Keith has a lot of company. Most mortgages offered with less than a 20% down payment will require PMI (private mortgage insurance). So a lot of people pay for PMI.
PMI protects the lender if you default on the loan. It does not protect the borrower. It's fairly expensive insurance and is calculated based on how big your mortgage is. Your lender can tell you exactly how much you pay for PMI.
Back in the 90's some lenders were taking advantage of PMI. They would continue to charge the borrower for PMI long after they had reached the level of equity necessary to drop it.
Back in 1998 the Homebuyers Protection Act (HPA) was passed. It required lenders to notify homeowners when they had 20% equity in their home and terminate PMI when equity reached 22%.
Note that HPA does not require the lender to drop PMI if home appreciation causes home equity to go above the required levels. Only if payments cause it to reach that level. But most lenders will drop PMI if the equity in the home reaches the threshold level.
We won't get into all the different calculations as to whether you still need PMI. There are plenty of info available on that. We'll focus on getting PMI terminated when the time is right.
Let's start by going directly to the law. In section 3, the act pretty clearly defines how a borrower can cancel.
(a) BORROWER CANCELLATION.
A requirement for private mortgage insurance in connection with a residential mortgage transaction shall be canceled on the cancellation date, if the mortgagor
(1) submits a request in writing to the servicer that cancellation be initiated;
(2) has a good payment history with respect to the residential mortgage; and
(3) has satisfied any requirement of the holder of the mortgage (as of the date of a request under paragraph (1) for
(A) evidence (of a type established in advance and made known to the mortgagor by the servicer promptly upon receipt of a request under paragraph (1) that the value of the property securing the mortgage has not declined below the original value of the property; and
(B) certification that the equity of the mortgagor in the residence securing the mortgage is unencumbered by a subordinate lien.
According to the HPA the lender must drop PMI within 30 days of the automatic termination date or cancellation. When PMI is cancelled the lender is required to send notification that there is no PMI coverage and no further premiums are due.
Now that we know the law, let's see if we can't create a step-by-step procedure for canceling PMI.
The first step is to contact your mortgage company and ask some questions. Call them and have them send you the requested info. You'll want to know three things. First, what is the equity threshold required to cancel PMI. Usually 20 to 25% depending on who holds the mortgage.
Secondly, you'll want to know if an appraisal is required. And, if so, are there approved appraisers that you must use. Expect to pay approximately $400 for the appraisal.
Finally, find out where to send your cancellation letter. It may be the same address where you send your monthly payment. But, you want to be certain. So ask.
Once you know that you can go to work. Get the appraisal done. Assuming that it shows that you are over the threshold for canceling PMI, write a letter to your lender questing cancellation. It doesn't need to be fancy. The letter should include the current value of your home, the amount of your loan, and a sentence saying that you want to terminate PMI. Include a copy of the appraisal with the letter.
Some might consider it overkill, but sending the letter via certified mail or overnight service is a good idea. That way you have positive proof of it's receipt.
Yes, Keith has been jerked around. But, an appraisal plus a letter (or forms) should put an end to the monthly PMI. And, using the money freed up to reduce his principal is a great idea!
http://www.debtsmart.com/pages/article_cancel_pmi_070502725.html
Monday, May 28, 2007
Credit Card Fee Increases
It's estimated that Americans charged $1.8 trillion in 2005 on the 690 million credit cards outstanding. According to a Government Accountability Office study released in September, 2006, 13% of credit card users were assessed over-limit fees and 35% were assessed late fees in 2005. So Gwen has a lot of company.
Let's try to do three things. First, understand what these fees are. Next, see how fees are changing. And, finally, what Gwen can do to keep from being hurt.
Credit cards have always had fees. Some, like for a late payment, are understandable. Others came along as credit cards took on new capabilities. Think cash advance and balance transfer fees. Still others, like over-limit fees, seem like they shouldn't be possible. You would think that they wouldn't allow you to borrow more than your limit.
There are also 'penalty interest rates'. If you're late with a payment or go over your credit limit, you could see your rate bumped to 30% or more.
The 2006 GAO study looked at fees and penalties. It said that not only were fees increasing, but the credit card companies were doing a lousy job of informing consumers about those fees.
The credit card companies are obligated to tell you about any fees or penalties and how they're triggered. Some fees, like paying your credit card bill by phone, are sometimes not clearly disclosed. What Gwen received with her statement was a notice of a change in how fees would be charged. And, as long as she's notified they can get by with almost anything.
Late fees have nearly tripled in the last 11 years. And many cards have adopted a 'universal default clause' that says a late payment on any card will trigger the penalty interest rate.
Credit card companies say that the higher interest rates and fees are appropriate based on risk factors. If it weren't for the higher fees, they claim that they wouldn't be able to offer credit to riskier consumers.
In fairness, the GAO's survey found that (at least among 6 of the largest card issuers) 80% of accounts paid interest rates of less than 20%. So the vast majority of card users are not paying penalty rates.
But the study also found that the disclosures were written well above the eighth grade reading level and (surprise!) featured small print. They recommended that the Federal Reserve Board revise rules on credit card disclosures.
Now that we understand what's going on we can try to help Gwen avoid problems. The first thing is to recognize that the card issuers get to make most of the rules. And, whether those rules are fair or not isn't relevant. The best she can do is to avoid getting hurt by those rules.
Get familiar with each account. The only way to know exactly what's allowed is to read and understand the "Card Member Agreement." Tough duty. But necessary.
Watch out for unexpected fees--like for balance transfers or increasing your credit limit. Know what could trigger fees or penalty rates.
Know exactly when your payment is due. Keep a list of due dates for your credit card accounts. If you don't get the bill, it's your responsibility to contact the company and still make a timely payment.
If possible, the best thing to do is to join nearly half of the cardholders who paid little or no interest. That's because they do not carry a balance.
Obviously, for many people that's not immediately possible. Then it's important to send in your payment as soon as possible. Being seven days early is better than being one day late.
If you find it difficult to get your payment in on time, you might want to authorize the credit card company to automatically debit your checking account for the minimum payment each month. You'll probably pay for the service, but that way the payment can't be late.
Talk to your card issuer. If your due date falls at a bad time of the month, they'll move it.
If Gwen is near or over the limit on any card, she should try to shift part of the debt to a different card. Some fees are even being assessed when an account is merely getting too close to the limit. Your best bet is to keep balances to less than half the available credit.
Although the higher late fees are infuriating, they do minimal damage. The real problem is in the universal default clause. Most credit card accounts now have a universal default clause.
Suppose your rate went from 15% to 30% on every open credit account. For every $1,000 you owe, an extra $150 interest would be charged each year. So if you're the type of person carrying a $10,000 balance, that one late payment could cost you $1,500 per year. For as long as you have the balance!
Gwen is right to pay close attention to her credit card accounts. With newer fees and penalty rates in place, it becomes more important to manage your credit. In fact, it's critical to your financial wellbeing.
http://www.debtsmart.com/pages/article_card_fee_increases_061129695.html
Let's try to do three things. First, understand what these fees are. Next, see how fees are changing. And, finally, what Gwen can do to keep from being hurt.
Credit cards have always had fees. Some, like for a late payment, are understandable. Others came along as credit cards took on new capabilities. Think cash advance and balance transfer fees. Still others, like over-limit fees, seem like they shouldn't be possible. You would think that they wouldn't allow you to borrow more than your limit.
There are also 'penalty interest rates'. If you're late with a payment or go over your credit limit, you could see your rate bumped to 30% or more.
The 2006 GAO study looked at fees and penalties. It said that not only were fees increasing, but the credit card companies were doing a lousy job of informing consumers about those fees.
The credit card companies are obligated to tell you about any fees or penalties and how they're triggered. Some fees, like paying your credit card bill by phone, are sometimes not clearly disclosed. What Gwen received with her statement was a notice of a change in how fees would be charged. And, as long as she's notified they can get by with almost anything.
Late fees have nearly tripled in the last 11 years. And many cards have adopted a 'universal default clause' that says a late payment on any card will trigger the penalty interest rate.
Credit card companies say that the higher interest rates and fees are appropriate based on risk factors. If it weren't for the higher fees, they claim that they wouldn't be able to offer credit to riskier consumers.
In fairness, the GAO's survey found that (at least among 6 of the largest card issuers) 80% of accounts paid interest rates of less than 20%. So the vast majority of card users are not paying penalty rates.
But the study also found that the disclosures were written well above the eighth grade reading level and (surprise!) featured small print. They recommended that the Federal Reserve Board revise rules on credit card disclosures.
Now that we understand what's going on we can try to help Gwen avoid problems. The first thing is to recognize that the card issuers get to make most of the rules. And, whether those rules are fair or not isn't relevant. The best she can do is to avoid getting hurt by those rules.
Get familiar with each account. The only way to know exactly what's allowed is to read and understand the "Card Member Agreement." Tough duty. But necessary.
Watch out for unexpected fees--like for balance transfers or increasing your credit limit. Know what could trigger fees or penalty rates.
Know exactly when your payment is due. Keep a list of due dates for your credit card accounts. If you don't get the bill, it's your responsibility to contact the company and still make a timely payment.
If possible, the best thing to do is to join nearly half of the cardholders who paid little or no interest. That's because they do not carry a balance.
Obviously, for many people that's not immediately possible. Then it's important to send in your payment as soon as possible. Being seven days early is better than being one day late.
If you find it difficult to get your payment in on time, you might want to authorize the credit card company to automatically debit your checking account for the minimum payment each month. You'll probably pay for the service, but that way the payment can't be late.
Talk to your card issuer. If your due date falls at a bad time of the month, they'll move it.
If Gwen is near or over the limit on any card, she should try to shift part of the debt to a different card. Some fees are even being assessed when an account is merely getting too close to the limit. Your best bet is to keep balances to less than half the available credit.
Although the higher late fees are infuriating, they do minimal damage. The real problem is in the universal default clause. Most credit card accounts now have a universal default clause.
Suppose your rate went from 15% to 30% on every open credit account. For every $1,000 you owe, an extra $150 interest would be charged each year. So if you're the type of person carrying a $10,000 balance, that one late payment could cost you $1,500 per year. For as long as you have the balance!
Gwen is right to pay close attention to her credit card accounts. With newer fees and penalty rates in place, it becomes more important to manage your credit. In fact, it's critical to your financial wellbeing.
http://www.debtsmart.com/pages/article_card_fee_increases_061129695.html
Lost Opportunities
Sometimes it's helpful to take a concept out of it's original environment and see how it fits someplace else. Today we're going to examine an economic theory and see how it might apply to our personal lives.
The Economist website defines 'opportunity cost' as "The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits that you did without because you bought (or did) that particular something and thus can no long buy (or do) something else."
To put it simply, for everything you get, you give up something else. That's an important concept. Let's consider an easy example. If you spend $15 on a pair of jeans, you do not have that money available to buy a pizza. The 'cost' of the jeans is not only $15. It is also giving up a pizza.
Another way to look at opportunity cost is the amount of time we give up working to buy a product. Suppose you make $12 per hour. Our tax rates are all different, but you can pretty much expect to pay about 1/3 in Social Security and federal, state and local income taxes. That leaves you with $8.
Let's further suppose that you go out to lunch with co-workers every day. And a typical lunch costs you $6. Add a tip and sales tax and that lunch brings the total to $7.20. So you give up 54 minutes of your life every day to work just to pay for lunch.
How about a different situation. Remember that an opportunity cost is what you give up by making another choice. For instance, suppose that you choose to spend $100 on a credit card knowing that you'll pay the minimum when the bill comes due. In effect you've given up about $140 in the future to make that purchase today. That's because finance charges will be added to the cost of your purchase.
We face opportunity costs with our time, too. I can choose to spend an hour watching TV. But that's an hour that I won't be talking to my wife, playing with the kids, doing home projects or sleeping. Of course, watching TV might be the best use of that hour. Still, it's a good idea to think about it before you spend the hour.
Sometimes the difference between choices is surprising. Suppose you spend $1 at break time five days a week. No big deal. Right? But if you didn't spend that dollar every day and put it in a bank at 3% interest, you'd have $3,000 in ten years. Or $7,100 in 20 years. Or $20,000 in 40 years. So by choosing that $1 snack each day you've given up a new car when you retire. A good trade-off? Only you can decide.
There's also the possibility of trading money today for time tomorrow. For instance, you could use the money from those work day snacks to allow you to retire 3 or 6 months earlier than you would otherwise. Is it unusual to think of 'banking' a few minutes each day towards an early retirement? Perhaps, but it does give you a new perspective on spending.
But, what about credit cards? Don't they make it possible to buy both things that we want? Yes, you can use your plastic to do that.
But credit cards are deceptive. They lead you to believe that you can spend more than you make. And, for a short time that's probably true. But eventually you get to a situation where you can only afford the minimum payment each month. Once there, you're back where choosing to spend on one thing prevents you from buying something else. And, you've also made the choice of paying interest to the credit card company on the monthly balance instead of having that money for other uses.
So how can you use opportunity costs to help you live a happier life? By thinking of the alternatives before you spend your time and money. Even though something looks good, if you stop to compare, you might find something else that you'd prefer to spend your time or money on.
http://www.debtsmart.com/pages/article_lost_opportunities_031022414.html
The Economist website defines 'opportunity cost' as "The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits that you did without because you bought (or did) that particular something and thus can no long buy (or do) something else."
To put it simply, for everything you get, you give up something else. That's an important concept. Let's consider an easy example. If you spend $15 on a pair of jeans, you do not have that money available to buy a pizza. The 'cost' of the jeans is not only $15. It is also giving up a pizza.
Another way to look at opportunity cost is the amount of time we give up working to buy a product. Suppose you make $12 per hour. Our tax rates are all different, but you can pretty much expect to pay about 1/3 in Social Security and federal, state and local income taxes. That leaves you with $8.
Let's further suppose that you go out to lunch with co-workers every day. And a typical lunch costs you $6. Add a tip and sales tax and that lunch brings the total to $7.20. So you give up 54 minutes of your life every day to work just to pay for lunch.
How about a different situation. Remember that an opportunity cost is what you give up by making another choice. For instance, suppose that you choose to spend $100 on a credit card knowing that you'll pay the minimum when the bill comes due. In effect you've given up about $140 in the future to make that purchase today. That's because finance charges will be added to the cost of your purchase.
We face opportunity costs with our time, too. I can choose to spend an hour watching TV. But that's an hour that I won't be talking to my wife, playing with the kids, doing home projects or sleeping. Of course, watching TV might be the best use of that hour. Still, it's a good idea to think about it before you spend the hour.
Sometimes the difference between choices is surprising. Suppose you spend $1 at break time five days a week. No big deal. Right? But if you didn't spend that dollar every day and put it in a bank at 3% interest, you'd have $3,000 in ten years. Or $7,100 in 20 years. Or $20,000 in 40 years. So by choosing that $1 snack each day you've given up a new car when you retire. A good trade-off? Only you can decide.
There's also the possibility of trading money today for time tomorrow. For instance, you could use the money from those work day snacks to allow you to retire 3 or 6 months earlier than you would otherwise. Is it unusual to think of 'banking' a few minutes each day towards an early retirement? Perhaps, but it does give you a new perspective on spending.
But, what about credit cards? Don't they make it possible to buy both things that we want? Yes, you can use your plastic to do that.
But credit cards are deceptive. They lead you to believe that you can spend more than you make. And, for a short time that's probably true. But eventually you get to a situation where you can only afford the minimum payment each month. Once there, you're back where choosing to spend on one thing prevents you from buying something else. And, you've also made the choice of paying interest to the credit card company on the monthly balance instead of having that money for other uses.
So how can you use opportunity costs to help you live a happier life? By thinking of the alternatives before you spend your time and money. Even though something looks good, if you stop to compare, you might find something else that you'd prefer to spend your time or money on.
http://www.debtsmart.com/pages/article_lost_opportunities_031022414.html
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