This report comes out on the heels of President-elect Obama warning that the country faces “trillion dollar deficits for years to come”.

The CBO report states that the budget outlook for 2009 “will be dramatically worse than it was in 2008″. In the first three months of of the 2009 fiscal year, which began on October 1, the government spent $408 billion more than it took in. The blame goes to a drop in corporate and individual tax revenues, and increased federal spending. The spending increase is largely attributed to the TARP program and the recent federal takeover of Fannie Mae and Freddie Mac.

The CBO’s baseline projections serve as a “neutral benchmark” that legislators and policy makers can use to determine the potential effects of any change in policy. The projected deficit for 2010 is about $700 billion or 4.9% of the GDP. President-elect Obama mentioned the new CBO projection at his news conference on Wednesday. “We know that our recovery and reinvestment plan will necessarily add more,” he conceded.

The problem they saw was that not only was there a high rate of defaults for sub prime mortgages, they found that the Alt-A and option ARM mortgages, which enticed borrowers with very low initial rates, are beginning to reset. This in turn causes the mortgage payments to go up, and many of the home owners to default. If you project the current default rate data over the next few years, the housing market is in for a very tough time.

Every time there is a foreclosure, the housing prices drop, and the falling prices only add to the trouble. There was a Miami condo featured in the report that originally sold in October 2006 for $2.4 million, the asking price is now $939,000. The report also cited statistics from the National Association of Realtors that state the supply of housing units on the market has grown from 2.2 million units to 4.5 million units in three years. With that much supply, and fewer people eligible to get a mortgage, the prices will drop further. It will be some time before this sorts itself out.

So what do the leading economists in the nation think we should do? Increase the national debt to stimulate the economy. The thought behind it is that avoiding a deepening recession is more important than higher budget deficits. We have already committed $700 billion to bailout a financial industry that could not regulate itself. President-elect Obama has pledged to plow money into the largest infrastructure building plan since the Eisenhower Interstate highway program, and now we are going to pledge $14 billion to rescue the automobile industry, that is so oafish, it needs help to keep itself from stumbling into the abyss of bankruptcy.

We need a JFK challenge for the best and brightest Americans to come up with new solutions to our pressing issues. If we are going to invest tax dollars into bailing out companies that are too big to fail, shouldn’t we also have a say in how they use that money? If it comes down to borrowing money to stimulate the economy, shouldn’t we also invest in projects such as alternative energy to put people back to work and ease our dependency on foreign oil? In exchange for tax dollars, shouldn’t we demand that the foundering auto makers come up with a plan to focus on hybrid and 100% electric vehicles? Maybe then America can once again lead the world in something other than our carbon footprint.

The stakes are extremely high, but we have much to gain. Throughout our history, America has always risen to the occasion when things looked bleak. Tapping into the ingenuity of the American people has always been America’s salvation. Our deliverance from economic ruin depends on it.

• Can you really Afford it?
• Is it worth the price tag?
• Will the Terms Change?

Can you really Afford it?

Lenders are right now offering very low rates, often for the life of the loan. Still you have to make sure that you can really afford the extra monthly payment in an economy where food prices are still high, and while gas prices are low right now, it may not be the time to buy a Hummer. Inflation is still high and undertaking a large new bill could be taking away from cost of living expenses in years to come. It is important to consider where to put the extra cash if you are fortunate enough to have extra. Low interest rates, and enticing terms may make important purchases more affordable, and tough times for retailers mean lower prices as well. It could be a great time to put on that new addition, upgrade your appliances or buy a new car.

Is it worth the price tag?

A deal isn’t a deal if the product isn’t worth the price tag. There are places to invest in your home where you will always get a return on your investment. Upgrading your kitchen with granite counter tops, new cabinets and stainless steel appliances are always a smart buy, provided you don’t over improve your home for the neighborhood. Research the marketplace on the Internet, or check with a local real estate professional. Spending for a home improvement that will overprice your home for the location is a bad investment. Automobiles are always a bad investment, but for most of us they are a necessity. Compare prices and interest rates. You may be able to get a great deal on a “new” 2008 model, but you must remember that the vehicle is a year older than a “new” 2009 model, so at trade in time it will be worth less, no matter how many miles it has been driven.

Will the Terms Change?

You must also consider the terms on the loan. If it’s an introductory rate, then it is important to consider if you will be able to afford the payments after it changes. You will also want to consider if the lender has provisions to change the terms if you are late on a payment. Always read the fine print, and always make sure you can afford any debt you take on.

Summary

Irresponsibility caused the recent financial crisis. Some of that was irresponsible consumers, some was irresponsible bankers, some was irresponsible government overseers. In bad economic times it is vital to make smart choices with money. Using good judgment is always a smart policy.

The first thing you need to do is figure out where your down payment is coming from. With the end of Down Payment Assistance on FHA loans that was enacted when the housing bill was passed, you are now going to be required to have a down payment of at least 3.5% on an FHA loan, 5% on a conventional loan. If you don’t have that kind of cash saved up, all hope is not lost; there are a few different programs that may help you.

First is going to be the NACA program, which is a 100% financing program that is administered by a non-profit organization. There are no closing costs, no minimum credit scores, and no private mortgage insurance, which can save you a lot of money! The negative to this program is that it will take a while to get through; you must first attend a homebuyer workshop, and then there is usually a wait of between one to two months before your appointment with a loan officer. The whole process will take at least 90 days, possibly longer, depending on your credit situation.

For those of you that already have a home picked out, there are some grant programs out there that are legitimate. The Federal Home Loan Bank (FHLB) offers a grant program for “very low- to moderate-income families and individuals.” There are also grant programs that are sponsored by HUD, which are going to be administered by city and county governments. A good place to search for one of these is at Down Payment Solutions, they have a state-by-state listings of all grants available.

The next thing you want to do is check out your credit report. Almost all loan programs are now credit score driven, so you need to know what score you have. A 580 score is going to be the minimum that is going to be accepted on an FHA loan, while a score of 680 will be required for a conventional loan, unless you have saved up a down payment of 20%; in that case, normally a 620 will do. If you have open collection accounts, the lender may require them to be paid, especially if they occurred within the past 12 months. Any judgments or liens will be required to be paid regardless of the loan program.

While it may seem to be frightening to try and get a mortgage in these times, it is definitely possible if you have prepared. With all of the incentives available now, it may be the best time ever to purchase your first home!

Some of the President-elects other thoughts on the economy:

When asked about the $300 billion spent so far on The Troubled Asset Relief Program (TARP): We should be looking at what didn’t happen such as more banks failing or a bigger drop in the stock market, not just what has happened. He also wants more focus on the impact of foreclosures, and to “set up a negotiation between banks and borrowers so that people can stay in their homes.”

Comparisons of today to 1932: “We’re not going through something comparable to that. But I would say that this is as bad as we’ve seen since then.”

The dire straits of General Motors: “We need to provide assistance to the auto industry. But I think that it can’t be a blank check.” He would like the assistance contingent on all of the major stakeholders, management, labor, suppliers and lenders “coming together with a plan what does a sustainable U.S. auto industry look like?”

Moving the nation towards energy independence. “It’s more important. It may be a little harder politically (because of the drop in oil prices), but it’s more important.”

Re-regulation of the financial market “to restore a sense of trust, transparency, openness in our financial system.. And the answer is not heavy-handed regulations that crush the entrepreneurial spirit and risk taking of American capitalism.”

Did you know that by paying a mortgage bi-weekly you can condense a 30 year mortgage to 24 years? Many consumers spend thousands of dollars extra on interest, which they could spend otherwise, or invest for their retirement. If you would like to investigate this valuable personal finance tool, talk to your lending institution about your options. Here’s what you need to know:

Why Bi-Weekly Payments?

They eliminate your debt faster by paying half of your monthly mortgage payment every two weeks. There are 52 weeks in the year, so at the end of the year you will have paid the equivalent of 13 monthly payments instead of 12. This will take years off your mortgage, and because you are putting more money towards the principal, you pay less interest.

Prepaying on the principal

There are a couple of options. If your mortgage has a prepay provision, you can simply apply more money towards your principal each month. Technically this isn’t a bi-weekly mortgage, but the same rules apply; the more you pay towards your principal, the faster your mortgage will be paid, and you will pay less interest. This is a good option if you are already maximizing your contributions to a tax advantaged retirement account, and you have the income to invest in your home.

Refinancing your mortgage

The 2nd option would be to talk to your bank about refinancing your mortgage. This will require a new mortgage, which will mean closing costs, but you will save in the long run. This is an excellent option if you have equity in your home, and you would like to pay down some higher interest debt, or invest in updating your home.

Summary

Bi-weekly payments are a great way to pay off your debt faster without noticing much difference in your monthly payments. They also work on your other debts, including credit card debt, and car loans. It is important to read the fine print and make sure that your lender will apply the payments towards the principal, instead of the next months interest. Take the time and discuss it with your lender. You could save thousands, perhaps even hundreds of thousands of dollars in interest.

• How Bankruptcy Works
• Debt As An Asset
• Can A Bank Buy A Mortgage And Change the Terms?
• The Truth in Lending Act

How bankruptcy works.

Bankruptcy essentially means that a company or individual can no longer afford to pay their debts. That doesn’t necessarily mean that all their debts are forgiven or disappear. (In the case of banks, their assets are either auctioned off, or in some cases, outright assigned to other banks by the government.)

Debt As an Asset

When you have a mortgage with a bank, it is a debt for you. (For the bank, though, it’s an asset; it’s something that brings in money.) Even when mortgage holders can’t pay their bills, and the bank in turn is unable to pay their own bills, every mortgage the bank holds still has some kind of value. If nothing else, there is the possibility of the bank foreclosing on the collateral property in order to sell it. When a bank declares bankruptcy, its assets – including the mortgages it hold – are either auctioned off or assigned to other banks to help pay for its debts.

Can a Bank Buy A Mortgage And Change the Terms?

The answer to this is often in the mortgage contract, which is a really good reason to make sure you read your mortgage contract and consult your attorney before signing one. In most cases, as long as you are paid up and following the terms laid out in your mortgage, a company cannot change it. However, if you become delinquent, there are often provisions that allow the new owner to change the terms, as could the original bank if you were to default. Some people assume that if their lender is overloaded with debt and declares bankruptcy, their mortgage disappears. This is rarely true, and assuming so without proof in writing could make for a very big financial pitfall.

The Truth in Lending Act

Recently, some of the troubled lenders have been investigated for telling borrowers incorrect terms about their mortgage. (Many mortgage holders who thought they had a traditional 30-year mortgage in fact had an adjustable rate mortgage, or one with a balloon payment. ) Every mortgage contract must conform to the Truth in Lending Act, which among other things requires lenders must plainly state the actual interest rate in the contract.

Summary

The old adage holds true: you should always read your contract, especially in an environment where mortgage companies are being investigated for lying to consumers about the mortgage terms. Even if your lender is not one of the many currently facing bankruptcy, you should know what terms might change if your mortgage were to be sold or if you were to default. For most people with mortgage debt, as long as you are still in good standing with your current lender, it would be unlikely for the terms of your mortgage to change. For owners not in good standing, it would be very good to contact the new company that holds your mortgage very quickly. Often times, mortgages in default can be sold very cheaply to companies that are interested in taking ownership of the collateral property, not a repayment of the loan, which they may have purchased for pennies on the dollar.

Most people who try to accelerate the process of paying of their debt use the “shotgun” approach. For instance, one month they will pay 100 dollars on one account, then a different account the following month. The problem with this is twofold. Firstly, it doesn’t actively target the accounts with the highest rates and fees that are keeping you in debt longer by taking more of your income for the interest and fees that could be more effectively applied to principal. Furthermore, it doesn’t consider that accelerating large debts make keep you paying added fees on small ones for a long period of time, which could be avoided by simply picking off the small debts quickly. It all comes down to getting out of debt faster and paying as little as possible in interest.

The first step to debt stacking is to make a list of all your debts, the minimum monthly payments, and the interest rates. It’s important to note which debts are fixed debts, for instance a 5-year car loan, and which are revolving, like credit cards, or in store credit accounts. Whether you work out the debt stacking yourself or use a debt-stacking program, you still need this information.

If you really want to kiss your debt goodbye, then it makes sense to set aside at least a little extra every month to help accelerate your debt. If that isn’t possible or doesn’t interest you, then you can just keep paying the minimum monthly payment. The key is that once you’ve made your list, you put it into order according to which debts to pay first and which ones to pay last. Once you’ve paid one off, you take the money you had been applying to the monthly payment of the first debt and apply it to the next one on the list along with the minimum payment for that debt.

The question now is how to put your debts in order. There are a few ways to do this, and it’s somewhat subjective. Some people simply sort the list so that the highest interest debts are first and lowest interest debts are last. Others use debt calculators to determine how long each debt will take to pay off, and put the shortest ones at the top so that they know the fastest way to get out of debt. Also, there are computer programs that can look at this in more detail by making projections based on all the combinations of payments the fastest possible way.

Summary

Debt stacking isn’t the same as debt consolidation, and it’s often not as fast or as dramatic in terms of freeing up money. That said, debt stacking could be used in conjunction with debt consolidation. Consolidating the highest interest debt into a fixed loan is a great way to combine these two programs. Either way, debt stacking is an effective way to accelerate the repayment of debt that doesn’t require a high priced credit counselor or an excellent credit score to accomplish.

]]> http://www.uwsa.com/blog/debt-consolidation/how-debt-stacking-can-help-you-eliminate-debt/feed/ http://www.uwsa.com/blog/debt-consolidation/save-or-pay-debt/ http://www.uwsa.com/blog/debt-consolidation/save-or-pay-debt/#comments Tue, 21 Oct 2008 19:15:50 +0000 UWSA Staff http://www.uwsa.com/news/?p=11 What makes more sense, paying down debt or saving for retirement?

Especially in today’s climate where many are seeing their retirement savings reduced by the falling stock market, and the debt level of the average American is approaching all time highs, many are faced with a question; should I pay off my bills or put more into savings? There’s a bit of math to really answering this question, and some other considerations, which can affect the answer.

The kind of debt

First let’s consider the kinds of debt we could be talking about. For some a hundred or so thousand in student loans seems like an immense amount of debt. In truth though a twenty thousand in credit card debt could affect your financial situation a lot more dramatically. You can write off interest on student loans, you cannot on credit cards. Further because of the fees and revolving nature of credit cards they can amount to thousands more in costs over a long period of time. With low interest, non-revolving debt it can make a lot of sense to invest as well especially when you factor in the tax advantages of many savings programs, and ability to get ‘free money’ in the form of an employer match, or other tax advantages investing incentives.

The Interest Rate

Much of this also requires a look at the interest rate. Even assuming a rate of return on your savings of as much as 12%, which is what the S&P 500 has averaged since 1926; if you’re paying 25% to your credit card company you’re losing money. In fact if you’re getting 12 percent your money about doubles about every 6 years, while at 25 percent your credit card company is doubling the money they lent you about every 3.6 years, and that’s assuming that you’re not charging it back up!

The kind of savings

Even if you don’t actually have any debt you could still be losing money. Inflation averages 3 percent historically and recently it’s been as high as 4.1, excluding increases in gas and food prices. If your investments are not keeping pace with inflation you’re losing buying power; essentially you’re not making any money, and possibly losing it. This is called inflation risk (as opposed to market risk; when the market goes down, which is what many novice investors tend to think about). So say you’ve got an investment averaging 12 percent, and a 9 percent interest credit card. You could still be in effect losing more than 1 percent of the buying power of your money.

How long until you retire?

Bottom line saving is about the math as much as it is the risks. If you are already nearing retirement you may not have enough time for your savings to begin growing enough to outpace the debt you are paying off. Young investors however may be able to afford more investment risk, ideally for a higher return, and out pace the costs of debt. Either way however debt is eating money every month or that’s extra money you could be saving.

Summary

You have to really look at your projected, as well as historic, rate of return on your investments and compare those to what you’ll be giving to the companies, which hold your debts. There are several on line calculators that can help you accomplish that. If you’re up to your ears in debt and haven’t started saving it’s time to get serious and look at ways to eliminate your debt quickly such as debt consolidation, or debt stacking. To be truly saving you have to be saving more money than you’re losing, and the bigger the difference between the two the faster your savings will grow which is critical to retiring well.