Avoiding The Bi-Weekly Payment Scam
by
Dave Czach
On the surface, the Bi-Weekly Mortgage Reduction Plan seems great. You divide your mortgage payment in half and pay it every two weeks into a large escrow account. The escrow service company then pays your payment every month on your behalf. The amount they pay is equal to your regular payment plus 1/12 of one payment. The extra 1/12 is applied directly towards your principle balance - not interest. Thus, shaving approximately 9.1 years off a 30 year mortgage loan and saving you tens of thousands of dollars in interest.
Now here's the flaws with this system. First, the escrow company usually charges a set up fee in the neighborhood of $200 or more. Second, the escrow company charges you around 2% of your new payment amount every month. Third, you sign a contract to authorize the escrow company to make your loan payments on your behalf. Fourth, your credit rating is now in the hands of strangers. The good news is you can do this on your own without fees or sleepless nights.
There are two methods for do-it-yourself mortgage reduction. First, simply send two checks each month to pay your loan. One check for the full regular amount. One check for 1/12 of your regular payment with the memo section highlighted and stating "Apply directly to principle reduction only."
At the beginning of each quarter, send a certified letter to your lender requesting your account balance history over the past three months. Double-check to see if your 1/12 payment was applied directly to your principle. If not, send a certified letter to the manager with copies of your checks to settle the dispute.
The second method of self mortgage reduction is the mysterious 13th payment. Establish a separate savings account to be used only for your mortgage reduction program. Each month deposit 1/12 of your regular monthly mortgage payment in the account - use payroll deduction if necessary. At the end of the year, you have accumulated the 13th payment (1/12 payment per month x 12 months). In December, you send two checks to your mortgage company. One for the regular payment and one for the 13th payment. Be sure to write and highlight the memo section on your 13th payment check with "Apply directly to principle reduction only." Again follow-up with a certified letter within 3 months to verify the 13th payment went straight to principle, not interest.
In conclusion, the Bi-Weekly Mortgage Reduction Plan is great and makes sense. However, since most lenders do not accept bi-weekly payments, clever entrepreneurs created the massive bi-weekly escrow system. But this method can be costly and leave your perfect credit rating in the hands of an independent, non-interested, 3rd party. If you can sleep at night with that decision, great. If not, do it yourself.
© 2003 SonicPoint.com.
Dave Czach has 12 years experience in the mortgage business and a Bachelor's Degree in Real Estate. He can be reached at dave@czach.com.
Saturday, October 15, 2005
Bad Credit Loans - Good Debt Vs Bad Debt
Good Debt Vs Bad Debt
by Jakob Jelling
Debt has been a part of every body's life and personal debt gradient is on the rise because credit hasn't been easier to receive. In everyday life, most of us would not have enough finances in one go when it comes to paying for our apartments or children's college education. Hence we borrow in one form or the other to get the expenses meet.
Debt is not a simple concept to comprehend, but in fact is a bit difficult one to get hold of. Ideally, as per financial experts' statements, a person's total monthly long term debt payments - which includes credit cards and mortgage - should not exceed 36 percent of his/her gross income for a month. This is the bench mark mortgage bankers take in to consideration while appraising the creditworthiness of a potential borrower.
It is very easy to spend far more than what one could afford. It is interesting and intriguing that a large number of people does exactly this and fail to recognize that they are heading down in an abyss - the deeper you sink, the more difficult will be the chances of a recovery. That is unbridled spending. But to avoid debt is not a smart option either. If properly handled, debt can be money spinning as well. That brings us to the concepts of Good Debts and Bad Debts. Let us see what are the differences between good debts and bad debts?
The secret of acting smart with the money is all about learning to discern between good debt and bad debt. Unfortunately this is something that most people around the world fail to be experts in. Good debt is something that helps improve your financial position or net worth. That is, in simpler terms, a good debt increases cash flow. That is, mortgage debt, for example, is good debt. You are borrowing money from someone, but you're getting a tax advantage so that you are able to cancel interest on an asset that's gaining in value over time. Also you can live there.
On the other hand bad debt can occur when you buy something that goes down in value immediately. That is, when the thing that has been brought on credit does not have the potential to increase its value. Purchase of disposable goods or durable items or, as commonly found, the use of higher interest credit cards can lead one into bad debts. Ideally, debt-to-income ratio of a person shouldn't go above 20 percent. That is - while adding up all of your non-mortgage loans, credit cards and outstanding charges - it should not exceed 20% of the annual income. If it goes beyond the 20% mark, that is bad debt and it doesn't go down well in his/her credit reports even if payments are made in time.
To conclude, debts can be productive if properly and rationally exploited. It is financially draining to incur bad debts but if you could gain more by investing the borrowed money than the interest associated with the credit, then it is good debt which is useful. Managing one's debt and hence the finances might need a bit of brain scratching. But it is not that enigmatic for a common man to comprehend. After all it is no rocket technology. It is all about learning to manage your finances!
About the Author
Jakob Jelling is the founder of http://www.cashbazar.com. Visit his website for the latest on personal finance, debt elimination, budgeting, credit cards and real estate.
by Jakob Jelling
Debt has been a part of every body's life and personal debt gradient is on the rise because credit hasn't been easier to receive. In everyday life, most of us would not have enough finances in one go when it comes to paying for our apartments or children's college education. Hence we borrow in one form or the other to get the expenses meet.
Debt is not a simple concept to comprehend, but in fact is a bit difficult one to get hold of. Ideally, as per financial experts' statements, a person's total monthly long term debt payments - which includes credit cards and mortgage - should not exceed 36 percent of his/her gross income for a month. This is the bench mark mortgage bankers take in to consideration while appraising the creditworthiness of a potential borrower.
It is very easy to spend far more than what one could afford. It is interesting and intriguing that a large number of people does exactly this and fail to recognize that they are heading down in an abyss - the deeper you sink, the more difficult will be the chances of a recovery. That is unbridled spending. But to avoid debt is not a smart option either. If properly handled, debt can be money spinning as well. That brings us to the concepts of Good Debts and Bad Debts. Let us see what are the differences between good debts and bad debts?
The secret of acting smart with the money is all about learning to discern between good debt and bad debt. Unfortunately this is something that most people around the world fail to be experts in. Good debt is something that helps improve your financial position or net worth. That is, in simpler terms, a good debt increases cash flow. That is, mortgage debt, for example, is good debt. You are borrowing money from someone, but you're getting a tax advantage so that you are able to cancel interest on an asset that's gaining in value over time. Also you can live there.
On the other hand bad debt can occur when you buy something that goes down in value immediately. That is, when the thing that has been brought on credit does not have the potential to increase its value. Purchase of disposable goods or durable items or, as commonly found, the use of higher interest credit cards can lead one into bad debts. Ideally, debt-to-income ratio of a person shouldn't go above 20 percent. That is - while adding up all of your non-mortgage loans, credit cards and outstanding charges - it should not exceed 20% of the annual income. If it goes beyond the 20% mark, that is bad debt and it doesn't go down well in his/her credit reports even if payments are made in time.
To conclude, debts can be productive if properly and rationally exploited. It is financially draining to incur bad debts but if you could gain more by investing the borrowed money than the interest associated with the credit, then it is good debt which is useful. Managing one's debt and hence the finances might need a bit of brain scratching. But it is not that enigmatic for a common man to comprehend. After all it is no rocket technology. It is all about learning to manage your finances!
About the Author
Jakob Jelling is the founder of http://www.cashbazar.com. Visit his website for the latest on personal finance, debt elimination, budgeting, credit cards and real estate.
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