Some basic Rules about Budgets, Credit and healthy Personal Spending Patterns

Your Maximum Debt Capacity and the Debt to Income Ratio

Mortgages, Equity Loans and Refinancing

How to create a personal budget when you buy a House

Documents needed for a Mortgage

Your Mortgage Choices

Refinancing, Home Equity and other Property Related Loans.

What can you do when Foreclosure looms

Credit Cards

The New Credit Card Rules (The Card Act of 2009) and How they affect you

Car Loans and Car Financing

Pay Day Loans (Cash Advances against Paycheck)

Credit Scores and Credit Management

Debt Consolidation and Credit repair

The recent financial crisis has not stopped risky lending, it has only changed its character.

• the prevailing costs for money in your market place. The basis of that costs is usually determined by the level of
  

  	the Monthly Prime Rate, usually as published in the Wall Street Journal. The Prime Rate is the rate of interest at which your bank borrows money from the "lender of last resort" the Federal Reserve Banks; or
  	the Monthly LIBOR Rate: LIBOR is the London Interbank Borrowing Rate. It is the market rate at which highly rated international banks borrow at the London, Zurich, Singapore, Frankfurt etc. In other words, it is a sort of International Prime Rate; or
  	the Treasury LIBOR Rate is the London Interbank Borrowing Rate at which the US Treasury (and other highly rated national treasuries or National Reserve Banks) borrows money in the international market place. As a general rule the Treasury LIBOR Rate is some points lower than the banking LIBOR. The rational behind this is that Treasuries or National Banks carry a lower risk of default to lenders than a privately held bank

• To this rate, the banks costs of using someone else's money, the bank will add its own margin. This will be determined by
  

  	The internal profitability and cost consideration of the bank or mortgage company. The higher the administrative costs of the bank or mortgage company, the higher the margin needed to cover that. Similarly, the higher the profit goals of the investors in the bank the higher the margin. In addition, the margin will also vary with factors such as
  	The amount of down payment you make on the property. The amount you are able to put towards the property purchase as a down payment is important. The more of your own capital you have in your property, the lower the risk for the bank. This will be especially important, if you buy a "fixer-upper", or a house in a marginal area. The amount you can borrow on any property is also related to the valuation and appraisal of the property. Usually the appraisal is done by a specialist who compares three or more comparable recent sales in comparable areas, with the house you are intending to purchase. Notwithstanding what you pay for the property, the lenders maximum mortgage amount will be related to the appraisal value and not to the amount you actually pay the seller. Unless, of the unlikely event, that the purchase price is lower than the appraised value.
  	Your credit rating is a key factor in the banks risk assessment of you as a borrower. If you have a poor credit record, the bank may still lend to you, if you make a high down payment. Because a high down payment on the house would reduce the lender's risk.
  	The neighborhood in which the property is located should should only have a peripheral influence on the size of the mortgage you can get in relation to the appraised value of the house. Obviously, house prices differ from neighborhood to neighborhood and so do lenders risks related to defaults, late payments and statistically average credit ratings. There is a narrow line here about what is reasonable risk assessment by the lender and what can be construed as discrimination.
  	The type of property and the general condition of the the property should be reflected in the appraised value and hence, will influence the amount you can borrow. The lenders view of the condition of the house will not be based on its potential, but instead on the actual value he could get for the property, as is, where is, in a "firesale"!

  All of the above mentioned items will be the determining factors in the costs of borrowing the money for the mortgage of the property. The relative weights, or importance, the lender will attach to each item will vary from property to property and from lender to lender and, not least, from borrower to borrower.

  But these direct costs of using someone someone else's money to buy a property are only part of the deal.

With a fixed interest rate mortgage, the rate of interest paid on the principal remains the same over the lifetime of the mortgage. That is advantageous, when overall interest rates are low as at present (2009) and are likely to stay the same or, are likely to go up in the future. But even on some fixed rate mortgages, the lender can increase the rate of interest, if your repayments are late. So beware of, and understand any rules within your mortgage agreement that say how often, when and under what circumstances the lender can change the rate of interest.

The alternative, to that is a variable interest rate mortgage. Here, the interest rate reflects the prevailing prime rate plus the margin the bank adds. If the prime (or base) rate goes up, your interest rate on the mortgage will go up, and vice versa if the prime rate goes down. Usually that is expressed in the mortgage agreement as "prime plus X%" where "X" might be 2.5, or 5 or even 10%. Whatever the lender thinks is enough to cover his risks and his profit motive.

It is vitally important to be fully aware how often, under what circumstances and how, the lender can change the rate of interest. Look through the agreement and see if the mortgage agreement states that

	(1) the rate of interest may be changed, 30 or 60 days after a change in the prime rate (usually as stated in the Wall Street Journal) is announced, and
	(2) if there is a reasonable annual "cap" (a maximum of say 2%) for the maximum change to the rate of interest.

If this can be found in your agreement, there is really no problem, because the speed at which the bank can change your interest rate is predetermined and the maximum annual amount of increase (or decrease) is limited.

The borrowers maximum exposure is clearly limited within a timeframe where the borrower would have the possibility to get another mortgage from another lender. Under these circumstances, there might be a higher risk on a variation in your outgoings for the mortgage. But it is a predictable risk and one which is clearly limited. Most local banks, Credit Unions and Savings and Loan Associations, will offer loan agreements based on the above premises. If they do not, don't go to them!

However, one of the elements that contributed to the financial crisis we are in now, was the ability of many lenders to change the interest rates almost at will. These lenders intellectual argument was that they provided mortgages to high risk groups and therefore had to have a means to vary their "risk perception". It is an argument that allows "usury" (the charging of excessive rates of interest). Most countries have laws against that, but not the USA.

Beware of "Teaser Rates"

These lending practices also made the use of "teaser rates" common. A "teaser rate" is when the lender offers a borrower a low introductory rate of interest which at a later date (within 2, 4 or six months), will increase to a rate determined by the lender. The trigger that leads to an increase in the rate of interest the borrower pays for his mortgage, may not only be time but also late payments, changes in the borrowers credit report (credit scores) or similar occurrences. In the commercial credit world, these are known as "changes in the covenants".

The key to avoiding these potential problems is to read your loan agreement thoroughly and have a knowledgeable lawyer (not your friend who practices law and deals mainly with low level criminal cases, or works in some other unrelated field) explain to you passages that are not clear to you. The costs of doing that maybe worth it!

One would think, that this is clear to most people. Unfortunately, it is not! Late payments have become so widespread, that many lenders have introduced default, or late payment fees. This has become a substantial source of income, not only to credit cards, but also to mortgage lenders.

Repeated late payments may also change your rate of interest (in case of a variable interest rate mortgage) or can make the lender cancel your loan agreement. Some lenders, and not only small and marginal ones, may add fees to your principal, that exceed the amount of principal that you pay back with your monthly mortgage repayment.

The brokers fee may depend on your credit rating and other risk factors. If you are a "prime-borrower" and have good credit and 100% income verification, you could pay 1 to 2%. If, on the other hand, you have poor credit, and/or some of your income cannot be verified, you become a "sub-prime borrower" and you pay a higher brokers fee. The rational being that the broker has to do more work for a "difficult client". The justification argument is largely humbug, since most brokers have lenders on their books that give mortgages for different qualities of clients. But it gives a justification for a whole industry.

If you intend to keep the property and the financing of it for a long time and you have the cash, this might be worthwhile. There maybe some tax benefit for you in paying for points. If you are purchasing the property, the amount you pay for points is fully tax-deductible in the tax year you sign the mortgage. If you are refinancing the property, the amount you pay for points is deductible over the life of the loan. In other words if you refinance with a 10 year mortgage, then you can charge 10% of the amount you paid for points every year!

• Banks and mortgage companies have become quite inventive in charging "new fees" to clients. It is important that you understand what they are and that you can compare them between different lenders. Beware, names for these fees change and so does the stated reason for charging them. That makes mortgage quotes often difficult to compare!

  	Administrative Fee: $250-$750. This fee should cover underwriting and document preparation. Some lenders lump the two together and call it their "administrative fee." Again, you may be able to negotiate. Underwriting Fee: $50-$450 Although it is supposed to be part of the Administrative Fee, some lenders charge the underwriting fee extra. You would think that underwriting a loan is part of the normal costs of banking! But in the scramble to "unbundled costs", this has become a special fee. Document Preparation Fee: $100-$400 Again, preparing documents for a mortgage loan is supposed to be part of the normal activity, and hence costs generating, for a bank. This "unbundling of costs" has become a common feature, largely driven by management consultants. Far from making the process more accountable, it is just a means for transferring costs to the client. Because the client does not have a choice. He cannot refuse to take the service, and therefore reduce the costs to him. If he does that, his loan application will almost certainly be denied.
  	Obtaining a Credit Report: $35-$75. For the bank obtaining a credit report about a potential client is just good business sense. There are two services offered by credit bureaus: The fully verified credit report, where the credit bureau phones every creditor and verifies the credit item, and/or The standard credit report from the three credit bureaus Banks and brokers often subcontract this service and the borrower will end up paying an inflated fee.
  	Fees related to the Valuation of the Property Appraisal Fee: $250-$750. The lending institution has to know what the true market value of the property being offered as the security is. Since few banks and mortgage companies here have the in-house capability to make such an assessment, they use Certified Appraisers. These utilize a number of methods to come up with a valuation number that represents their estimated market value. One of these methods is to compare recent sales of houses with similar square footage and similar plot sizes in similar overall condition, listing their sales/purchase price. But that kind of valuation is, relatively speaking, subjective! Survey Fee: $100-$250 A land survey is obviously a necessity, when one buys a property, so that the borders can be defined. It will also show easements, where third parties might have a right of access to the land. Condominiums generally do not need a land survey, Though, it has been known, that financial institutions have charged mortgage applicants for condo's for land surveys! So beware!
  	Insurance Escrow, Property Tax Escrow and Flood Certification. In order to ensure that the borrower will pay hazard insurance and the property taxes, the lender will create escrow accounts and collect predetermined amounts for both which he will pay on behalf of the borrower, when they fall due. Property Tax Escrow Account: If the lender administers the escrow account, he will charge a small annual fee which he usually collects as part of the tax amount. This is usual with banks and large mortgage companies. However, recently it has become one of the items (the management of escrow accounts) that are subcontracted to third parties. The fee usually amounts to $80-$120 a year. The monthly amount collected for the taxes will obviously depend on the property taxes charged in the county you live. Beware: if you purchase the house in a company or a trusts name, your taxes might be twice the amount than, if you purchase the property as a homestead in your own name. Escrow Account for Hazard Insurance. The lender wants to protect the property which is his collateral and on which he has a security lien. Therefore he wants to be sure that you insure the property. Usually this is done, like the Property Tax through an amount which you pay, together with the monthly mortgage repayment into an escrow. From that the lender will pay the annual property insurance. You should however be aware that this insurance will not cover any of the contents of your property. It is therefore advisable to take out a complete homeowners insurance. Flood Certification. If you are buying a house rather than a condominium, the lender is likely to ask for a flood survey to ensure that your property is not in a flood plain. The charge for this is minimal, usually about $20-$50. You should not be charged that if you purchase a condominium on a higher floor.

• Fees related to title and title search are some of the most important items you pay for.

  Fees related to the Title of the Property Abstract or Title Search: $250-$350 - A title search is performed by the title agent or one of his assistants, is the search for all the legal impediments that exist for the ownership of a piece of land or a property (house, condo etc). It is supposed to make sure who is the owner of the property and what kind of limitations are associated with his ownership. Such limitations could be "easements", that is, rights of access to parts of the property by public utilities (gas, water, electricity, cable, sewage, etc.). Limitations on the property could also be ordinances that limit the holding of farm animals, the maximum height of any structure, mineral rights and other similar items. In addition there could be legal encumbrances, such as liens, environmental clean up needs/demands, or similar items. The buyer has to be aware, that it is his duty (and his lender's to make sure, that his title to the property is free and unencumbered and that its value is not limited by any of the above. Or, at the very least, that he knows of any restrictions on his title. Title Examination: The Title Examination is really the above, but we have been told, that some title agents "create" a special fee for that. As a buyer, be careful and check that! Title Insurance Binder: $0-$100 - The insurance binder is another artificial fee. It is the promise that a title insurance will issue title coverage, once the sale is completed. It is in fact an insurance proposal, a sort of "invitation to treat" for the buyer and lender to obtain Title Insurance once the sale is completed. Title Insurance in this country is necessary, because public records are often poorly established and, before digitalization, which only slowly takes hold,even more poorly stored. Misspellings of names are not uncommon in entries on titles, nor are mistaken coordinates. This becomes more serious now that many municipalities use computer records. As you know, a misspelled name simply does not show up in a computer search. The insurance is supposed to protect you, the buyer, from such errors and omissions and insure you against claims which could possibly arise from such errors. The Costs of Title Insurance covers your title from the moment you acquire it, to the moment you sell or dispose of it. As a general rule, the buyer of the property will pay 0.025 percent to cover the lender. If you take out a mortgage for, say, $100,000, you will pay $250 to cover the lenders interest. You can also insure your title interest, as the homeowner for which you will pay 0.003% of the loan amount. This is highly recommended. In total this will then be $300. Though, you should be aware that different insurance companies offer different rates. Moreover, the rates are not the same nationwide, since insecurity with title records differs from area to area. Title Document Preparation: $0-$100 - Although the lender prepares the bulk of the documents required to close a loan and buy a home, the title agent prepares some documents too. Some, but not all, title agents charge for this. Some title agents show document preparation and courier fees as one item and call it an "administrative fee." Notary Fees: $10-$25 - Even though, most title agents are also notaries, or have at least one notary on staff, they will charge for every page that they have to notarize. Release of Lien Fee: $0-$150 - The release of a recorded lien, involves the county office of records to change the title record. Some, though not all counties will charge a fee to remove the old homeowner and the old lender from their record. Make sure that this is done, because some title agents charge for this, but never do it. The record then shows multiple owners for the same property.Technically, it is not serious, since you will have title insurance. But, for practical purposes, it is very annoying and sometimes quite difficult to rectify. Courier Fee: $0-$300 Lawyers and title agents use Couriers to get documents from one place to the other.For many, it is just another means of getting an additional fee from the home purchasers. Some home purchasers will ask for receipts and some are sometimes successful! If you have a mortgage for the purchase of your property, some of these items will be required by your lender. However, if you are a cash buyer, then you as the buyer have to check, either yourself or through your lawyer, that all these items related to the title on your property are carried out judiciously and accurately!

  Closing or Settlement Fees: $350 for a purchase (split between buyer and seller). $150-$350 for a refinance - This is sometimes also known as the Attorney's Fee. Your closing is the meeting where you sign all the paperwork to finalize your loan and purchase the home. Closings can be conducted by title agents or by real estate attorneys who double as title agents. In some parts of the country they are called "escrow agents." The government does not regulate these professionals when it comes to fees. It's up to you to shop around and find the best rate. Don't automatically hire the title agent recommended by your Realtor or mortgage broker. Some of the less scrupulous Title Agents have been known to charge Closing and Settlement Fee. Watch out for that!

• Whenever you access government, it is bound to cost you a fee or a tax. Buying a house or taking out a loan based on the security of a property is no exception.

  	Recording Fees - This fee is charged by the COUNTY RECORDER OF DEED'S office for the recording of your property transaction. The county recorder will record the change of ownership and the mortgage that has been raised on the security of the property. Whether you are recording a new mortgage or refinance, you have to pay this fee. The county recorder will be able to tell you the amount of the fee.
  	Tax Stamps - Also known as STAMP DUTY, is the amount you pay when you record a change of ownership of a property to the County Recorder of Deed's. The amount will be based on the purchase price. Some counties will give you a reduction, if you are a first time buyer. In some places this is known as "Recordation Tax". Based on the location, you might have to pay this amount also for the refinancing of a property.
  	Transfer Tax - Is another tax on the transfer of the property. Again it is based on the purchase price. Your county tax office will be able to tell you on what basis it is calculated and whether it applies to your transaction.

These three government fees sound like taxes on the same aspect of the transaction. But they are not. The Recording Fee is for recording the two transactions (change of ownership and change of lender); the Tax Stamp is a tax on the purchase of the property and the Transfer Tax is a tax on the transfer of the property!

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Some clients find dealing with S & L's easier than with commercial banks. S & L's will sell your mortgage on the secondary market (e.g. Freddie Mac and Fanny May)

They are very competitive as mortgage lenders, since they have generally a low cost base. However, in order to obtain a mortgage you have to qualify as a member.

Most Credit Unions will not sell your mortgage on the secondary market. You will therefore usually deal with the owner of your debt, rather than just the administrator.

Recently, many large main street banks have created, as subsidiaries, special mortgage companies which cater to different risks that are inherent in mortgage lending. That way the main street banks could better package the mortgages as Collateralized Debt Obligations to Investors. The conditions under which mortgages were offered differed widely, and some of these subsidiaries of major banks were outright predatory. Therefore do not automatically assume, because you are dealing with a well know and recognized main street bank that all loan conditions are competitive and "have your well being in mind!"

Make sure that your lender is the main street bank and not some obscure company, associated with the bank. Main street banks will sell off your mortgage on the secondary market and will, in the end, only do the administration of the mortgage. Although, it is often said, that main street banks offer competitive rates, make sure that they are competitive and do not have any "specials", or little "nasties", such as "teaser rates", attached to the mortgage agreement.

But local high street banks have an advantage: They understand the local market and its peculiarities. Don't underrate that! It might even be worth a small increase in the interest rate offered!

Many of the mortgage companies that advertise, are in fact brokers and not mortgage companies at all. So, beware!

Brokers are usually paid a fee by lenders and an origination fee by the borrower. The lenders fee could be a straight percentage of the amount of the loan or a Yield Spread Premium of up to 2 percent. In other words, the lender offers a 7% mortgage and then adds a 2% ISP for the broker. The ISP can obviously be less than 2%. But it has to be disclosed to the borrower and it is often negotiable.

Using a broker can become a necessity. Especially, when other lenders, such as S & L's, Credit Unions and high street banks refuse to finance a particular property.

You can have a broker working for you as the borrower, if you negotiate an up-front fee with him. Usually, the fee is a percentage of the amount you borrow.

Similarly, the private lender might not require a title search or a title insurance, it is highly recommended to go ahead and complete these formalities. This applies especially in cases, where the private individual financing the property is also the original owner of the property!

The major players in the Internet arena are:

	Capital One - a credit card company that has expanded into banking and mortgage loans
	INGDirect - The American subsidiary of a Dutch banking group
	Ditech - a subsidiary of GMAC
	Charles Schwab The discount broker
	HSBC is in some areas a high street bank. But it is also a very large Internet bank. Their Web Site, at this time, shows that they are not accepting any loan applications

If you want the personal touch these companies are not for you.

More operators enter this business. The key is that you contact only reputable and known firms, since the internet is an ideal platform for more shady operations.