Effective Interest Rates

Remember the feeling of excitement when you were heading to the closing table to purchase your first home? Exciting, on top of the world kind of a feeling would probably describe it well! Then you got to the closing and your Title Company or Attorney showed your the Truth in Lending Disclosure. When you saw what you will pay back to the bank in interest, you almost choked on that lump that immediately formed in your throat, right?!!!

Well, most might say to you "welcome to the world of mortgage financing! And, up until recently, my response was something to the effect that if you dwell on that fact, you will never purchase anything! But in reality, people continue to buy a payment. They look at what they can afford each month and based on the total of their Principal, Interest, Taxes and Insurance. Many times, people will base the amount of their down payment upon where they want their monthly payment to end up. I have heard the term "buying the monthly payment".

And sadly, most people either refinance or sell the home after only five years.Now there are a lot of mortgage brokers out there that will tell you that a fixed rate of interest is just that. I tell you that they do not understand a truth in lending disclosure. That can be a topic for another day, however for today's topic and because you are paying mostly interest in the first five years of the loan, your effective rate of interest is much, much higher than you might ever imagine. Take a 200,000.00 loan for example. After only 5 years, you would still owe 186,108.00 and if you paid off the loan, the effective rate of interest would be approximately 81%. Read the Asher Intitute Consumer Guide for the Banking Industrys Biggest Secret. It will help you to understand how the lender caluclates interest and how you the consumer is at a serious disadvantage. I am going to tell you how you can help yourself to get out of debt quicker than you might expect possible!

One way that you can increase your equity and reduce your mortgage principal is to pay additional money to the pricipal each month or better still, make two payments every January, one going directly to the principal. In effect, you just made 13 payments, which is what you do when you sign up for a bi-weekly program. If you do not have the discipline to send the additional money each month or once a year, the bi-weekly plan forces you to make those payments. And, the good news is that it will pay off your mortgage, in about 6 years less on a thirty year mortgage!

In my next post, I will discuss another way to pay down your mortgage. Stay tuned!

One last thought on Credit scores!

For now, I just wanted to say one more thing about your credit scores before I leave the topic for now! I recently assistaed a client with a mortgage application and must be very careful here about what I say due to confidentiality. But, what struck me was that this individual had a Chapter 7 in his not that distant past and his (not necessarily a man by the way!) credit scores were very high considering the public record, etc. I asked him about how that was and what he explained was exactly what I have always thought and professed to others. Simply put, he continued to struggle to make his payments through the Bankruptcy process. He discharged the accounts he knew he had to but continued to make payments on those accounts and all others that he reaffirmed after the Bankruptcy was completed! Yes, his scores di go lower initially, but only for a very short time. He even went out and got new credit, including a car loan at a rather decent interest rate!

I hope that none of you reading this post every have need to file such an action, but if you do, keep your payments current if you can, especially the ones you intend to reaffirm!

More on Credit Scores

You know most people would guess that they would be better off with a high balance on one or two credit cards as opposed to a moderate balance on three or four cards! Well, my recommendation is to get rid of the card balances as soon as you are financially able! They will drain you and you will take years to pay them off, but not before paying exorbidant amounts of interest!

The fact is however, if you are unable to fina a way to consolidate the debt, it is better for you to have a few more card balances with lower balances! When you get close to the high credit limit on one card, it will actually lower your credit score faster than having leveraged the debt over a few cards . The idea then is to keep the debt to less than half your high credit limit on any card. So, if you have credit card debt, keep this thought in mind.

More about Credit Card debt and mortgage debt in future posts!