Dangers of Interest-Only Mortgages

An interest-only mortgage is not a specific type of mortgage. It is an option that can be added to a mortgage loan that allows you to pay only the interest on the loan for a specified time period, usually five or 10 years. Borrowers sometimes find this option attractive because it requires lower mortgage payments during the interest-only period than a comparable loan without this option. However, an interest-only loan can pose several dangers.

Buying More than You Can Afford

Because an interest-only option on a mortgage allows you to make lower mortgage payments during the interest-only period, it may cause you to become overly optimistic about your ability to manage payments over the life of your mortgage. You might begin looking for a more expensive home, reasoning that your income will increase before the interest-only period ends. If your income does not increase as expected, this can make meeting your mortgage obligations difficult when you have to start paying both principal and interest.

Higher Future Mortgage Payments

The option to pay only the interest during the first years of your mortgage loan comes at a price -- when the interest-only period ends, your payments will be higher than if you had paid both principal and interest from loan inception. This is because after the interest-only period ends, you will have a shorter period of time to pay the principal balance of the loan. For example, if you take out a 30-year mortgage loan for $200,000 with a 10-year interest-only option, you will have to pay the $200,000 in principal over 20 years instead of 30 years.

Selling the Home

If you have to move for marriage, work or other life event, you will likely need to sell your home. If you cannot command a selling price high enough to cover your principal balance and selling costs, you will realize a loss from the sale. With an interest-only mortgage, your principal balance will be exactly the same at the end of the interest-only period as at loan inception. The lack of equity in your home during the interest-only period can make it difficult to sell the home without incurring a loss.

Renting the Home

If you need to move and cannot sell your home, you may consider renting the property to tenants to cover your mortgage payments on the home. During the interest-only period, you may be able to command rent high enough to cover your mortgage costs; however, after the interest-only period ends, you will have to raise the rent on your property to cover your higher payments. If you cannot find tenants willing to pay the higher rent amount, you will have to let the property sit vacant or make up the difference between the rent payments you receive and your higher mortgage payment.

Read More

North Carolina Statute of Limitations on a Loan Default

If you default on a loan in North Carolina, state statute of limitation laws limit your creditors' ability to collect the debt through the courts. When contacted by a creditor or collection agency, always check the age of the debt, as you may no longer be legally obligated to pay it.

Statute of Limitations

There is a limit on the time that a creditor has to file a lawsuit in order to collect a debt. If a debt is older than a state's statute of limitations and a creditor does try to sue you, you can ask the judge to dismiss the case. In North Carolina, the statute of limitations on a defaulted loan is three years.

Judgment Debts

The statute of limitations on collecting a judgment in North Carolina is 10 years. This means that if a creditor does successfully sue you to collect a debt, that creditor has 10 years to try and collect the judgment, which may include a property lien or levying your bank account.

Wage Garnishment Exceptions

North Carolina is one of the few states in which wage garnishment isn't an option for most creditors. However, if you owe money to a government agency (such as student loans), back taxes, or child support, those creditors can garnish your wages.

Time-Barred Debt Collection

Some companies buy up debt that is past its statute of limitations for a tiny fraction of its value. They then try to collect the debt from you. In some cases, they may even try and trick you into agreeing to pay the debt. If you hear from one of these debt collectors, send them a letter via certified mail explaining that the debt is out of statute, and that they are not to call you again.

Read More

The History of the FICO Credit

Beginning in the 1950s, with the founding of the company Fair Isaac and Co., the originators of the company started building credit scoring systems with very little interest from credit grantors. With persistence and the installation of credit systems with key credit grantors, over time Fair Isaac and Co. devised FICO scores, which measure credit risk, and successfully became the primary source for credit scoring.

Who Invented FICO Credit Scores?

FICO stands for Fair Isaac and Co., a company founded in 1956 by Bill Fair, an engineer, and Earl Isaac, a mathematician. The company philosophy was that data can improve business decisions when applied intelligently. Fair Isaac and Co. supplied consulting services and decision management systems. It is based in the U.S., specifically Minneapolis, Minnesota, but has spread all over the world, with offices in many countries.

1950s

In 1957, Fair Isaac and Co. developed and installed a billing system for Carte Blanche, one of the first credit cards. They began creating credit score systems in 1958, with little interest from credit firms but began a long-time association with Ward Montgomery in 1963 by putting together a credit scoring system for them. By 1970, they'd developed the first credit card scoring system and successfully started gaining interest from credit companies.

1980s

By 1981, Fair Isaac and Co. initiated Fair Isaac credit bureau. It is well-known for the development of custom software in the 1980s that determined credit risk based on a number determined from the examination of a person's credit history. The credit bureaus Experian, TransUnion and Equifax took on the number as their standard procedure. Experican, TransUnion and Equifax gather the data that is used to make up credit reports.

The New Millenium

In 2002, Fair Isaac and Co. merged with HNC Software, Inc. and embarked on the addition of fraud detection to their accumulation of milestones. They renamed the company in 2003, calling it the Fair Isaac Corporation. They continue to expand the company, celebrating their 50th anniversary in 2006.

How It Works

A person's FICO score can range from between 300 and 850. Banks and credit card companies use the score to determine how much risk is involved in lending patrons money. Though the system takes all parts of a person's credit history into consideration, it does not rate them all equally. A person's payment history makes up 35% of the score, total amounts owed takes 30%, length of credit history makes up 15%, new credit takes 10% and type of credit in use makes up 10%.

Read More

How to reduce debt using the snowball debt reduction method

Almost everyone has some type of debt that they would like to reduce and get rid of. The problem is that most people view their money emotionally instead of rationally, and find it hard to stick to a debt reduction plan. I like to use the classic snowball debt reduction to help me reduce my debt in a rational, goal oriented way. If you view your debt rationally and stick to the snowball debt reduction plan, you will reduce your debt. Here is how you do it.

Instructions

1

The first thing we want to do is identify the highest interest rate you are paying in your debts. So make a list of all your debts and order them from the highest interest rate to the lowest interest rate.

2

Now you want to look at all of your income and compare this to your debt. Do you have enough left over to set aside each month to go toward paying your debts? Be realistic about this amount and do not strap yourself each month for necessities like gas and food.

3

Specify what that amount of money will be to go toward paying your debts each month.

4

Once you have established the extra amount of money you have left over each month, make the minimum payment on all debts. Whatever money is still left over after you have made all of your minimum payments, put the extra toward the debt with the highest interest rate.

5

When you finish paying off the debt with the highest interest, reassess the extra money you have coming in each month and to pay down the debt with the next highest interest in the same manner.

6

OPTIONALLY: You can list your debts from the lowest to the highest balance, and apply your money toward paying off the debt with the lowest balance first and then moving up the list. This also works, but it only works really well if you have debts with an equal or near equal interest rate.

7

Now that you understand this technique - take a look at how to analyze your debt to income ratio here:

http://www.ehow.com/how_2311884_calculate-debt-income-ratio.html

Read More

Organizations to Help Get Rid of Credit Card Debt

Credit card debt piles up quickly if you use your accounts excessively and only pay the minimum amount due each month or skip payments. Certain organizations, like nonprofit credit counseling companies or bankruptcy-focused law firms, offer help getting rid of the debt if you cannot handle it yourself. Scam organizations claim to reduce or eliminate it, but the Federal Trade Commission (FTC) warns that they just rip you off, so choose debt help wisely.

Credit Counseling

Nonprofit credit counseling firms offer debt management plans (DMPs) to get rid of your credit card debt in 60 months or less. A good counselor assesses your situation to see if a simpler solution, like personal budgeting, might work. If your debt is beyond self-help, the counselor negotiates with the credit card companies for waiver of late fees, lower interest rates and other helpful concessions. You agree to a payment plan in which you send the counseling firm a lump sum every month. They take a fee, then distribute the rest to your credit card issuers and other lenders per the DMP terms.

Bankruptcy Law Firms

Chapter 7 bankruptcy gets rid of all your credit card debt, according to the FTC, although the courts liquidate your major assets, too. Chapter 13 is a less intrusive form of bankruptcy in which you pay back some money and keep most possessions. Some law firms specialize in bankruptcy filings. Be aware that attorneys charge legal fees on top of the actual filing costs. Federal law mandates credit counseling before and after the bankruptcy for an additional fee, although the cost is waived if you are unable to pay.

Debt Negotiation Firms

Debt negotiation firms claim to stop collection efforts and reduce your credit card balances significantly, but the FTC charges that many such companies are fraudulent. Negotiation does not stop collection efforts, interest or late fees, and unsuccessful negotiations often leave consumers with no choice but bankruptcy because of the damage to their credit ratings from delinquencies, charge-offs and collection accounts.

Payment Pushes

You may not need an organization to get you out of credit card debt if you have an income and are able to make at least your minimum payments on all your cards. Bankrate's Dollar Diva, Dorothy Rosen, recommends calling your card issuers and asking for interest rate reductions. Prioritize your card by interest rate and pay as much extra money as possible toward the highest rate account each month. For example, if you get a tax refund or have some extra money in your budget, channel it to the designated card. Repeat this with the next-highest interest account when the highest one is paid off, and continue this strategy until you are rid of all your credit card debt.

Read More

Tricks to Pay Off Debt Sooner

Debt can be a cumbersome obstacle for many who are trying to get out from under its burden. Through the use of planning, budgeting and self control, an individual or family can get out of debt faster than merely paying the minimum monthly payment. While it is not an easy task, the end result is well worth the hard work it took to get there.

Remove Credit Card Temptation

The first and most important step in getting out of debt is to avoid new debt. Remove the temptation of credit cards by taking them out of your wallet and placing them in a desk drawer. The mere act of having to "find" the credit cards will give you the time needed to think twice about your decision to use them again. Make a vow to yourself and your family to only use the credit cards in the event of an emergency.

Cut Expenses and Increase Income

Avoid overspending. Ask yourself before each purchase: Is this a want or a need? Avoid purchasing wants as much as possible until the debt repayment is complete. Review all of your expenses and reduce any unnecessary spending. Look at utility bills and see if transferring the service provider will reduce costs. Reduce frivolous services on your cable, cell phone, and Internet bills. Eat at home as opposed to dining out and use coupons at the grocery store to reduce your food expenses even more.

Find ways to increase your income, at least temporarily, through overtime, additional jobs, or by selling unused items at home.

Create a Budget and a Plan

Create a budget and a debt repayment plan. First, look at all of your expenses over the past few months--your checking account statement is a great place to start. Categorize all of your spending and account for each penny earned and spent. Look for ways to reduce your expenses further once you have created a preliminary budget. Remember to make a category for debt reduction and place all extra money "found" by reducing expenses or earning extra money into that category.

Create a debt-repayment plan. List all of your debts and pick which one you want to pay first. You may want to select the smallest debt first to give yourself a quick feeling of success. Once your first debt is paid in full, continue on with your plan until all debts are paid in full. Once all debts are paid, use the extra money in your budget to save for future expenses and to avoid having to use debt in the future.

Read More

Can a Creditor Garnish an Inheritance Check?

An inheritance can bring welcome financial freedom, but debt can put a damper on the excitement of inheriting. You generally dont have to worry about paying the decedents debt out of your own funds. However, if you default on your own debt, your creditors can take steps to seize what was left to you.

Decedents Debt

When a decedent dies with more debts than assets, beneficiaries often worry theyll have to pay the leftover debts out of their own pockets. While a decedents debt load might affect how much his beneficiaries will inherit, there is usually no requirement for a beneficiary to pay off a decedents excess debts. Instead, the personal representative of the estate uses estate funds to pay as many of the decedents debts as possible, and when the estate assets are depleted, the remaining debts are canceled.

There are a few common exceptions to this rule: If a beneficiary has agreed to pay a decedent's debt or has entered into joint debt with the decedent, the beneficiary will be responsible for paying the debt.

Inheritance

Unless your inheritance is held in a very specifically worded trust, your creditors can generally seize the funds you inherit. However, this cannot happen unless you default on your debt and your creditor files suit against you and wins. When a creditor wins a lawsuit against a debtor, the court issues a money judgment for the amount owed, and the creditor can use this judgment to levy your bank accounts. Once inheritance funds have been released to you and you have deposited them in the bank, a creditor can reach those funds.

Collateral

Another way to lose your inheritance to a creditor is to pledge inherited property as collateral for a debt. If you fail to repay as agreed, your creditor can seize the property to collect on the debt.

Considerations

Disclaiming your inheritance is one option for keeping it away from your creditors. A disclaimer is a written refusal to accept inherited property or any benefit of that property. When you make a valid disclaimer within nine months of the decedents death, your inheritance goes to the next beneficiary in line.

If you anticipate receiving an inheritance and you are concerned about losing it to your creditors, check with an attorney for advice on ways to shield your assets.

Read More