Tuesday, June 19, 2012

The second is that you really need a home equity line of credit if you don’t already have one. As with the case of the aforementioned unsinkable ship, sometimes the unforeseen happens and you need a financial safety net to fall back on. A home equity line is ideal for this purpose because it’s a pre-approved line of credit that doesn’t cost you a thing until you tap into it. Plus, you can borrow and pay it back again and again, as needed.”-Credit Union
This paragraph came from a credit union that I actually belong to and when I read it I thought I was hallucinating.  The same hallucination came the other day when I passed a home for sale and on the sign it said “zero down payment”.  Obviously I must be back in 2006 because lenders are offering the same financial options for mortgages that sent our economy off a cliff in 2008.  First with the zero down payment option, if a potential home buyer comes in to a lender to get a mortgage and does not have any money to put down this person more than likely does not have the available funds to pay a mortgage if the economy takes a turn for the worse again.  Let’s look at it a different way what if the borrower does have some money to put down, but decides to keep it in their savings because the lender said zero down.  What happens to this borrower is now they are placed in an 80/20 mortgage where 80% of the mortgage is a fixed rate and the 20% is usually interest only and unless the borrower pays extra each month the 20% portion of the mortgage never goes down.  That sounds like a raw deal if you ask me.  It is better to save 20% of the total mortgage before going to a lender and put it as a down payment.

Now to deal with the credit union promoting that everyone should have an equity line of credit.  Guess what people were doing before 2008 with their home equity line of credit they were taking money out to buy cars, go on vacations, send kids to college, buy second homes, put additions on their home, etc and then 2008 hit and their home values collapsed into a black hole.  Now these same borrowers because they took money out of their homes through an equity line of credit now had a house that was worth less than they owed.  Because of irresponsibility a lot of American homeowners could not refinance and to add insult to injury the economy was so bad that millions were laid off from their jobs and now could not afford their monthly house payments.  It was a domino effect that all started with lenders saying take out an equity line of credit just in case you need it.  I had an 80/20 mortgage in 2008 where the 20% represented the equity line of credit and you want to know what the lender did when the economy collapsed they took away the opportunity to take money out of that equity line.  I never missed a payment and yet they closed the line off.  I didn’t need the money, but it is interesting that now the credit union and I am sure banks are saying this equity line of credit can be used in an emergency when times get bad.

You know what else can be used in an emergency? An emergency fund and it does not have an interest rate attached to it!  Houses are not to be used as piggy banks so equity lines of credit are not needed in any circumstance.  Mortgages are to be paid off as quickly as possible so in retirement you don’t have to worry about losing your home because your monthly salary has been cut in half.  When any lender starts talking about zero down or equity line of credit politely look them in the eye and say no thank you because you are not a fan of DEJA VU!

If you are in an undesirable mortgage are you going to take advantage of the low rates and refinance?

Thursday, June 7, 2012

Will That Be Debit Or Credit?

Recently I returned from speaking at a conference that was solely filled with college women.  I spoke at 4:45PM which meant that I had time in the morning to go to a workshop.  I chose to go to another financial literacy workshop just to see what would be covered.  The speaker was doing great, she was talking about saving money, and doing a budget, but then the workshop took a turn for the worse.  She started talking about credit cards and not just talking about them, but actually being their biggest advocate.  I was squirming in my seat fuming over the advice she was giving these young ladies.  She started off by saying how she has own a credit card since she was eighteen so she has been using credit cards for twenty years.  From there she told them they need a credit card to book a hotel room, rent a car, and to build credit so later they can get a mortgage.  By this time I had launched into the orbit of anger because as financial speakers we were here to show these ladies how to start their lives on a financial strong foot and here this advice was about to put them in a debt trap!  Most of these college students are already in student loan debt so why tell them to borrow more money by using credit cards? 

To address the above lie about everyone needs a credit card I will start out by saying any transaction that a person uses a credit card for a debit card can be used.  With the hotel room and rental car booking you can give your debit card and the only difference is that the hotel or rental company will put a hold on the card or go ahead and take the amount from your bank account.  Some say to me I can’t afford to have them put a hold on my card!  My reply to that is “you should not be staying in a hotel or renting a car if the money is not readily available.”  How about the statement that you need to use a credit card to build credit so you can get a mortgage?  Also a lie because if you actually go to a company that underwrites mortgages they will look at more than a credit score and you will get approved.  They look at how long you have been at your current place of employment, do you pay other bills on time, do you have a 20% down payment, etc.  They look at the whole person instead of at a number and let’s talk about that number.  Your FICO score is a ridiculous score to care about if you are trying to win financially.  Look it up online and see what it represents.  35% represents how long you have been paying on DEBT, 30% is based on the DEBT you owe, 15% is the length of DEBT history, 10% is based on new DEBT, and 10% is based on types of DEBT used.  Why should anybody care about a score that keeps you from being wealthy because you are always paying YOUR money to someone else? 

Now some people think they can stump me by saying that they have a credit card that has no annual fee and that they pay their bill off each month so they never are penalized with the interest rate or late fee.  What they don’t realize is that it has been proven that people with credit cards spend 40% more than if they would have used their own cash.  So they are still losing with that credit card.  Here is an example in my own life.  I use to work for a company that gave every employee a credit card for company expenses and so I thought I would be smart and pay the annual fee and rack up points off their money.  I wanted to use my points for a free flight and so this is how the credit card company gets over.  I had to spend $25,000 to get the 25,000 points needed for the free flight not to mention the $80 annual fee that paid at the beginning of the year.  $25,000 for a flight, I don’t think that is a fair trade.  Neither you nor I can outsmart the credit card companies and that is why they are a billion dollar industry.  Be smart with your money and next time say debit please!

Does this post change your outlook on credit cards?