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Housing and Transportation

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What are the risks of a home equity line of credit?


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If you are a homeowner and you need money, one option might be a home equity line of credit (HELOC).


When a lender provides a HELOC, she takes the value of your home, multiplies it by a set percentage and deducts how much you owe on your mortgage. The final number is the maximum amount you can borrow against your home, a figure also known as your credit limit.

Talk to your banker about whether you’d be eligible for this type of loan. If your credit score is low, a home equity line of credit may not be available.

Before setting up a HELOC, be sure to ask about these important criteria:

  • What is the interest rate? Is it fixed or variable? (Most HELOCs have a variable interest rate.)
  • Is there a cap on the variable interest rates?
  • Is there an annual membership or maintenance fee?
  • What is the application fee?
  • What are closing costs? (These also are sometimes called settlement costs.)
  • Are minimum payments based only on interest or on interest plus principal?
  • Are there any transaction fees when I use my HELOC?
  • Will my line of credit be frozen or reduced if my home value decreases?

A benefit of a line of credit is that you don’t have to pay on it if you don’t use it. However, if you’re planning on only utilizing a small percentage of your credit limit, the fees may not make this option cost-effective.

Another benefit is that the interest rate is usually lower than on other forms of debt because the loan is secured by your house. The downside to this setup is that failure to repay your line of credit once you’ve drawn on it could mean the loss of your home.

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What should I watch out for when taking out a mortgage?


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Your home is likely the biggest purchase you’ll make in your life. Before signing on the dotted line, be sure to fully understand everything that goes into your mortgage. Start by keeping an eye out for these common pitfalls.



Private Mortgage Insurance

You don’t necessarily need 20 percent down to get a mortgage. However, if you don’t have 20 percent down, you’ll find yourself paying private mortgage insurance (or PMI) every month. If you can find a conventional loan that will allow you to put less than 20 percent down, you’ll be paying PMI until you have 20 percent equity in your home. If you take out an FHA loan, which only requires 3.5 percent down, you’ll be paying PMI for the entirety of the loan.

Amortization

Not all mortgage payments are created equal. At the beginning of your mortgage, a large portion of your payments will be going directly toward interest rather than toward your principal. That means that it takes longer to build meaningful equity than you may initially anticipate.

Interest Rates

There are more options out there than just the 30-year fixed-rate mortgage. For example, a 15-year fixed-rate mortgage has higher monthly payments, but will save you a good amount of money in interest over the long term as you’ll only be paying it for half the time.

Another type of mortgage is an ARM, or adjustable-rate mortgage. Interest rates will be fixed for a set number of years, after which they will vary depending on the market. If interest rates go down, this could work in your favor, but if they go up, it could be devastating. ARMs are usually only good for people who have a firm plan to pay off the mortgage before the rates switch from fixed to variable.

Restrictions on Payments

There are two major restrictions to watch for in your mortgage paperwork when it comes to payments: balloon payments and early payoff penalties.

Balloon payments mean that you will make modest monthly payments toward interest for a set amount of time, then be required to make one massive payment that will take care of the principal.

Early payoff penalties discourage you from paying off your mortgage early. If this penalty is written into your contract, you may save money on interest by making additional or early payments, but that savings is likely to be negated by the penalty fee. 


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How can I lower my car insurance premiums?



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There are three basic ways to lower your car insurance premiums: cutting benefits, inquiring about discounts and shopping around.


Cutting Benefits

To cut costs, you can lower your coverage or raise your deductibles or both. States have minimum coverage requirements that will dictate to how much you can cut; sometimes these are very low, so you may want to keep more than the state-required minimum. If you find yourself in an accident, you’ll regret being one of those underinsured motorists.

Some common coverages include:

  • Liability Insurance. If you are determined to be at fault for an accident, liability insurance covers medical bills and property damage to others.
  • Collision Coverage. This coverage pays for any fixes to your car. If your car needs to be replaced, you could receive a payout in the amount of the cash value of your vehicle.
  • Comprehensive Coverage. This covers events that aren’t related to an accident with another driver, such as auto theft or damage incurred from hitting an animal.
  • Personal Injury Protection. If you or any of the passengers in your vehicle are injured, this part of your policy pays the medical bills up to the maximum benefit, regardless of who was at fault. You may also be presented with an option for full or limited tort, which gives you the ability to either sue for pain and suffering.
  • Uninsured/Underinsured Motorist Protection. It’s illegal to drive without insurance in all states, but that doesn’t mean people don’t do it. They may also not have enough of a liability benefit to pay for all of your repairs or medical bills. This part of your policy protects you in those situations.

Not all coverages are available or required in all states, and some coverages will be required by your lender if you have an auto loan.

If you decide to raise your deductible to cut your premium, be sure that you are in a financial situation to pay them should the worst happen.

Ask for Discounts

You may qualify for many discounts, including:

  • Good student discounts
  • Discounts for paying premiums on a yearly or twice-yearly basis
  • Bundling various types of insurance into one plan
  • Discounts for receiving all of your policy paperwork electronically
  • Discounts for married couples
  • Low-risk occupation discounts
  • Discounts for security features on your vehicle
  • Discounts for taking defensive driver courses

Shop Around

Shopping around at different insurance carriers allows you to identify the best offer in the marketplace. To shop around, ask for your declarations page, which will provide you with your max benefits and deductibles for the various coverages outlined above.

Some insurance carriers code their declarations pages, making them impossible for anyone outside the company to read. If this is the case, call and ask an agent to walk you through what each code means.

Once you have your declarations page, you will be able to shop around for the exact same policy with other car insurance providers. The side-by-side comparison will help you find the most cost-effective provider.

Do keep in mind that some providers will give you a loyalty discount for sticking with them for a certain number of years. They might also offer discounts for bundling different types of insurance. Be sure that switching providers for a lower cost today will not negate a bigger discount on your car insurance a few years down the road. 

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How is interest calculated on my car loan?


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You do not pay the same amount of interest every month on your car loan. In fact, at the beginning of your loan, you pay more in interest than you will at the end. This is call amortization.


Every month, you have to pay interest on the full amount of the remaining balance of your car loan, or the principal. Because your monthly payments stay the same for the life of your loan, the amount of your payment that goes toward interest will go down as your balance does.

For example, let’s say you borrowed $9,000 to purchase a used vehicle. Your interest rate is 5 percent, and your loan term is 60 months. Your monthly payment would be $169.84.

The first month of your loan, you would have to pay 5 percent annual interest on the entire $9,000 balance. To figure out how much that is in interest, use this formula:

[(interest rate)/(12 months)]*principal balance

In our example, that looks like this for Month One:

(.05/12)*9,000

When you run those numbers, you find that in the first month, $37.50 of your payment is going toward interest, with the remaining $132.34 going toward your principal, or how much you still owe on the loan. Now you only owe $8,867.66.

The next month, your payment stays the same at $169.84, but because your principal has gone down, you pay less interest. Here is your equation for Month Two:

(.05/12)*8867.66 = $36.95

In Month Two, you pay only $36.95 in interest, with $132.89 going toward your principal. Now your remaining balance is $8,734.77.

This process continues, lowering the amount of interest you pay and increasing the amount you are putting toward your principal balance until Month 60, when the loan is completely paid off.

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Should I refinance my car loan?


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Extending a five-year car loan to seven years could lower your monthly payment and even give you a lower interest rate, but because it will extend the period of time you are paying off your debt, you likely will end up paying more than you would have paid on the original loan.


If you’ve lost your job, gone through a divorce or experienced some other life event that has reduced your monthly income, affording the monthly payments may trump the desire to pay less interest over time.

On very rare occasions, if you bought when interest rates were high and they have suddenly taken a dip, refinancing to a loan with a lower interest rate may save you money. Generally, though, refinancing your auto loan is not a good approach to cut costs in the long term. You can run your own numbers by playing with the purchase section of this calculator.

If you are looking at refinancing with a new-to-you lending institution, be sure to do your due diligence. Research the institution via customer reviews using resources like the Better Business Bureau and online forums.

Before signing the paperwork, make sure you understand all terms, fees and penalties. Here are a couple that you should be aware of:

Up-front Cash Payment. If you owe more than the car is worth, the lender may require you make a large payment up front to make up the difference.

Early Payoff Fee. Some lenders will charge you a lump sum fee if you pay off your loan early.

The further you are into your auto loan, the less money refinancing will save you. Due to amortization, more interest is paid on the front end of the loan than the back. If you refinance, you’ll start the cycle over again with a higher percentage of your initial payments going toward interest.

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