plus 1% prepayment penalty)  It will probably be a little more because of unpaid interest that hasn’t been billed yet.  Instead of making a lump sum payoff, break it down.

Ask to make a principal only payment of $9,999 or something close to that amount.  Make sure you find out how long it takes for the payment to post.  At my bank it’s usually overnight.  The next day, go in and ask for a payoff calculation.  Your new balance is going to be around $1 plus any unpaid interest.  When the teller gives you a payoff, the prepayment penalty is going to be a penny!  (1% of $1)  Awesome!  Make sure you share with your financial savvy friends!    

And that’s how you avoid a prepayment penalty!  I hope I’ve explained that well enough.  Please let me know if something’s not clear.

With the current credit crisis happening before our eyes, now is the time to make sure your credit report is in order.  Many banks are taking precautionary measures to ensure a credit crisis like this doesn’t happen again.  They are lowering the loan to value ratio on how much they will lend up to the home’s value; for example, my financial institution used to lend up to 100% loan to value, and now the maximum is 85%.  The are verifying income on a regular basis and requiring pay stubs.  It seems that the rules are being changed and banks are buckling down even more on a daily basis.

Today it was announced that if there’s a joint application, the rate of the loan would be based off the person with the lower credit score.  Hypothetically, if Mr. Money and I applied jointly for a loan and my credit score is 800, which would be an interest rate of 5%, and his credit score is 700, which is an interest rate of 7%, they are going to give us the 7%.  It is really devastating for someone who has horrible credit and has a strong co-signer.  It’s almost not worth having that co signer anymore.

While I understand all the rules and regulations, it’s still hard for me to grasp.  Almost my whole banking career we’ve been very giving with our loans.  As long as you had good credit, a steady income, and would sign on the line, you’d get the loan you wanted.  Not anymore.  We’ve been struggling every month to meet our loan goal.  Thankfully, they did lower it, but even then we’re still struggling.  It just amazes me how fast things can go downhill.

What’s your opinion of all these new rules and regulations for lending?  Do you think they are a good thing?

Lately I’ve been going back and forth between buying a new or used car when the time comes. Thankfully, we haven’t had any more trouble with my car, so we haven’t been having to give it too much thought. Just tossing around ideas. Tiffany brought up a good point about buying a used car.

“However, used is much cheaper, but I see it as inheriting someone else’s problems.”

That’s a great point, and I can’t get it out of my head now. Even though I’ve always wanted to buy a used car as our next vehicle, I’ve been debating about getting a brand new car. Here are some of the pros and cons I’ve been thinking about:

• If we buy new, we won’t have to worry about ANYTHING being wrong with the car. Well, of course something could be wrong, but we would know it would be covered under warranty.
• Some used cars are “lemons”. I’d hate to get stuck with one.
• If we buy new, the minute we drive off the lot, the car has depreciated in value. Of course I’m not looking at the car as an investment, but it just stinks to know there’s money gone instantaneously.
• If we buy used, our insurance will be cheaper.
• If we buy used, we may have the opportunity to pay cash for the vehicle. Mr. Money and I have different opinions on this (he’d rather take out a loan and have cash available if we need it) but the option may be there.
• Used cars can smell bad or be “beat up” from the previous owners being abusive. I definitely don’t want a car someone smoked in because of Mr. Money’s allergies.

Those are just some ideas I’ve had. I hope we don’t have to start seriously looking for a vehicle for awhile. I like having money in our emergency fund. I like not having a car payment. I like that our insurance premium is not outrageous. I’m just going to keep my fingers crossed for the moment! It’s good to know that we are exploring our options for the future though.

Is there something I missed in the “new versus old”? What would you do?

A few days ago I opened a new checking account for a very nice lady that came in asking about our free checking accounts. As I was talking with her about her lending needs, she asked me about “the loans that let you make flexible payments”, AKA home equity lines of credit. I was telling her about how they work; the minimum payment is interest only, so if you only pay the minimum payment you won’t get anywhere, but if you pay the amount you pay now on your mortgage, everything above the minimum payment goes towards principal. She thought it was a great idea, she’d be paying less than she pays for her mortgage payment each month, and it would free up some money for her and she’d be not as strapped for cash each month. I put an application in for her.

Declined.

I was a little taken aback, until I looked at her credit report. Her credit score? 494. That is the lowest credit score I’ve ever seen! I took a look and realized why it was so low. She had been 60 days late on her mortgage 3 times, and 90 days late 9 times. I was shocked. When I called her to let her know the decision, she acted surprised. I asked her if she had been late on any of her payments lately. She told me she’d been late a few times. A few times?? How can you be 90 days late 9 times?

This example is a perfect example of one of the sub prime loans and why it is a good idea to not get into a mortgage payment you can’t afford, and also why it’s important to make your payments on time. Because of her being late so many times, her credit score is trashed. I feel sorry for her, but on the other hand I don’t. She is the one that got herself into the situation, and she’ll have to get herself out.

Do you feel sorry for people like this who have overextended themselves?

Smarty Pig is a new idea, started by two individuals, Mike Ferrari and Jon Gaskell. The basic gist of it is this: you want a new ipod, a Hawaiian vacation, a new bike, etc. First you start a profile on the site, then you establish your savings account and goal, and figure out your monthly contribution. Then you have the option to share with friends and family your savings goal so they can track your progress and make donations if they would like. Start saving, and before long you’ll meet your goal!

There are no fees, you earn interest on your balances, and it’s FDIC insured, just like a high yield online savings account. What a great idea! The minimum savings goal is $250, and the maximum is $100,000. To get the account started, there has to be a deposit of $25 made to the account. Interest accrues daily but is posted quarterly. Once you reach your savings goal, you can request a Smarty Pig MasterCard® Debit Card which has the funds loaded on that you’ve saved up. You can then use your card to book your vacation, buy your bike, or do whatever you’d like with it. You also have the option to get a retail gift card to a retailer and get up to 5% additional boost on the money.

I wouldn’t recommend using Smarty Pig as your emergency fund. I think you should have your emergency fund easily accessible to you at all times. After all, that’s why it’s called an emergency fund!

There are a few points I did not like: you can’t stop the transfer once you’ve started it, but you can change the funding source. <s>There is a $25 fee if you would prefer a check be mailed.</s> They have done away from the $25 fee for a check! I think this shows how wonderful the people are at Smarty Pig. They heard people didn’t like the $25 fee for the check, so they did away with it. Great job, Smarty Pig!

Otherwise, there are no monthly fees. I think Smarty Pig is a great idea for anyone who is trying to save for a goal. Give it a shot!

It’s no secret that since the economy took the plunge banks have started tightening up on their lending standards. Many people are excited about lower rates, but just exactly how many of them can get approved for a loan in this economy?

In February of this year, many banks were still lending at 100% loan to value (LTV). Basically what this means is that they would allow you to tap into more equity in your home, but it would cost you a higher rate than if you went with the standard 89.9% LTV.

For example, if your house is worth $300,000, and you don’t owe anything on it, before you would have the possibility of a Home Equity Line of Credit or a Home Equity Loan of $300,000 if you wanted to go 100% LTV. Today, the most you could borrow out of your home’s equity would be $269,700, which is 89.9% of $300,000.

The reason banks are doing this? To cover their assets. I know many banks went crazy lending money to anyone who wanted it about 1-2 years ago. Now they are seeing the repercussions of this in today’s economy. Banks were lending too much money and consumers just couldn’t handle it. Here came the foreclosures.

If you were to go into the bank today and ask about home equity lending, you would probably be asked a couple questions: how much do you think your home is worth, and what is the total amount of any mortgages on the property? From there, the banker would tell you what amount you could get financing up to.

Banks are using the same lending procedures for auto loans, unsecured loans, and lines of credit. If you don’t have good credit and a good income, you’re probably not going to get approved. Use common sense when you are applying for any type of loan. Make sure you ask questions first before you sign. If you have any questions about lending, I’d be happy to help!

Many people are turning to their homes these days to tap into a resource they have worked hard to get: equity. They are looking to Home Equity Loans and Home Equity Lines of Credit to solve their financial problems.

Let me first explain how each of the two products work: a Home Equity Loan (also called a HELOAN) and a Home Equity Line of Credit (also called a HELOC). Both of these products are using your home as collateral, so to obtain one you have to own your home and have some equity available as well. There are benefits of both, but also each has drawbacks. Personally I believe that you must make the decision on which one (if any) is a good idea for you to do.

The Home Equity Loan is a FIXED amount of money borrowed for a FIXED interest rate over a FIXED amount of time. The payments each month include both principle and interest. This would be a good choice for someone who knows exactly how much money they need to borrow and for how long they’d like to make the payments.

Obviously the longer the term of the loan, the lower the monthly payment will be, but also the more interest that will be tacked on. Of course, you should have the option to make principal only payments if you are able so you can wipe out the debt faster. This option is usually great for people trying to consolidate credit card debt, auto loan debt, or other unsecured debt. Terms are generally anywhere from 3 to 30 years, and most likely you’ll be able to write the interest off on your taxes.

A Home Equity Line of Credit is just what it sounds like: it is a line of credit using your home’s equity, it is a FIXED limit, but a VARIABLE rate that is usually prime based, and generally is interest payments only.

A Home Equity Line of credit is a wonderful product for someone to have that is on top of their finances; generally I wouldn’t recommend this to someone who has a ton of credit card debt because this is pretty much like a huge credit card, only it’s tied to your home. If you don’t make the payment, you can lose your home. Think wisely when you are doing a loan with your home as collateral. The Home Equity line of credit’s minimum payments can be interest only, which is great in that the minimum payment is generally pretty low, but for people who don’t understand this, it can be a night mare. They could go paying the minimum payment forever if they don’t realize they are not touching principle with the payment.

Also, as you pay down your equity line, you have more credit available to you, so again, that’s why it’s not good for someone who is not diligent in spending more than they make. Some home equity lines of credit have the option to lock in a rate on the line of credit. For example, you go buy a $15,000 car and want to finance it on your line of credit. You want to lock it in for X years at X interest rate on your line of credit. When you do this, you will be making payments towards principle and interest and knocking that out faster than if you were making interest only payments. Generally the interest you pay on the home equity line of credit is tax deductible.

I truly believe both of these can be a great asset to a homeowner; however, I also believe they can be devastating to some people. Make sure you know the ins and outs of any lending product you are getting into when you are talking to your lender. If they don’t know the answers or you aren’t trusting them, then take your business elsewhere. A smart borrower is a happy borrower!