$ People Are Saving Less

• The Commerce Department reports that Americans are saving at the lowest rate since the Great Depression.
• Personal savings stood at a national level of negative $6.2 million in January.
• About 40% of Americans say they are saving nothing for retirement. One reason: Over the past year, inflation rose 4.3% while salaries rose only 3.4%.
• One in four Americans told the Employee Benefit Research Institute that they have no saving at all.

$ Retirement Is Coming Later and Later

• The percentage of Americans 55 or older working full-time increased from 54.2% in 1993 to 64.4% in 2005.
• Nearly one in four people between 65 and 74 was still in the labor force in 2006, compared with just one in five in 2000.
• A recent study indicates that 17% of workers have suffered a reduction of retirement benefits offered by their employers in the last two years. Of these, only one-third say they are saving more for their retirement as a result.

$ Student Debt Is Piling Up

• Tuition cost have climbed 60% since 2000, and the average graduating senior now owes more than $20,000, according to the National Center for Education Statistics-twice as much as graduates owed a decade ago.
• Nearly a quarter of recent grads owe in excess of $25,000.
• While student debt rose 8% from 2005 to 2006, starting salaries rose only 4%.

These are the statistics. Break away from the crowd and do NOT be one of the statistics. Call us if you want to stand out from the crowd.

The equity in your home is not like an ATM. The worst thing you can do is borrow against your home equity and buy depreciating assets. You borrow equity to conserve not consume.

Many newspaper ads offer home equity loans. Essentially, these loans are second mortgages in the form of a revolving credit line. They provide a method by which homeowners can tap the equity of their real estate. Often, homeowners can borrow as much as they need merely by writing a check. However, these loans can be dangerous. Variable interest rates with no upper limit, deceptively low interest-only payments and other complex schedules could easily put a borrower into a financial bind.

Why they are popular

The TRA ‘86 – or Tax Reform Act of 1986 – seems to encourage excessive use of home equity loans. A loophole as big as your house preserves interest deductions on home loans since the deductibility on interest on all forms of personal, consumer and student loans has now been phased out. Interest on home equity loans is fully deductible for educational or medical expenses. For other borrowing needs, including relatively frivolous ones like a vacation, home equity loan deductions are limited to interest on borrowing up to the original purchase price of the house, plus the cost of any improvements, and not the current appraised value.

The laws continue to change. You are entitled to take a deduction on your home’s “acquisition indebtedness” (or its lowest level) plus up to $100,000 of home improvements. The maximum deductibility (in 2006) is $1 million on acquisition indebtedness plus $100,000 of home improvements. Example: you buy a $400,000 home with a $300,000 mortgage and pay the mortgage down to $50,000 over time. The home value has grown to $600,000 and you want to refinance all the way up to $400,000. Careful! “Acquisition Indebtedness” is the original acquisition indebtedness mortgage or it’s lowest level. For this example, the lowest level is the $50,000 balance plus $100,000, so, the maximum you should be deducting on interest is a total of $150,000. After decades in the mortgage industry, I see these mistakes all the time. Contact me if you have questions.

New Property Advantages

Thus, some newer homebuyers can deduct more than equity-rich homeowners who paid comparatively little for their houses in pre-inflation days. This has started people thinking about selling the old homestead and buying a new one just to boost deductions. Real estate commissions, closing costs, and moving and redecorating, however, are likely to cost far more than one can save with a higher deductibility limit.

Multiple Sources

Home equity loans are now being heavily promoted by brokerage houses and finance companies as well as by banks. Such loans provide a line of credit that can go as high as 70 percent or 80 percent of the unmortgaged value of a house. Thus, if the house has an appraised value of $125,000 and you owe $50,000 on the mortgage, you might qualify for $60,000 of credit. (But remember, you might not be able to deduct all the interest on this amount).

Loan Features

You do not have to borrow it all at once, or any of it for that matter. The lender extends a special credit line to use as you please. The borrower pays no interest until he or she starts using the credit and then pays it only on the amount borrowed. The debt can be repaid at any time or paid off in installments over five to ten years, depending upon the lender’s terms. Another alternative is to pay strictly interest until the end of the term, and then pay off the lump sum left or refinance it.

Most home equity loan rates have no ceiling on how much they can rise from month to month over the life of the loan. The rate piggybacks on some index of market interest, usually the prime rate. The borrower pays the index plus one to three percentage points. If rates climb steeply, so do monthly payments. It is likely that interest rates will remain a volatile item as politicians continue to tinker with the economy.

• Immediate cessation of the use of credit
• Evaluation of the extent of the problem – listing debts
• Consideration of declaring bankruptcy
• Seeking the services of a credit counseling service
• Developing your own workout resolution

Most persons recognize the problem long before it becomes serious enough to warrant that bankruptcy is the only viable option. However, because they are not aware of the fourth and fifth possible steps, they allow the situation to grow worse.

CREDIT COUNSELING SERVICES

In many areas there are credit-counseling agencies that can provide help. These are non-profit organizations, frequently affiliated with local United Way and other service coalitions. If you are not aware of them, simply call the local services organization and ask for a referral. Generally, these groups help the consumer straighten out the credit and budget situation for a nominal fee. The bulk of their compensation, which is used to offset the expense of operations, comes from the merchants as a percentage collection fee. What these groups attempt to develop is the following:

• Have merchants and creditors suspend collection efforts
• Have creditors suspend all interest charges
• Collect one check each pay period from the debtor
• Make monthly disbursals to the creditors

These organizations are quite distinct from the companies who market loan consolidation packages, which frequently increase the total interest expense, lower the monthly payment, all of which significantly prolongs the payout period. Their reputation can be easily confirmed by a few calls in the community, and their performance record nationally is quite good.

DEVELOPING YOUR OWN WORKOUT RESOLUTION

However, there are not always local agencies available, and some people are reluctant to use the services of an organization. In those situations, the best technique is to try and negotiate the same arrangement. Here are the steps to follow:

1. Develop a complete list of all debts. This includes the names and addresses of the creditors, account numbers, the current amount owed, and the monthly payment expected.
2. Prepare a budget, allocating income to cover fixed monthly expenses, variable monthly expenses and a sinking fund for the periodic expenses that come up annually or semi-annually.
3. Cease using credit cards and charge accounts entirely. If you are concerned with temptation, then destroy the cards.
4. Send a letter to all creditors requesting a special payment arrangement. If they do not respond in writing, insist that they do so. Otherwise, you may be hit much later with a staggering amount of accumulated interest.
5. Make the monthly payments on schedule.
6. If some crisis causes you to have to temporarily suspend payments, contact the creditors in writing immediately. Explain the situation frankly and send some payment, however small. Do not leave them in the dark. Communicate each month. Resume full payments as originally agreed as soon as possible.
7. Do not open any new accounts or incur new debt.
8. Start saving some money so that you will have some financial resiliency. The best way to do this is through payroll deduction to a savings institution or credit union. Try to increase the amount of savings as your creditors are paid off and should you get any pay raises or bonuses. Just getting out of debt is not enough – you have to feel that you are making progress.

SAMPLE LETTER TO A CREDITOR

As one of my creditors, I am asking for your help in order that I can pay all accounts in full and avoid bankruptcy. As the result of significant medical bills, coupled with a temporary reduction in income, a negative financial condition has developed. Here is a summary of my financial circumstances:

My net take home pay is $ ______ per week. My rent and fixed utilities total $______ per week. (or per month)

Attached is a list of all my accounts payable.

I have instituted a rigid budget, but without the help of my creditors, it is impossible for me to make the payments that are being requested of me. As part of my financial rehabilitation, I have decided to totally cease using all charge accounts and credit cards until all have been paid in full.

What I am asking you to do is to suspend all interest charges and accept a payment of 1/24^th of your current balance of $ ______ each month for the next 24 months. If this is acceptable to you and each of my other creditors, I will be sending you a check each month in the amount of $______ until the account is paid in full.

Please acknowledge in writing your willingness to accept this debt workout plan. Thank you for your help and cooperation.

(You may want to explain more about how the debts happened.)