How's your credit?

[alnorth]

This may be a bit controversial, but I am very new to the whole concept of credit scoring, so we'll see what happens. I just got my FICO score today from Experian. I'll need to get a car loan next summer so I'll need to work on my credit till then, but I wanted to see how it compares with a random sampling of chiefs planet fans who are inclined to anonymously vote their range in a poll.

[Iowanian]

Most people don't realize that on a $700 mortgage payment..they're only knocking 45/month off the principal....and paying that extra 75/month will take YEARS off of the debt not counting the extra interest you're not paying.

I'll have to disagree for my personal choice...no debt, is good debt

[alnorth]

Originally Posted by Iowanian

Most people don't realize that on a $700 mortgage payment..they're only knocking 45/month off the principal....and paying that extra 75/month will take YEARS off of the debt not counting the extra interest you're not paying.

I'll have to disagree for my personal choice...no debt, is good debt

For a typical 100,000 home, a monthly payment of 700 that pays only 45 principle (and 655 interest) on the 1st payment implies a monthly effective rate of 0.655% interest, which works out to a nominal rate of about 8%. 45 principle out of 700 also implies a loan that was amortized 30 years or longer.

In that case, its a no-brainer. Pay extra on the loan to retire that 8% 30-year debt quicker.

However, if youve got a nominal 3% rate (so 0.25% effective monthly) 30-year loan on a 100,000 home, your payments will be about $420. (If the payments are that low, it probably shouldnt be stretched out to 30 years)

Option a) pay an extra $280/month to make it an even 700.

Option b) Pay the minimum 420, and put the extra 280 into a conservative investment that earns 6%, with a 2% fee upon sale.

Option a) you pay the home off early after 14 years and 9 months

Option b) after 14 years and 9 months you owe $61,853. Your investment has reached $79,388.24. If you sell today you have $77,800.48 after fees. If you take out more for capital gains, you are still significantly ahead. You probably could have bought the house 2-3 years earlier if you intended to sell the investment as soon as it = outstanding balance.

Increase the fees a little or make them front-loaded if you like. If the interest on the loan is extremely low (~3%) and you can get a reasonable return on investments, (~6+%) youll still come out ahead by paying the minimum and investing the extra you were going to add to the loan payment.

Again, this only works if you have the discipline to follow through.

When the interest gets to the 8% implied by your example though, youd have to do unbelievably well to out-perform your loan's interest rate, youd be better off taking the safe route and paying off the loan faster in that situation.

[KingPriest2]

Originally Posted by Iowanian

Most people don't realize that on a $700 mortgage payment..they're only knocking 45/month off the principal....and paying that extra 75/month will take YEARS off of the debt not counting the extra interest you're not paying.

I'll have to disagree for my personal choice...no debt, is good debt

or you can just divide that payment in two and do biweekly payments.

[KingPriest2]

Originally Posted by alnorth

For a typical 100,000 home, a monthly payment of 700 that pays only 45 principle (and 655 interest) on the 1st payment implies a monthly effective rate of 0.655% interest, which works out to a nominal rate of about 8%. 45 principle out of 700 also implies a loan that was amortized 30 years or longer.

In that case, its a no-brainer. Pay extra on the loan to retire that 8% 30-year debt quicker.

However, if youve got a nominal 3% rate (so 0.25% effective monthly) 30-year loan on a 100,000 home, your payments will be about $420. (If the payments are that low, it probably shouldnt be stretched out to 30 years)

Option a) pay an extra $280/month to make it an even 700.

Option b) Pay the minimum 420, and put the extra 280 into a conservative investment that earns 6%, with a 2% fee upon sale.

Option a) you pay the home off early after 14 years and 9 months

Option b) after 14 years and 9 months you owe $61,853. Your investment has reached $79,388.24. If you sell today you have $77,800.48 after fees. If you take out more for capital gains, you are still significantly ahead. You probably could have bought the house 2-3 years earlier if you intended to sell the investment as soon as it = outstanding balance.

Increase the fees a little or make them front-loaded if you like. If the interest on the loan is extremely low (~3%) and you can get a reasonable return on investments, (~6+%) youll still come out ahead by paying the minimum and investing the extra you were going to add to the loan payment.

Again, this only works if you have the discipline to follow through.

When the interest gets to the 8% implied by your example though, youd have to do unbelievably well to out-perform your loan's interest rate, youd be better off taking the safe route and paying off the loan faster in that situation.

I have been doing mortgages for over 5 years. I have never seen a fixed 3% rate.

[sedated]

Originally Posted by recxjake

also don't buy cars, lease them, much lower payments, get a new car every 2 or 3 years...

...except you are never without a car payment.

I have a car loan now, and when that's done I won't have fork over that monthly check for 5-10 more years.

How much will that lease cost you over those years? (but you will have a newer car)

[Iowanian]

I don't claim to be a financial/investment genius. I'm always open to advice, but generally try to just use common sense.

My Personal theory on home mortgages is, If I want the 15 year payment, I'll get a 20-25 year note and make close to the 15 year payment. ALOT more comes off of principal for the same money.

In my case, not running up cc debt unless needed, only getting loans I need ,and paying them off early has worked out well. When I need a loan...banks fight for it. I bought a house in June, and had the money within 2 weeks for closing.

My intention is, to get most of my debt paid off, which for the most part, I now have, which sets me up with more capitol/month that I can save/invest for the long term. I'll probably work with short term money market stuff, with the intention to invest in land when I can and the oportunity arises. In the mean time, I put whats allowable in my matched work savings plan. Our vehicles are now paid, and my intent is that any further car purchase, to put a significant % down and "stay on top" of the value.

thats the Iowani-plan and probably won't work for everyone.

[Calcountry]

Originally Posted by alnorth

In theory I agree with you. The reality is, I'll need a new car next summer. It doesnt have to be "new" as in 2006 model, but I need something very reliable and decent. I dont know if I'll be able to have $6,000+ banked by June. To make up for that, I plan on having a short-term loan of only 2-3 years. Taking out a 5-10 year loan for a car so that you can have small payments is stupid. I dont give a rat's ass what the payments are (within reason), as long as the interest is low and the duration of the payments are short, I care more about the dollars paid out at the end of the loan. All the extra interest you pay for 2-3 more years is money not invested or spent elsewhere. I'll seriously think about investing some extra money each month after this summer for the next 4-5 years to pay cash for the next car, though.

In other topics we are probably not far apart. I put away about $200/month (50% matched, so really $300/month) in an extremely diversified 401k with some moderate risk (at 28, I am still young enough to tolerate a lot of risk). I dont own a home or have a mortgage, I rent. I see absolutely no reason not to continue to rent as long as houses continue to be massively overpriced. Everyone is pre-programmed to buy a home as soon as they start making money, but the low price of rent is one of the best-kept secrets in America. In theory, a "fair" rent/month should be 1% of the home's value. Right now, in many places where I live, either the rent is about half the price it should be, home values are nearly twice as high as they should be, or a combination of the two. Even when you figure in the income tax deduction from paying interest, rent is a bargain right now.

After this post, I checked where you are from. Obviously you don't live in California.

[Amnorix]

Originally Posted by Iowanian

thats the Iowani-plan and probably won't work for everyone.

Frankly, the Iowani-plan is a common sense plan that should work for nearly everyone.

One of the most amazing things about my (mid-30s) and younger generations is this incredible capacity for stupidity in fiscal management. "spend every dime you make, AND go into debt while you're at it, to live large" seems to be the rule of thumb. It boggles my mind. I know MANY people who are otherwise smart who consistently do unbelievably stupid things in terms of fiscal management.

And, of course, nobody wants any advice because they don't want to hear how they shouldn't be living large for today.

With Social Security restructuring a 100% certainty before my generation hits retirement age 30 years from now, I dont' even want to think of how these folks are going to avoid working until they're 75.

[Andoverer]

Originally Posted by Amnorix

Frankly, the Iowani-plan is a common sense plan that should work for nearly everyone.

One of the most amazing things about my (mid-30s) and younger generations is this incredible capacity for stupidity in fiscal management. "spend every dime you make, AND go into debt while you're at it, to live large" seems to be the rule of thumb. It boggles my mind. I know MANY people who are otherwise smart who consistently do unbelievably stupid things in terms of fiscal management.

And, of course, nobody wants any advice because they don't want to hear how they shouldn't be living large for today.

With Social Security restructuring a 100% certainty before my generation hits retirement age 30 years from now, I dont' even want to think of how these folks are going to avoid working until they're 75.

You are so right on the money (pun intended).
"Live on less than you earn" is foul mouth language to some people.
For a great and eye-opening book read "The Millionaire Next Door". It is excellent and should be required reading. Our schools, sadly, don't teach the right ways to handle financial matters so when kids get their jobs the first thing they want to do is go into debt to buy their first car. I know, I did the very same thing.

[Area 51]

Originally Posted by Iowanian

I don't claim to be a financial/investment genius. I'm always open to advice, but generally try to just use common sense.

My Personal theory on home mortgages is, If I want the 15 year payment, I'll get a 20-25 year note and make close to the 15 year payment. ALOT more comes off of principal for the same money.

In my case, not running up cc debt unless needed, only getting loans I need ,and paying them off early has worked out well. When I need a loan...banks fight for it. I bought a house in June, and had the money within 2 weeks for closing.

My intention is, to get most of my debt paid off, which for the most part, I now have, which sets me up with more capitol/month that I can save/invest for the long term. I'll probably work with short term money market stuff, with the intention to invest in land when I can and the oportunity arises. In the mean time, I put whats allowable in my matched work savings plan. Our vehicles are now paid, and my intent is that any further car purchase, to put a significant % down and "stay on top" of the value.

thats the Iowani-plan and probably won't work for everyone.

I've used the same basic plan with a few modifications.

It works for me.

[Andoverer]

High FICO scores don't indicate what wealth you may have or how brilliant you are with finances. Actually quite the contrary. It only indicates you like to borrow money time after time and are willing to make payments time after time. It's an "I love debt" score in reality.

[Iowanian]

I don't see it that way, as I've only borrowed money in 4 categories...1.college loans 2. Car notes 3. home mortgage 4. refinance for capitol for remodel

I think the score shows 1 thing....if you pay your bills, and if you are good financial risk for any future loan. In no way do I think a good credit score indicates "wealth". We all know that a widow with 10mil in her mattress is wealthy, but if she never borrows, her score would be bad.

1 Thing I DO want to do is keep-attain some cash capitol, at whatever level I can manage...be that $1k or 100K....so that when the people who ARE living beyond thier means, if interest rates go up....I'll be able to buy some of their bad investments...dirt cheap.

1 thing I'm making a concious effort to do, is make sure my wife maintains a high credit rating....getting some loans and a credit card in her name.....so that if something happens to me, she'll still have solid credit. Its also a good idea for those longtime housewives.....when they become widowed...the family/husband's credit doesn't automatically pass on.

[rockchalkgirl]

Originally Posted by Black Ice

I need to run a more recent credit report. I plan on upgrading to a new home next spring. What are some decent online sites?

A new federal statute that went into effect this year provides that you can get a free copy of your credit report from each of the three credit reporting agencies once every twelve months. Go to www.annualcreditreport.com and follow the links. Make sure that you link to each of the agencies through that website, or it won't be free.

[Andoverer]

Originally Posted by Iowanian

1 Thing I DO want to do is keep-attain some cash capitol, at whatever level I can manage...be that $1k or 100K....so that when the people who ARE living beyond thier means, if interest rates go up....I'll be able to buy some of their bad investments...dirt cheap.

And what better way to increase your wealth assets than by not making monthly payments to a lender. Save up money for a purchase, then get a big big bargain with that cash in hand. Make "payments" to yourself every month to build wealth instead of sending it to a lender every payday. It's a cycle that most people don't realize that if they break it they will begin to prosper. It's not an easy thing, because we've become a gotta have it now culture, and that mindset is causing most people in America to live broke all their lives because all their hard earned money is going to other people instead of to themselves.

[Iowanian]

You pay for your house with Cash?

In theory you are right, however, young people have to start building thier station in life with intelligent debt. Its taken me 10 years of working my ass off, and in some cases severely restricting my 'fun money' to get to the point where I'm just now able to start considering your idea as a reality.