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Accelerated Debt Reduction Plans
Advantages, disadvantages; do-it-yourself, and structured plans.
To continue the slide sh...
Accelerated Debt Reduction Plans
Sound debt reduction or debt elimination plans
involve one or more of the following three...
Extra Principal payments:
Nearly all loans made to Utah consumers allow extra principal payments to be applied to the loan...
Long-Term Loans
The savings resulting from extra principal payments is even more dramatic for long-term loans such as
mort...
Bi-Weekly (b/w) Payment Programs:
A convenient way to make extra principal
payments, if:
Your paydays are Bi-weeklyYour pa...
If a person makes 26.09 half payments bi-
weekly in an average year:
The Advantage of
Bi-Weekly Payments:
Since there are:...
About
every 11 years:
*Technical detail: Since there are 26.08929 bi-weekly periods in an average
year (365.25 ÷ 14 = 26.0...
Pay 1.09* x 733.77 = 799.81
Loan Rate Pmt Term Total Paid
Extra Principal Bi-Weekly or Monthly
If you don’t get paid bi-we...
Mortgage $ 87,724 734 pmt 8% 20 yrs. remaining
Car loan 13,056 415 pmt 9% 3 yrs.
Other debts 8,000 203 pmt 18% 5 yrs.
Tota...
After 1 year
New New New
Bal. Pmt. Term
77,554 651 21.9
8,072 250 3.1
4,126 150 2.6
6,253 120 8.5
0 0 0
794 90 .8
Getting ...
After 3.7 years
New New New
Bal. Pmt. Term
73,863 651 19.2
1,153 250 .4
0 0 0
2,745 360 .7
0 0 0
0 0 0
Getting out of debt...
Formal Debt Reduction Programs:
As shown in the earlier slides, you may do
your own debt reduction plan by simply
adding e...
Formal Debt Reduction Programs:
Remember: Some bi-weekly servicers
charge very large set-up fees. Although
you will likely...
Formal Debt Reduction Programs:
Also, make sure companies you consider
doing business with are reputable money
handlers. M...
Dangers Lurking!
Each time you refinance, you
add to your debt (nearly always).
Be careful that you don’t defeat your inte...
She had refinanced her home 2 years prior “because interest rates
had gone down.” She thought she was getting the loan ter...
Variable vs. Fixed RateVariable rate loans can be great if rates go down, but if rates go up, the payments go up, and the ...
Home Loans: Beware
1. Prepayment penalties?
Most loans do not have them. Make sure yours doesn’t!
Or if it does, make sure...
Avoid Closing Trapsespecially if delayed
Understand
what you are
signing and
why.
Take your time
Don’t just (sign, sign, s...
Some say: Put your equity to work
Companies keep trying to encourage people
to mortgage their homes and invest the
money.
...
Equity Investments: Suppose a person with plenty of equity
takes out a new mortgage and lets the company “invest it”
0
200...
Equity Investments
0
20000
40000
60000
80000
100000
120000
140000
160000 $150,000 value of home$150,000 value of home
Old ...
If you are divorced or getting
divorced...
Have you closed out
all of your old joint
accounts?
If not, you may be
liable e...
Don’t sign it -
unless you agree to it!
How can you agree to it if you
don’t understand it?
How can you understand it, if
...
For more information,
You may contact the Utah Department of
Financial Institutions.
801 538-8830
www.dfi.utah.gov
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Accelerated Debts Reduction Plans

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Tips to help you get out of debt and stay out.

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Accelerated Debts Reduction Plans

  1. 1. Accelerated Debt Reduction Plans Advantages, disadvantages; do-it-yourself, and structured plans. To continue the slide show, mouse click or press Page Down. To back up, press the Page Up key on your keyboard. To end the slide show, click on the Back ← command.
  2. 2. Accelerated Debt Reduction Plans Sound debt reduction or debt elimination plans involve one or more of the following three components: 1.Extra principal payments. • Making larger-than-required payments; and/or • Bi-weekly payment arrangements 2.Paying the highest rate debt first. 3.Reduction of interest rates. (Each of these points will be discussed in detail in the following slides).
  3. 3. Extra Principal payments: Nearly all loans made to Utah consumers allow extra principal payments to be applied to the loan balance, and thus reduce the total amount of interest paid. Before you make extra principal payments, be sure to follow the method prescribed by your lender. Usually that simply means showing the amount of extra principal being paid (the amount in excess of the required payment) in the designated place on the payment coupon or remittance slip. The following is an example of the potential savings. In this example, if extra principal payments of only $10 are made each month, 10,000 12% 57 mo. 210,000 12% 57 mo. 2332 13,1672 13,167 Loan Rate Term Pmt Total Interest 10,000 12% 60 mo. 222 13,346 3,346 If $50 extra principal is paid each month, the borrower pays 10,000 12% 47 mo. 2772 12,582 If $100 extra principal is paid each month, the borrower pays 10,000 12% 38 mo. 3322 12,069 2,069 $1,277 $1,277 less interest, and pays the loan off almost 2 years early. Savings 3,167 $179 the borrower pays $179 less interest, and pays off the loan about 3 months early. 2,582 $764 $764 less interest, and pays the loan off more than a year early
  4. 4. Long-Term Loans The savings resulting from extra principal payments is even more dramatic for long-term loans such as mortgages. Consider the following example: 136,283 8% 10136,283 8% 101010 29 yr.29 yr. If $10 extra principal is paid each month Bal Rate Pmt Term Interest Savings 136,283 8% 1000 30 yr. 223,717 136,283 8% 105050 25 yr. If $50 extra principal is paid each month 136,283 7.757.75% 1283 1515 yr. 98,077 $125,640 If the borrower can afford $283 extra each month, a 15 year loan can be obtained. Usually 15 year loans can be obtained at a lower interest rate, thus adding to the savings. In this example, if the loan had been obtained at 7.75% rather than 8%, $125,640 less interest would have been paid versus the 30 year loan (assuming each loan was paid according to the schedule shown above). 212,773 $10,944 $10,944 less interest is paid, and the loan is paid off about one year early 180,817 $42,900 $42,900 less interest is paid, and the loan is paid off about 5 years early
  5. 5. Bi-Weekly (b/w) Payment Programs: A convenient way to make extra principal payments, if: Your paydays are Bi-weeklyYour paydays are Bi-weekly If you don’t get paid every other week, don’t bother with bi-weekly! (See the following slides). Your lender accepts extra principalYour lender accepts extra principal (most do without penalty). Reputable money handlerReputable money handler (some have misused funds). Low or no feesLow or no fees (some lenders charge no fees, some servicers charge high fees). Warning: many charge periodic service fees and a set-up fee! For some people, a small fee may be worth it for the convenience, and discipline, but watch out! Some servicers claim that the fees come out of the savings. Yes, if you stay with the program, you will save more than the fee they charge, but if you do it yourself, you can avoid the fees and thus save even more. $ 5 b/w service fee $ 150 setup fee $25 b/w service fee $ 4,0004,000 setup fee
  6. 6. If a person makes 26.09 half payments bi- weekly in an average year: The Advantage of Bi-Weekly Payments: Since there are: 365 1/41/4 days in an average year, and ÷÷ 14 days in a biweekly period, there are == 26.09 bi-weekly periods in an average year. that is the equivalent of 13.045 full payments in an average year! Most months have 2 bi-weekly paydays, but each year, there will be 2 months with 3 paydays.
  7. 7. About every 11 years: *Technical detail: Since there are 26.08929 bi-weekly periods in an average year (365.25 ÷ 14 = 26.08929), about every 11 years, people who get paid bi- weekly, have 3 months with 3 paydays. Since most years have 26 bi-weekly pay periods, we may subtract 26 from 26.08929 to get .08929 as the incomplete portion of a bi-weekly period in an average year. To determine how many years before an extra full bi-weekly period will take place, we may divide 1 (bw pmt) by .08929 = 11.1995 years. a person paying 1/2 of the regular monthly payment bi- weekly, will make the equivalent of 13 1/2 monthly payments (by making 27 half payments). This is because every ~11* years 3 months have 3 paydays. (3 extra paydays yield 1 ½ extra full payments).
  8. 8. Pay 1.09* x 733.77 = 799.81 Loan Rate Pmt Term Total Paid Extra Principal Bi-Weekly or Monthly If you don’t get paid bi-weekly, or if you just want to administer your own monthly debt reduction plan and get the same results, you may pay 1.09 times your required monthly payment. If you do, you will obtain almost the same result as paying 1/2 of your monthly payment biweekly. Bi-weekly: 26.09half pmts each yr. 733.77 ÷ 2 = 366.8926.09 times per year 22.65 yrs22.65 yrs the new term 22.522.5 yrsyrs new term 48,20948,209 interest saved (not paid) 216,832216,832 the new total 215,948215,948 new total paid 47,32547,325 less interest paid Save 66.04 add .09 of a payment each month. 100,000 8% 733.77 mo. 30 yr. 264,157 Consider the advantage of paying this loan bi-weekly: (by paying 17,000 early, you avoid paying $47,325 of interest) Extra Principal *1.09 = 1/12 of 13.05 pmts (which is the av. number of full payments made each year in a bi-weekly plan).
  9. 9. Mortgage $ 87,724 734 pmt 8% 20 yrs. remaining Car loan 13,056 415 pmt 9% 3 yrs. Other debts 8,000 203 pmt 18% 5 yrs. Total debt 108,780 1,352 Suppose you were to consolidate these debts into one new mortgage loan; the balance would immediately go up due to closing costs, but the required monthly payment would drop. Assuming you could get a better rate, say 7.5% and closing costs of $3,000: Total Interest 95,00095,000 If you refinance, but keep paying: 1,352 payoff in 9.75 yrs. Interest & fees 50,00050,000 If you just keep paying the old debts as agreed: New loan 111,780 782 new pmt 7.5% new rate 30 yrs. new term you “save” (delay paying) 493 each month, but do you really save? The total of interest and fees paid (assuming you pay according to the new terms): There are many who claim that you can Re-finance and “save”. If your goal is to reduce your monthly payment, it may work just fine. But if your goal is to get out of debt, or reduce your debt more quickly, if you aren’t careful, refinancing will cause the opposite of what you intend. Sometimes it works great, especially if you don’t run up other debts again. But often, it just means you are delaying paying, increasing your debt, and greatly increasing the total amount you pay. Let’s consider the advantages and disadvantages of refinancing the following debts: Interest & feesInterest & fees 173,000173,000 50,756 if you keep paying 1352 (no refi) focusing on highest rate debt first.
  10. 10. After 1 year New New New Bal. Pmt. Term 77,554 651 21.9 8,072 250 3.1 4,126 150 2.6 6,253 120 8.5 0 0 0 794 90 .8 Getting out of debt quicker, by focusing first on highest rate debts Let’s suppose someone had the following debts. They could meet the payments, but with no money to spare: Existing Balance Payment Rate Remaining Obligations (p & i*) Term (yrs.) 1st Mort 78,721 651 8.5% 22.9 yrs. Auto Loan 10,239 250 9.0% 4.1 yrs. Trailer 5,451 150 9.8% 3.6 yrs. Credit Card 6,539 120 18.0% 9.5 yrs. Doctor 400 40 21.0% .9 yrs. Dentist 1,200 50 19.0% 2.5 yrs. Totals 102,550 1331 (*p&i stands for principal & interest) After 1 yr., start applying the amount formerly going to the doctor ($40) to the next highest rate debt (the dentist). After 1.8 years New New New Bal. Pmt. Term 76,547 651 21.1 6,194 250 2.3 2,970 150 1.8 5,984 210 3.1 0 0 0 0 0 0 After .8 yr. more, apply the amount formerly going to the doctor ($40) and to the dentist ($50) to the next highest rate debt (the credit card).
  11. 11. After 3.7 years New New New Bal. Pmt. Term 73,863 651 19.2 1,153 250 .4 0 0 0 2,745 360 .7 0 0 0 0 0 0 Getting out of debt quicker, by focusing first on highest rate debts Let’s suppose someone had the following debts. They could meet the payments, but with no money to spare: Existing Balance Payment Rate Remaining Obligations (p & i) Term 1st Mort 78,721 651 8.5% 22.9 yrs. Auto Loan 10,239 250 9.0% 4.1 yrs. Trailer 5,451 150 9.8% 3.6 yrs. Credit Card 6,539 120 18.0% 9.5 yrs. Doctor 400 40 21.0% .9 yrs. Dentist 1,200 50 19.0% 2.5 yrs. Totals 102,550 1331 After 1.9 more yrs, apply the amounts formerly going to the doctor & dentist to the credit card: After 4.4 years New New New Bal. Pmt. Term 72,760 1,261 6.2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Out of debt in 10.2Out of debt in 10.2 yrs. After .7 yr. more, apply the amounts formerly going to the doctor, the dentist, the credit card, trailer & auto loan to the mortgage loan.
  12. 12. Formal Debt Reduction Programs: As shown in the earlier slides, you may do your own debt reduction plan by simply adding extra principal to your required payment. In most cases, the more extra you pay, the greater your savings, and the sooner you are out of debt. If you wish to use a formal plan (maybe because you lack the willpower to do your own, or want the convenience), be cautious:
  13. 13. Formal Debt Reduction Programs: Remember: Some bi-weekly servicers charge very large set-up fees. Although you will likely save more than the fee - if you stay with the program, such fees still represent money out of your pocket. Watch out for no-refund clauses (if for some reason you want to get out of the program early).
  14. 14. Formal Debt Reduction Programs: Also, make sure companies you consider doing business with are reputable money handlers. Many of the programs draft money from your checking account and then make your payment for you. Some have been found to misuse the money. Apparently no regulatory agency oversees such companies.
  15. 15. Dangers Lurking! Each time you refinance, you add to your debt (nearly always). Be careful that you don’t defeat your intent. There are monsters out there who are more than willing to take as much money as you are willing to give them. A lady called the Department of Financial Institutions recently who wanted to get a better rate on her mortgage loan. She found out that she’d gotten a very bad deal the last time she refinanced.
  16. 16. She had refinanced her home 2 years prior “because interest rates had gone down.” She thought she was getting the loan terms shown in the left column below. When she went to refinance again, 2 years later “because rates had gone down again,” she found out she actually had the loan in the middle column below. I asked why she signed such a loan, she said she was in a hurry and didn’t read the documents. A very costly mistake! According to my calculations she lost about $24,000 by not paying attention. Typical Re-financed $147,000 “Closing Costs” $3,000 New Loan $150,000 Rate 8% Diff $14,000 $3,000 NWFin Prepay Penalty $0 $7,000 7,000 Total Loss $24,000 10% $147,000 $17,000 $164,000
  17. 17. Variable vs. Fixed RateVariable rate loans can be great if rates go down, but if rates go up, the payments go up, and the total cost of the loan goes up. In a fixed-rate loan, the rate stays the same and the payment stays the same. If rates go down, a person can refinance (if s/he thinks the cost of the refinance is worth the difference in rate). If rates go up in the marketplace, his/her loan is not affected.
  18. 18. Home Loans: Beware 1. Prepayment penalties? Most loans do not have them. Make sure yours doesn’t! Or if it does, make sure you get some benefit in exchange. 2. Compare Rates 3. Compare Fees 4. Fixed vs. Variable?
  19. 19. Avoid Closing Trapsespecially if delayed Understand what you are signing and why. Take your time Don’t just (sign, sign, sign) Expect delays, and keep all your other obligations current. Could be the most important 3 hours of your financial life.
  20. 20. Some say: Put your equity to work Companies keep trying to encourage people to mortgage their homes and invest the money. These speculative arrangements have cost many people their homes. Beware! Even though they promise all sorts of guarantees, too often the investments fail andthe borrowers lose their homes. Don’t risk your home for speculative investments!
  21. 21. Equity Investments: Suppose a person with plenty of equity takes out a new mortgage and lets the company “invest it” 0 20000 40000 60000 80000 100000 120000 140000 160000 $150,000 value of home$150,000 value of home Existing mortgageExisting mortgage New mortgageNew mortgage InvestInvest EquityEquity (proceeds(proceeds of loan)of loan) Interest to make paymentsInterest to make payments Remember:Remember: EquityEquity HigherHigher raterate 2. If you can’t afford to lose it, don’t invest it!2. If you can’t afford to lose it, don’t invest it! 1. The greater the rate, the higher the risk!1. The greater the rate, the higher the risk! LowLow raterate
  22. 22. Equity Investments 0 20000 40000 60000 80000 100000 120000 140000 160000 $150,000 value of home$150,000 value of home Old mortgageOld mortgage New mortgageNew mortgage Remember:Remember: 1. The greater the rate, the higher the risk!1. The greater the rate, the higher the risk! 2. If you can’t afford to lose it, don’t invest it!2. If you can’t afford to lose it, don’t invest it! 3. Don’t borrow it if you don’t want to pay it back!3. Don’t borrow it if you don’t want to pay it back! Far too manyFar too many programs, have lostprograms, have lost the investment, leavingthe investment, leaving the victim to pay backthe victim to pay back both the old and theboth the old and the new mortgage.new mortgage.
  23. 23. If you are divorced or getting divorced... Have you closed out all of your old joint accounts? If not, you may be liable even if the divorce court directed your x-spouse to pay!
  24. 24. Don’t sign it - unless you agree to it! How can you agree to it if you don’t understand it? How can you understand it, if you don’t read it? If you still don’t understand it, get some help before signing!!!
  25. 25. For more information, You may contact the Utah Department of Financial Institutions. 801 538-8830 www.dfi.utah.gov

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