Money Talk

If you need money for any legal reason and want help finding it, post your need and situation here and others will see it and try to help. I hope that this will be of help to anyone out there that needs money or just help making it.

Examples of what you might post on this blog:

• Need financing to buy a home
• Need money for my business
• Need a bridge loan
• How can I raise money for a good Idea
• Advise on how to increase my cash-flow in my business
• You have money to loan to others
• What a bridge loan
• Creative ideas on how to by real estate or a business
• Sources of money for anything
• Anything to do with money or finance
• Ideas on how to get out of debt
• Post a website that could be helpful in anyway
• Got a good idea for saving money or making it
  

Ok I think you get the idea. I really hope this will become a real source of creative ideas.

Negative Amortization Loans (Option ARM)

The
Negative Amortization loan
by
Anderson Capital Funding

The low interest Rate scam
Have you seen the ads recently claming that you can get a 5.0% fixed mortgage rate for 30 years? How about the ads that promises you a low fixed rate of only 1.0% on your mortgage? I even heard one on the radio the other day that claimed you could have a monthly payment as low as your cell phone bill.

Hopefully you were not suckered in buy these ads. I get so upset by mortgage companies that will say anything to get your business. Don’t get me wrong, these loans do exist, but there is a lot they are not telling you.

Negative Amortization Loans

These ads are talking about a “Negative Amortization Loan” AKA Neg Am loan. These are the most difficult loans for the average consumer to understand. I would venture to say that many of the loan officers that sell these loans don’t even understand them. If they do, they sure don’t want you to understand them. What really frost my buns is that there is a real purpose for these loans. When the consumer understands the loan and under the right circumstances this can be a very useful loan.

What is a Neg Am Loan and how do they work

These loans are all designed with four payment options each month.

1. Minimum fixed payment
2. Interest only payment
3. 30 year fully amortized payment
4. 15 year fully amortized payment

Many come with a very low start rate of around 1.0% and last for only one to three months.

Each month you have the option of making one of the four payment options. The borrower is required to make at least the minimum payment, usually below the true rate on interest. This “payment rate” is fixed and can be from 1.0% to over 4.0% depending on the terms of the loan. Most of the ones you here about are at 1.0% and sound great when you see how low your payment will be each month. What they don’t seem to explain, is what happens to your loan balance each month, if you always make that minimum payment. Instead of paying down the loan balance, in most markets, you are negatively amortizing and so your loan balance is going up. I will go into more detail later but just keep in mind that you may be going backwards on your loan.

Your second option is to make the interest only payment. Your interest only payment is the fully indexed rate times the balance divided by 12months. This payment will be a lot less that your fully Amortized rate and I will make this more clear in later in this article.

Your last two options are to make a 30 or 15 year fully amortized loan payment.

Do you see why so many people are confused about this loan? Well it gets worse.

Let me see if I can clear it up for you with an example;

A borrower is going to take out a $400,000 loan and decides to do a Neg Am loan. All Neg Am loans have true rates of interest. This interest is computed using an index (usually the LIBOR of MTA). True rates of interest can fluctuate monthly after the initial introductory period (usually 1 or 3 months) in this example I am using the MTA as of January 2007 of 4.933%

$400,000 loan amount

• Index + Margin = True Interest Rate
• Minimum payment = 1.0%
• MTA Index 4.933% (Jan. 07)
• Margin 3.025%
• Fully Indexed 7.958% = $2,652.67 per month payment
• Pay Rate 1.0% = $1,286.56 per month minimum payment
• Negative amortization = ($1,366.11)

After only one year this borrower would owe $416,393.34 + on a $400,000 loan.

The “Recast Time Bomb”

Another feature of this loan is the “Recast” feature. Most lenders will put a 3 year pre-payment penalty on these loans because they get points from the lender to do so. That means more money in there pocket and the lender likes it because they know you will be in the loan for at least 3 years.

The Recast feature means that the loan will have a 110% to 125% clause in it. Most of the loans today recast after your loan gets to over 110% of the original loan amount. What that means is that if the loan ever goes over 110% of the $400,000 (in our example above) the lender will recast the loan and there minimum payment will go up substantially.

Example: same $400,000 loan as above

• On that loan of $400,000 you would have negative amortization of $16,193 per year
• The loan would then recast after 2.4 years when loan goes over the 110% clause
• The minimum payment would go to $3,242 from the original $1,286

That is a huge jump in monthly payments and on top of that, if the loan agent put on that 3 year pre-payment penalty you are stuck in the loan for another 6 months before you could refinance without paying a huge pre-payment penalty.

When and how should you use this loan?

Remember I said that there are times when this loan should be used. I will give you some examples of when this loan works and just remember that you should never let a loan agent stick you with a pre-payment penalty on this loan.

• Investors will use this loan when they are trying to avoid negative cash flow on a home that is in an area that the values are going up at a rate greater than the negative amortization on the loan
• Someone just out of college moving into a new job that they know their income is going to go up substantially in the next few years and they want to get a nice home now and take advantage of the lower prices today
• Self-employed consumer with a business that is seasonal. When business is slow they can make the minimum payment and make up for it when business is good.

There are other reasons but I think you get the point. As a mortgage broker I never use this loan unless it makes sense for my client and I have explained every aspect of the loan to them. If you have other questions about this loan you can find me on the web at

www.andersoncapitalfund.com

Improve your Credit Score

What is a credit Score?
Your credit score is the way creditors measure your credit worthiness. Credit bureau scoring is a statistical means of assessing how likely a borrower is to pay back a loan. A credit bureau score is based on the data available in the borrower's income, assets, or bank account, although those and other factors are still considered by lenders investors, independent of the score.
Creditors report your account information to one or all three credit bureaus (Equifax, Experian and Trans-union). That information is put into the proprietary FICO scoring formula. Because FICA is proprietary they do not publish how they arrive at a credit score, but with many years of experience I have learned a great deal about what affects your scores and how to correct it.

Steps to improve your credit score

What you are about to learn , 95% of the population does not know or have not yet figured out. There are five things that will dramatically affect your credit score.

• About 35% of your score is affected by your payment history
• 30% by the amount of debt you have
• 15% your credit history
• 10% new credit
• 10% types of credit.
  
  

Payment history has the largest effect on improving your credit score at 35%

If you have any payments 30, 60 or 90 days late it can be devastating to your credit score. Any new late payments charge-offs, collections or bad debt of any kind will lower your score by as much as 107 points. If you have credit cards with over two years history of good credit and are not using them, do not close them. You may lose all of that good history. You should keep them open and active. To keep them active you need to charge something on them every five months. Even if you only charge $5.00 that will keep it active and you will keep the good history. If you close them your credit score will drop.

Amount of Debt at 30% can have a lot to do with improving your credit score

Check your current credit card limits to be sure that you do not go over 30%. Ideally you should pay off your credit cards to a zero balance each month and never charge greater than 30% of your limit. Here is am example: A client that came to me was really upset. They could not get a loan because there credit scores had dropped so low. He could not figure out how this could be. He said “I pay all my cards off every month and have never been late." When the I ask him how much he charged each month I found out that the client was charging close to his limit every month and then paying it off. Here is the problem. Creditors report information to the credit bureaus every 30-90 days and in most cases they do this in the middle of the month, when most people have the highest balances. Do you see the problem? Even though you pay off the card each month, the credit bureaus report it when you have the most balance and so you are over the 30% balance rule and receive a huge hit. The answer to this client’s problem was simple. The broker had him call his credit card companies and ask them to raise the limits on the three cards he was using. They raised the limits and he now was able to use the cards each month but never go over the 30% rule. Within several months his scores improved and he was able to get the loan he needed.

Length of credit history at 15%

The longer your accounts have been open and active the better your score. (Especially revolving) Remember to use the cards with good history once every five months. Any open credit cards with zero balance and that have not been used for more than 6 months, is considered an "inactive" account and will typically lower your score.

New open accounts at 10%

Did you know that when you open a new account it will lower your score for 6-12 months? In most cases, opening a new account of any type will lower your scores. Have you ever been in a store and about to buy something and the sales person says, "If you open a new account with us today we will take another 10% off the price"? Don't do it. Your score will most likely drop for the next 6-12 months. Only open accounts that you really need.

Types of credit at 10%

There is a hierarchy of "types of credit" that goes something like this:

• Mortgages
• Auto loans
• Bank credit cards
• Store credit cards
• Other installment loans

A mortgage loan carries more positive points after being open for 6 months than any other account, so if you can't pay anything else pay your mortgage first.

Last thought on improving your credit score
I want to leave you with one last thought. Do you remember when the credit card companies started offering a start rate of 0% interest on there cards for the fist 6 months? A lot of people went out and opened those accounts took the balances on there existing high interest cards and put them on the new one. After 6 months they did it again. They thought they were really pulling one over on the credit card companies and had a great time until they saw how low their credit scores dropped. The credit bureaus reported them as new accounts and reported them with a high balance and zero payments. I saw their credit scores go from 720 to as low as 580 in some cases. Don't do it.
Good luck and happy credit scores.

The Finance Guy

Come visit me at www.andersoncapitalfund.com