Sh money matters 3 23 14

SIDNEY HERALD SuNDAY, MARcH 23, 2014 1C

Money matters

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Pay off your mortgage earlyThough the apprehension

over mortgage payments may wear off once home-owners get settled, that doesn’t mean homeowners don’t wish they could pay off their homes before those mortgages reach matu-rity. Though it might seem impossible in those first few months after buying a home, paying a mortgage off early can be accom-plished in a variety of ways.

Increase yourpayment each month

Any type of loan, be it a traditional credit card or a mortgage, will disappear faster when borrowers pay more than the bare mini-mum. By paying just a little more each month, more of your money is going to the principal on the loan, lowering the amount of interest you will pay over the life of the loan at the same time. For example, a $200,000 30-year mortgage loan at 7 percent interest will cost borrowers $1,330.60 per month (costs may vary depending on taxes), and that loan will be paid off in 30 years. But borrowers who increase their payments by just $50 per month can pay off the loan in 26 years and nine months. What’s more, borrowers who only make the minimum pay-ment each month will have paid $279,017.80 in interest charges over the life of the loan, while those who increase each month’s pay-ment by just $50 will have paid just $242,588.80 in inter-est over the life of the loan. That means that extra $50 per month saves borrowers $36,249 in interest charges.

One thing borrowers must be certain of is that any extra money they send in each month is applied to the loan’s principal, and not just set aside for the next month’s payment. Talk to your lender to verify this, and when doing so, make sure you don’t have to pay

any prepayment penalties if you do, in fact, pay the mort-gage off before it reaches full maturity. Such penalties can be significant, but they might be worth paying for the peace of mind of know-ing you will be paying your mortgage off several years early.

bI-weekly payments Bi-weekly payments, in

which borrowers make half-payments every two weeks instead of one full payment once per month, are another way to pay your mortgage off early. A typical mortgage agree-ment has borrowers making payments once per month, meaning they are making 12 annual payments. But a bi-weekly payment system takes advantage of the fact that there are 52 weeks in a year. So by the end of one calender year, you will have made 26 half-payments, or 13 full payments. Such a payment system enables some borrowers to pay off

their 30-year mortgages in as little as 24 years.

When looking into bi-weekly payments, consult your lender to determine if there are any penalties to such a system. Some lending institutions charge customers who change their payment structure. In addition, confirm with your lender that each extra payment is going toward the principal and not toward your first payment next year.

refInance your loanRefinancing to a shorter-

term loan often earns bor-rowers a smaller interest rate, which can offset the higher monthly payments that accompany shorter-term loans. A shorter-term loan means you won’t have mortgage payments hang-ing over your head for as long as you would on a 30-year mortgage, and it also means you won’t pay nearly as much in interest over the life of the loan. Many homeowners find a 15-year mortgage forces them to be more disciplined. Homeowners who find their 30-year monthly mortgage payment is well below their means should consider a shorter-term loan, especial-ly if their 30-year mortgage would penalize them for paying the loan off before it reaches full maturity.

Mortgage payments have a way of dominating home-owners’ thoughts. But those homeowners who want to get out from under their mortgage payments without selling their homes have a handful of options at their disposal.

How to earn more affordable mortgageHome ownership remains

a dream for many people. But on the heels of the recession that began in late 2008, prospective home buyers are finding it far more difficult to secure a mortgage than it was in the years before the economy took a turn for the worse. Stricter guidelines now govern both borrowers and lenders alike, and the pro-cess can quickly frustrate prospective homeowners.

But strict guidelines and more diligent lenders do not mean prospec-tive borrowers will not be able to secure a loan to finance their home purchases. It just means those borrow-ers might want to take every stop possible to ensure their loan ap-plications are approved and their mortgages are affordable.

address any credIt concerns before process

Poor credit is a prospec-tive borrower’s worst en-emy, and it’s an instant and glaring red flag to lenders. And thanks to inaccura-cies on their credit reports, some people may have poor credit and not even know it.

Before they even begin the process of applying for a home loan, would-be applicants should go over their credit reports with a fine tooth comb, ensuring there are no potentially harmful inaccuracies that may affect the ability to secure an affordable mort-gage. Inaccuracies or poor credit histories can bring down individuals’ credit

scores, which lenders use to determine home loan interest rates. So prospec-tive applicants should have any errors to their credit reports corrected and/or work to improve their credit scores before apply-ing for loans.

pay down debt. Even if an applicant’s

credit score is solid, lend-ers may scoff at applicants with substantial amounts of debt. Credit card debt

should be paid down before beginning the process, and it also may benefit applicants to pay off any additional loans, such as car notes or student loans, before applying for a home loan. The less debt an applicant has, the more attractive that applicant becomes.

avoId overusIng your credIt cards

Using credit too fre-quently also can make it more difficult for prospec-tive home buyers to secure a home loan. Credit card holders each have a maxi-mum limit on their credit cards, and financial experts recommend using less than 20 percent of available credit to maintain a strong

credit rating.

don’t bluff on loan applIcatIons

Some borrowers might be tempted to inflate their earnings on home loan applications, including counting overtime or bonuses they haven’t yet earned when listing their annual income. Borrow-ers can expect lenders to request documentation of any extra income, includ-ing bonuses, so applicants

should avoid including additional income on their applications unless they can prove it.

Applicants also must avoid hiding past issues on their applications. Banks performing their due diligence will even-tually discover any past problems, so applicants should be straightfor-ward from the start. Ap-

plicants concerned about their earnings should know that it’s acceptable to include information about assets such as retirement plans and savings even if those funds don’t figure to be used to pay the mort-gage.

make substantIal down payment on loan

Lenders look fondly on borrowers who can afford hefty down payments, feeling that such borrow-ers are less likely to default on their loans. In addition, the larger the down pay-ment, the less the monthly mortgage payment will be, saving borrowers a sig-nificant amount of interest fees over the course of the loan.

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Many consumers are aware of the importance of having a good credit history. A strong credit history means consumers have a high credit score, which can help them se-cure home and auto loans with reasonable interest rates. But while consum-ers may know the sig-nificance of a good credit score, they might not know about the credit score itself. The following are a few things even consumers with strong credit histo-ries may not know about that three-digit figure that can have such a substan-tial impact on their lives.

multiple credit scores The success of Web sites

offering free credit scores, and those sites’ popular television ad campaigns, opened many consumers’ eyes to the reality that they have multiple credit scores. That’s because each of the three credit bu-reaus has its own way of determining an individu-al’s credit score. Experian, Equifax and TransUnion each has their own propri-etary scoring model. As a result, consumers typical-ly have three credit scores. Though these scores are often within a few points

of one another, that’s not always the case. Adults planning to apply for loans should find out all three of their scores before begin-ning the loan application process. If one score is considerably lower than the other two, examine each of the three reports thoroughly to determine if there are any discrepan-cies. Even credit reporting agencies make errors, but those mistakes can prove quite costly to less careful consumers.

Your score is constantlY changing

Just because you have a great credit score to-day does not mean that score will be just as stellar tomorrow. That’s because credit scores are constantly in flux. When

determining your credit score, credit bureaus consider a host of factors, including what’s known as a credit-utilization ratio. This compares the amount of debt an individual is carrying to his or her total available credit.

If your credit score last month was excellent but you have spent much of the past month piling up charges, then that score has probably lowered, even if you haven’t missed a payment. A low credit-utilization ratio is ideal, so piling up charges will hurt your score unless you are immediately paying those charges off. Carrying balances and/or missing payments can quickly turn a great score into one that raises a red flag with prospective lenders.

benefits from debtMany consumers are

aware there’s such a thing as good debt and bad debt. Credit card debt is typical-ly considered bad debt, as credit cards often charge much higher interest rates than lending institu-tions that give consumers chances to build good debt. Installment loans, which include mortgages and auto loans, give consumers the opportunity to dem-onstrate they can make steady payments over a prolonged period of time, and each timely payment can boost a consumer’s credit score. However, men and women should be aware that missing install-ment loan payments can have a very detrimental impact on their credit scores.

Money matters2c sunday, March 23, 2014 sidney herald

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Chances are you have come across an advertisement for a reverse mortgage and have probably wondered what this type of mortgage is all about. Geared toward seniors, reverse mortgages are growing in popularity and inspiring the curiosity of older homeowners.

A reverse mortgage is a loan offered to people over the age of 62 that enables borrowers to convert part of the equity in their homes into cash. People of retirement age may find that their limited income can make monthly expenses more difficult. Reverse mortgages were conceived as a method to helping people at this stage in life use the money they put into their homes to pay off debts or cover routine living expens-es. The loan is dubbed “reverse mortgage” because instead of the homeowner paying money to a lender as is customary with a traditional mortgage, the lender makes payments to the borrower. What’s more, the borrower is not required to pay back the loan until the home is sold or vacated. As long as a person is living in the home he or she is not required to make any payments toward the reverse mortgage loan balance. However, the borrower must remain cur-rent on insurance and tax payments.

When a person takes out a reverse mortgage, he or she may borrow a por-tion of the market value on the home. As of 2012, the maximum loan amount avail-able in the United States was $625,000. Any outstanding existing mortgages are paid off with the proceeds of the reverse mort-gage, and either a lump sum of the balance or monthly payments are established. A homeowner may also opt for a line of credit with the reverse mortgage proceeds. Here is

a more in-depth look at the pros and cons to reverse mortgages.

prosA reverse mortgage enables seniors to

live in their homes for the rest of their lives without fear of mortgage payments. Because there are no payments being made during the life of the loan, borrowers do not have to meet income requirements or credit

checks.As long as the borrower continues to

maintain residence in the home, he or she is still eligible for the monthly payments re-ceived through the reverse mortgage. This money can be used for any purpose and is tax-free. Borrowers can opt to modernize their homes or make safety improvements. The funds can also be put toward medical expenses or travel or to help family with their own financial needs.

Because the government insures the reverse mortgage program, borrowers need not worry about receiving their payments. Should a lender fail to make a payment, the borrower is eligible for that money and a late fee as well.

Another benefit of reverse mortgages is they protect homeowners against falling home prices. If the value of the home drops after the loan is negotiated, it will not affect the equity value assessed for the life of the loan.

consOne down side to reverse mortgages is

that the loans have higher up-front fees than other types of financing. Borrowers have to pay not only an origination fee and closing costs, but mortgage insur-ance costs as well. These initial costs can be several thousands of dollars.

Unlike a traditional mortgage, where the balance gets lower and lower over time, with a reverse mortgage, no payments are being made on the loan. This means the loan balance simply gets larger over time depending on how much money is drawn from the home’s equity. At the end of the loan, when the homeowner moves from the

property or the premises is vacated upon the borrower’s death, the value of the estate decreases based on the pay-off value of the reverse mortgage loan.

Heirs will pay off the mortgage by selling the home and will only inherit the remain-ing money after the reverse mortgage lender has the loan satisfied. This means men and women will be leaving less money for their heirs, but those heirs will not be personally liable if the home sells for less than the value of the mortgage. The mort-gage lender has to claim a loss and request reimbursement from the Federal Housing Administration.

Something many seniors may not be aware of with regard to reverse mortgages is that these loans can affect eligibility for some need-based programs.

Although Social Security and Medicare are not affected, Medicaid and other govern-ment assistance programs can be affected if a senior has a surplus of funds from a reverse mortgage that are not spent during the month.

A reverse mortgage is a long-term solu-tion. People who are looking for a short-term fix will find that this type of loan prob-ably doesn’t meet their needs. Furthermore, it is hard to be approved for reverse mort-gages on newly purchased homes. Lenders usually like to see at least six months or a year chain of title on a property before issu-ing a reverse mortgage.

Many seniors often find reverse mort-gages confusing. Seniors may unwittingly agree to a loan without fully understand-ing the scope of the reverse mortgage. It is advisable to seek counseling on reverse mortgages before applying for one.

pros and cons of reverse mortgages

things to know about credit scores

Reverse mortgages enable seniors to retire comfortably in their own homes. But that comfort does come with some drawbacks.

Financial planning is often mistakenly assumed to be a concern for the wealthy. That assumption essentially pro-motes the idea that people without much money need not worry about what to do with their finances. However, financial planning can benefit people at all income levels, even helping those at lower income levels move into higher brackets if they plan success-fully.

Though having an idea of how to spend and grow your money is an idea many people would likely embrace, a significantly large number of people do not have a financial plan. In its 2012 Household Financial Planning Survey, the Certified Financial Plan-ner Board of Standards found that just 31 percent of financial decision makers in families had created a financial plan. Some survey respondents did so on their own, while others used the services of a financial planner. Though some might be intimidated or even scared to institute their own financial plans, it can be done. For those who are especially hesitant to develop their own financial plans, financial planners can help you define your goals and make those goals a reality. The benefits of financial planning are numerous, helping men and women build better finan-cial futures.

A finAnciAl plAn forces you to define your goAls

One of the biggest advan-tages to financial planning is it forces men and women to define their financial goals. An effective financial plan should consider both short- and long-term goals. If you hope to one day own a home, a financial plan can help you figure out how quickly you will own that home. A good financial plan also can help you map out a course for retirement. Am-biguity with respect to your finances is potentially danger-ous. Saying you want to retire at 60 and developing a plan to make that happen are two very different things, but the latter can make it happen while the former won’t get you anywhere unless you take action. Be as specific as possi-ble when defining your goals, and recognize that, depending on when you are making your financial plan, you might need to reassess those goals if they are not realistic.

A finAnciAl plAn cAn help you curtAil your spending

With a financial plan in place, you’re less likely to waste your money on frivo-lous things. Without a plan, you’re more likely to treat money as disposable, put-ting your financial future in jeopardy as a result. A careful examination of your financial situation can shed light on areas where your spending is excessive. A negative cash flow, which occurs when there is more money going out than coming in, has never been a part of a successful financial plan. Correcting such a situ-ation, which is often accom-plished when people establish a financial plan that trims

excessive spending, can go a long way toward securing your financial future.

A financial plan can be mo-tivational. Another significant and often overlooked benefit to financial planning is how such planning can act as a motiva-tor. A good financial plan will include certain measuring sticks, such as having debt paid off by a particular date or a certain day by which you hope to deposit a certain amount of money into your savings. These measuring sticks often motivate men and women to be more responsible with their money, and many people find living up to short-term finan-cial goals to be very rewarding.

A finAnciAl plAn mAkes better use of your money

Even if you don’t have any negative spending habits, a fi-nancial plan can help you make better use of the money you do have. A closer examination of your finances can often yield a host of ways to grow your money or save it. For example, you might have multiple insur-ance policies, some of which offer duplicate coverage. Exam-ining each policy and removing duplicate coverage can save you money and help you spend that money in better ways.

You wouldn’t pay for the same slice of pizza twice, so why pay for the same coverage twice? But unless you make a finan-cial plan, you are unlikely to find those areas where you’re wasting money or discover the numerous ways in which your money can be better spent.

A finAnciAl plAn helps you grow your money

Even if you are worried about investing or especially skittish when it comes to risk, you will need to find ways to grow your money, and a finan-cial plan can help you do just that. The concept of inflation dictates that the dollar you have today won’t be worth as much next year, meaning you will need to take steps to grow your money if you hope to have enough to get by in retire-ment. A financial plan can help everyone, whether they’re risk-averse or not, grow their money. Something as simple as opening an interest-bearing account will grow your money more than if you were to put that money under the mattress. Without a financial plan that includes ways to grow your money, the money you have will only lessen in value as time goes on.

Retirement can simulta-neously excite and distress men and women as they approach the day when they end their careers. Anticipating the freedom can be exciting, while con-cerns about maintaining financial independence can be stressful.

Though there are no guarantees that men and women who prioritize retirement planning will not outlive their finances, those who do arrange their priorities in such a man-ner are far more likely to enjoy a comfortable retire-ment without worrying about their finances.

As men and women approach retirement age, certain steps with regard to preparing for retire-ment can put them in posi-tion to enjoy their golden years to the fullest.

Assess your resourcesAn honest assessment of

your assets will help you deter-mine a retirement lifestyle you can afford. Assets can include any property you own, invest-

ments, savings, and retirement accounts. Your property may be your biggest financial asset, but unless you plan to sell that prop-

erty or take out a reverse mortgage, then you won’t be able to rely on that property to fund your lifestyle. When assessing resources, keep in mind that you might have to pay potentially steep taxes when attempting to access any retirement accounts, such as a 401(k). Factor in any such taxes when assessing your retirement resources.

mAke A list of your monthly expenses

Once you have assessed your resources, make a list of your monthly bills. Mortgage payments, healthcare costs, taxes, and food are among the essentials, while addi-tional expenses like travel and entertainment will need to be factored in as well. When considering monthly expenses, keep in mind that some of those expenses, including mort-

gage payments and commuting costs, will likely disappear, while others, including health-care costs, are likely to

increase significantly. Once you have assessed your resources and expenses, you can then begin to paint a picture of the retirement lifestyle you can afford to live.

compAre lifestyle you wAnt versus one you cAn Afford

Considering your finances several years before you retire affords you the opportunity to make changes if you determine the retirement you can afford does not exactly match up with the retirement you want to live. After you have figured out what you can afford, compare that life-style to the one you hope to live. If they are one and the same, then you did a great job planning for retirement. If they are slightly or significantly different, then look for ways to close that gap.

If necessary, consult with a financial planner, who might be able to help turn your dream retirement into a reality. Clos-ing the gap between your dream retirement and the one you can afford to live may require you to work an extra year or two, so be prepared to make that decision if need be.

plAn on continuing to grow your money

Just because you’re retiring does not mean your money has to stop working as well. You will still need to combat inflation dur-ing your golden years, so plan on continuing to grow your money even after you retire.

Though it’s best to reduce in-vestment risks as you age, many retirees still need to keep a toe in the investment waters. Find a balance you’re comfortable with so your money continues to grow, but be conservative at the same time. As you grow older, continue to reduce your risk.

While conventional wisdom long suggested retirees should completely eliminate risk from their portfolios, today’s retirees are living longer than ever before, so you likely can’t afford to follow the advice of yesteryear.

As retirement draws closer, men and women must start making important financial decisions to ensure their nest eggs can support the lifestyles they want to live throughout their golden years.

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According to the Automo-bile Association of Amer-ica, the cost of owning a vehicle is on the rise. In its 2013 “Your Driving Costs” study, AAA determined the cost of owning a vehicle is somewhere between $7,000 and $11,000 annually depending on the type of vehicle. That’s a substantial amount of money and may leave many motorists look-ing for ways to reduce the cost of automobile owner-ship.

Driving is a way of life for many people left with little choice but to keep a vehicle. Thanks to mass transporta-tion, city dwellers might be able to get by without own-ing a vehicle, but those who live in rural communities or even the suburbs often find that public transporta-tion runs too infrequently or inefficiently to meet their needs. There are ways for those who need their own automobiles to reduce the financial burden of vehicle ownership.

Downsize your vehicle. In its study, AAA found that the average cost of owning a vehicle varied consider-ably depending on the size of that vehicle. That should come as no surprise, as larger vehicles tend to con-sume more fuel and, as a re-sult, cost more money. But drivers might be surprised to learn just how much less it costs to own a small sedan than it does a four-wheel-drive sport utility vehicle. Small sedans cost the least amount of money to own at $6,967 annually, while four-wheel-drive SUVs cost nearly twice that amount, setting their owners back $11,599 per year. But the most surprising thing from the AAA study might be its findings as to the costs of owing a large sedan. Such vehicles are nearly as

expensive as larger SUVs, costing drivers more than $11,000 per year. So drivers who downsize their vehicles to a small sedan will likely save themselves a substan-tial amount of money over the life of the vehicle.

Drive safe and cash in on lower insurance premiums. Though numerous factors, including individuals’ driv-ing histories, influence the cost of auto insurance, driv-ers with clean track records might be able to buck the industry trend and pay less for their auto insurance policy next year than they did this year. In its study, AAA found that the cost of insurance rose by nearly 3 percent in 2012 from the year before. But drivers who can avoid accidents and citations are likely to see their rates decrease from year to year.

Buy a used car. Buying a used car may not give buy-ers the initial excitement of driving off a car lot behind the wheel of a brand new vehicle, but it might prove quite exciting for your bank account. Revisiting a study they conducted in 2001, in 2013 experts at automotive Web site Edmunds.com examined three different financing methods and the cost of each over a six-year period, which the global market intelligence firm Polk estimates is the aver-age car ownership period. The study examined the costs, including interest rates and fees, of leasing or buying a 2013 Honda Accord EX and buying a used 2010 Accord EX. The total cost of buying used after six years was $20,960, while the cost of leasing was $24,768 and the cost of buying new was $28,330. Buying used even saves buyers money when factoring in equity. Of course, leasing saves driv-

ers the cost of maintenance and repairs, which can be considerable when buying used vehicles. However, an older used car won’t cost as much to insure as a ve-hicle that is being leased or financed.

Drive less. Of course, the easiest way for automobile owners to trim the costs of owning their vehicles is to drive less. Though vehicle manufacturers have improved fuel economy in recent years, driving less will save money on fuel, the cost of which hinges on a host of factors, including petroleum demand and eco-nomic conditions. Such fac-tors may cause a dip in fuel prices one day, but a sharp increase in price the next day. Regardless of those fluctuations in fuel prices, drivers who can cut back on their driving are certain to save money.

The cost of vehicle own-ership is on the rise. But motorists who rely on their vehicles can still find ways to save money.

Comparison shopBelieve it or not, drug prices vary depending on the time

of the year and even the pharmacy. A person can shop around for the most affordable medication just like they would when buying another product. Prescription drug apps enable you to search for discounts in your neighbor-hood.

read your billMedical coding and billing is not always accurate. Em-

ployees entering codes may put in the wrong information, inadvertently charging a person for the wrong medication. Treat your medical bills as you would any other bill and verify that the charges are correct. If you have any doubts, check the drug name with your doctor and then consult with the pharmacy to see if an error was made.

opt for generiC mediCationsGeneric versions of hundreds of brand name prescrip-

tion drugs are available and typically cost a lot less money. With a generic medicine you are not paying for marketing and advertising costs. These drugs are routinely tested for efficacy and safety.

There is really no reason to select a name-brand medicine over the generic alternative, even when it comes to over-the-counter drugs. Ask your doctor on your script to check the box for the generic option.

use a preferred pharmaCy mail-order serviCeCertain insurance companies have negotiated discounts

with mail-order pharmacies and pass on the savings to their members. Medicare and other government-sponsored plans may offer the same type of deal, and consumers can save a substantial amount of money by opting for mail-order service.

Consider big wholesalers for presCriptionsYou may think of Costco or Sam’s Club as your go-to place

to buy 30-packs of toilet tissue, but these retailers also offer discounts on prescription drugs. Even nonmembers are allowed to use these warehouses for their prescription drug needs. Big wholesalers could give you the best deal on your pills.

skip the insuranCe sometimesConsumer Reports says hundreds of commonly used

generic medications can be purchased for around $10 for a three-month supply at various major chains. Program details vary, but consumers might be able to save a lot of money by using these programs and leaving their insur-ance cards in their wallets.

opt for otCIn many cases, an over-the-counter medication may be

just as effective as a prescription drug. Talk to your doctor about trying an OTC remedy before a prescription is writ-ten. Ibuprofen may relieve arthritis pain, and diphenhydr-amine could alleviate insomnia, all at a much lower cost than prescription drugs.

Prescription drug costs can add up. But there are a number of strategies consumers can employ to reduce the out-of-pocket expenditures on medications.

save on prescription drugs

trim costs of car ownership


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