Ask The Money Coach

Archive for the ‘Loans’ Category

Becoming the co-signer on a new car loan will not hurt your credit score unless you or your mother fail to meet the terms of the car loan and start to miss payments.  Your email indicated that you already have many charge-offs on your credit records. Therefore, your credit scores are likely to already be very low, which means you will not qualify for a home loan, something else you also asked about.  People who buy their FICO credit scores or subscriber FICO’s credit monitoring service (www.Myfico.com) can get access to an online credit simulator which can show you want actions you need to take to increase your credit scores to qualify for all kinds of loans.

A subscriber had his car voluntarily repossessed but the collection agency still wants more money to settle the debt.  The debt collector wants a lot more than is already shown on his credit report.  The subscriber has already filed bankruptcy once and wants to know his options.  Click now to hear Lynnette’s answer.

If you can afford to do it, yes, it is a good idea to pay extra toward your mortgage and pay your house off early. The one caveat I would say, however, is to make sure that you’ve taken care of what I call “the financial basics” first. This means paying off excessive credit card debt, having at least a three month cash cushion set aside for emergencies, creating a will, and protecting yourself with both life and disability insurance. Once those things are taken care of, by all means, start throwing extra money at your monthly house note to own your home free and clear as soon as possible.

Paying Down a $300,000 Mortgage

You asked about paying “down” a $300,000 mortgage, and I assume you meant just that – paying a big chunk of it down, and not paying it completely off. If you acquired your home anywhere from 1 to 10 years ago, and got your standard 30-year mortgage, paying it off in just 10 more years would mean you’d likely have to nearly double your current payments. On the other hand, if you’ve owned the home for some time, and want to accelerate your payments so that you can, indeed, have it paid off entirely in 10 years, then that may be financially doable without such a huge increase in payments. One big variable in all this is also the interest rate on your home loan. Since I don’t know how any others facts outside of the payoff amount – $300,000 – and your desired time frame (10 years), I’ll briefly describe two payment options, and then point you in the right direction for further information, where you can run multiple scenarios based on your exact circumstances.

Mortgage Payments are Always Front-Loaded

According to Bankrate.com, to pay off in 10 years a $300,000, 6% home loan means your monthly payments would need to total $3,331. By comparison, a 30-year mortgage, also for $300,000 at 6%, would have payments of $1,799. But remember, mortgage payments are very front-loaded, so that you pay more in interest charges in the early years, as opposed to paying down the principal on the loan. In fact, after 10 years of paying on a 30-year mortgage, you’re likely to have knocked off just 13% to 17% of your principal balance. It typically takes about 17 to 19 years of paying a mortgage before your payments start being mostly applied to principal instead of interest.

Use Online Mortgage Calculator

Use this mortgage calculator on Bankrate.com: www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx.

It will allow you to play around with different payoff scenarios for your mortgage. By doing so, you’ll see how many tens of thousands of dollars you can save by applying extra payments to your mortgage, and paying it off sooner rather than later.

Negative information (such as late payments) generally stays on your credit report for seven years. So yes, your credit reports are likely accurate in indicating that in about a year or so, that car repossession – which is already about 5-plus years old – will be deleted from your credit files. If you make a lump sum payment to settle the account, or even make partial or monthly payments, then you would “reactivate” this account, so to speak, and extend the length of time for which is will be reported on your credit files. I suspect that you may have seen this information on your Experian credit report because Experian credit reports contain a unique feature that many users find extremely enlightening.

Experian Credit Report Highlights

For all of the accounts listed in your credit file, Experian shows you “Status Details” indicating when an account is scheduled to fall off your credit report. For example, an auto loan that you paid off and closed in July 2008 will show the following Status Details: “This account is scheduled to continue on record until July 2018.” Or let’s say you had an account go to collections and ultimate get written off by a creditor. In your case, the negative information is your car repossession. For you and anyone else with these and other negative marks in your credit file, you won’t have to wonder how long a certain blemish will haunt you. That critical “Status Details” section of your Experian report will give you that precise information.

No Need to Settle Very Old Debt

Regarding settling your debt, unless you’re in desperate need of getting that car repossession off your credit report before a year’s time (this might be true, perhaps, if you need to qualify for a mortgage), and unless you’ve got thousands of dollars sitting around to pay off that old car debt, I wouldn’t bother trying to settle the account. It’s already been on your credit report for nearly six years. I would simply tough it out for the next year or so until it falls off your credit.

For three reasons, I’d recommend paying off that credit card debt in full and then applying the remaining money toward your car loan. First, you’ll definitely get a boost to your credit scores if you can zero out that credit card bill, which are revolving debt. Paying off installment debt, like an auto loan, only has a negligible impact on your credit rating. Second, your credit cards probably have double-digit interest rates which are likely higher than your auto loan. So you can save yourself some money in finance charges by aggressively attacking that credit card debt. Lastly, it sounds as if your credit card debt balance is lower than your auto loan balance. So if you pay money toward that debt first, you’ll get the benefit of having money left over to also pay a hefty chunk toward your auto loan. That doesn’t appear to be the case with your car loan. It sounds as if you would not have much or any money left over to pay your credit card debt if you knocked out your auto loan in full. So go ahead and apply that tax refund first and foremost toward your credit card bill.