On calculator: .10 x 500 $50. Comparison shop for money,

1
Session 2 Basics of Borrowing
2
Disclaimer

• We are not providing Personal Financial,
  Investment or Tax Advice.
  
• The information in this presentation does not
  constitute Financial, Investment or Tax Advice.
  Rather, it is specifically for general
  information use only and does not attempt to
  provide specific advice for any individual
  circumstances.
• Although we have used reasonable endeavors to
  ensure that the information and data contained
  and presented herein is accurate, we do not
  warrant this, and all liability is expressly
  excluded to the maximum extent permitted by law.
  
• You are responsible for your own investment,
  financial and purchasing decisions. We suggest
  that you obtain independent financial advice if
  you are in any doubt as to the suitability of any
  financial action that you are intending to take.
  All information presented herein (including but
  not limited to any dollar amounts or statistical
  data) is indicative rather than definitive.

3
Homebuyer Education Syllabus

• Sessions
• 1 - Money Banking
• 2 - Basics of Borrowing
• 3 - Credit Management
• 4 - Getting a Mortgage
• 5 - Shopping for a Home
• 6 - Closing Your Loan
• 7 - Home Ownership
• 8 - Test

4
Agenda

• Basics of Borrowing
• Interest rates (APR)
• Types of loans
• Loan consolidation
• Predatory lending
• Federal Consumer Protection Laws
• Identity theft
• Credit card security

5
Interest Rates (APR)

• Use APR to compare interest rates
• How to Calculate Interest Rates
• 10 of 500 1/10 of 500 50
• On calculator .10 x 500 50

500 loan 10 interest weekly is 2600 per yea
r 520 APR 10 interest monthly is 600 per
year 120 APR 10 interest annually is 50 p
er year 10 APR
Comparison shop for money, like you shop for
other things.
6
Loan Amortization

• How a loan is paid down
• Example of Amortization Schedule
• Payment Balance Owed Payment
  Interest Principal
  
• 1 1,000.00 86.99 6.67 80.32
• 2 919.68 86.99 6.13 80.86
• 3 838.82 86.99 5.59 81.40
• 4 757.42 86.99 5.05 81.94
• 5 675.49 86.99 4.50 82.49
• 6 593.00 86.99 3.95 83.04
• 7 509.97 86.99 3.40 83.59
• 8 426.38 86.99 2.84 84.15
• 9 342.23 86.99 2.28 84.71
• 10 257.52 86.99 1.72 85.27
• 11 172.25 86.99 1.15 85.84
• 12 86.41 86.99 0.58 86.41

7
Types of Loans

• Secured (collateralized)
• Automobile/Boat/RV
• Home Mortgage
• Furniture
• Tax Refund Anticipation
• Unsecured
• Personal/signature
• Credit Card
• Overdraft protection

8
Types of Mortgages

• Mortgages are either conventional or government
  loans
  
• Conventional Any mortgage loan other than an
  FHA, VA or an RHS loan
  
• Conventional loans may be conforming or
  non-conforming
  
• Conforming loans have terms and conditions that
  follow the guidelines set forth by government
  (Fannie Mae Freddie Mac)
  
• Ginnie Mae (HUD) guarantees securities backed by
  pools of mortgage loans insured by FHA, VA RHS
  
• All mortgage programs are either fixed rate
  loans, adjustable rate loans or combination
  (hybrid)
  

9
Types of Mortgages (cont.)

• Jumbo Loans--Loans above maximum loan amount
  established by Fannie Mae Freddie Mac, known as
  jumbo loans, often have a little higher
  interest rate than conforming
• B, C D Loans--Loans that do not meet the
  borrower credit requirements of Fannie Mae and
  Freddie Mac vs. 'A' paper conforming loans
  
• for borrowers that may have recently filed for
  bankruptcy, foreclosure, or have had late
  payments
  
• offer temporary financing to these applicants
  until they can qualify for conforming "A"
  financing
  
• Hybrid loans - Combination of fixed and ARM
  loans come in different varieties

10
Fixed Rate Mortgages

• Interest rate mortgage monthly payments remain
  fixed for the period of the loan
  
• The shorter the loan term, the lower the interest
  rate
  
• Most popular mortgage terms are 30 and 15 years
• 30-year mortgage has lowest monthly payments
• 15-year mortgage has higher payments so loan is
  repaid twice as fast and total interest costs are
  less than half of a 30-year loan
  
• The payments on fixed rate fully amortizing loans
  are calculated so that at the end of the term the
  mortgage loan is paid in full
  
• At beginning, a large percentage of the monthly
  payment is used for paying the interest as loan
  is paid down, more of the monthly payment is
  applied to principal

11
Adjustable Rate Mortgages (ARMs)

• Interest rate and accordingly, monthly payments,
  fluctuate over the period of the loan
  
• Available with 30-year terms (some are 15-year)
• Most offer an initial teaser interest rate that
  is lower than the fully indexed rate (index plus
  margin) during the initial period of the loan
  which is usually the first year

12
Adjustable Rate Mortgages (cont.)

• New interest rate index margin
• Periodic interest rate adjustments are made based
  on a certain index like one of the following
  
• Constant Maturity Treasury (CMT)
• Treasury Bill (T-Bill)
• 12-Month Treasury Average (MTA)
• Cost of Deposits Index (CODI)
• 11th District Cost of Funds Index (COFI)
• Cost of Savings Index (COSI)
• London Inter Bank Offering Rates (LIBOR)
• Certificates of Deposit (CD) Indexes
• Prime Rate
• Fannie Mae's Required Net Yield (RNY)

13
Adjustable Rate Mortgages (cont.)

• The margin is fixed percentage points added to
  the index to compute the interest rate
  
• The result is rounded to the nearest one-eighth
  of a percent
  
• Example The index is 5.3 and the margin is
  2.5,then the new interest rate 5.3 2.5
  7.8The nearest to 0.8 is 0.75 6/8The
  result will be 7.75
• Margins remain fixed for term of the loan and are
  not impacted by the financial markets and
  movement of interest rates
  
• Most ARMs have interest rate caps to protect you
  from enormous increases in monthly payments

14
Adjustable Rate Mortgages (cont.)

• Lifetime cap limits the interest rate increase
  over the life of the loan and a periodic or
  adjustment cap limits how much your interest rate
  can rise at one time
• Examples
• The initial interest rate is 4.5, the index is
  7, and the margin is 3, then the new interest
  rate 7 3 10If the lifetime cap is 5,
  then the actual new interest rate will be 4.5
  5 9.5
• The initial interest rate is 6, the index is 5,
  and the margin is 3, then the new interest rate
  5 3 8If the periodic cap is 1 then the
  actual new interest rate will be 6 1 7

15
Adjustable Rate Mortgages (cont.)

• Negatively amortizing loans
• Some ARMs offer payment caps rather than interest
  rate caps which limit how much the monthly
  payment can increase
  
• If a loan has payment cap but no periodic
  interest rate cap, then the loan may become
  negatively amortized
  
• If the interest rates rise to the point that the
  monthly mortgage payment does not cover the
  interest due, any unpaid interest will get added
  to the loan balance, so the loan balance increases

16
Adjustable Rate Mortgages (cont.)

• Negatively amortizing loans (cont.)
• Example Your loan has a payment cap of 7.5. If
  your payment is 1,000 per month and interest
  rates rise, your new payment would normally be
  1200/mo, but your capped payment is only 1075
  so, another 125 is added to your total loan
  balance, to be paid off over time
• You can control cash flow (relatively stable
  payment), take advantage of low interest rates
  relative to the market at any given time, and pay
  back the money borrowed today at a depreciated
  value years from now (because of natural
  inflation)
• The interest rate on negatively amortized loans
  can adjust monthly

17
Balloon Loans

• 3, 5, or 7 year fixed rate loans that have fixed
  monthly payments based usually upon a 30-year
  fully amortizing schedule and a lump sum payment
  at the end of its term
• Interest rate on balloon loans is generally lower
  than 30 and 15 year mortgages resulting in lower
  monthly payments
  
• However, at the end of the term you will have to
  come up with a lump sum pay-off, either through a
  refinance or from savings
  
• Balloon loans with refinancing option allows
  conversion at the end of the balloon period to a
  fixed-rate loan
  
• Interest rate on the new loan is rate at the time
  of conversion
  
• May be a minimal processing fee to obtain the new
  loan

18
Hybrid Mortgages

• Come in different varieties
• Fixed-period ARMs
• 3-10 years of fixed rate before interest starts
  changing annually
  
• Interest rate is lower than for a 30-year
  fixed-rate mortgage, but you still get the
  advantage of a fixed-rate for some time
  
• Two-Step Mortgage
• Two-Step mortgages have a fixed rate for 5-7
  years, and then interest rate changes to a
  current market rate
  
• After that adjustment the mortgage will be at the
  new fixed rate for the remaining 23 or 25 years
  

19
Hybrid Mortgages (cont.)

• Convertible ARMs
• Some ARMs have an option to convert them to
  fixed-rate at designated times (usually during
  the first five years)
  
• New rate is established at the current market
  rate for fixed-rate mortgages
  
• Other kind is a fixed-rate loan with rate
  reduction option
  
• If rates drop after you close, you can adjust
  your interest rate to the going market rate for
  a small conversion fee
  
• Generally the interest rate or discount points
  are a little higher for a convertible loan

20
Hybrid Mortgages (cont.)

• Graduated Payment Mortgages (GPMs)
• Have payments that start low and gradually
  increase at predetermined times
  
• Lower initial payments allow you to qualify for a
  larger loan amount
  
• Monthly payments will eventually be higher in
  order to catch up (loan will be negatively
  amortizing during the early years of the loan)
  
• The greater the rate of increase or the longer
  the period of increase, the lower the mortgage
  payments in the early years

21
Hybrid Mortgages (cont.)

• Buydown Mortgage
• Has an initially discounted interest rate which
  gradually increases to an agreed-upon fixed rate
  usually within 1-3 years
  
• Lower initial rate allows you to qualify for more
  house with the same income and gives you the
  advantage of lower initial monthly payments for
  the first years of the loan when extra money may
  be needed for furnishings or home improvements
• To reduce your monthly payments during the first
  few years of a mortgage, you can also make an
  initial lump sum payment to the lender. (If you
  do not have the cash to pay for the buydown, the
  lender can pay this fee if you agree on a little
  higher interest rate)

22
Bi-weekly Mortgage Payment Plan

• You pay half of the monthly mortgage payment
  every 2 weeks, so the loan is repaid much faster
  
• 30 year loan can be paid off in 18 to 19 years
• Do your own bi-weekly by doubling your payment
  each month
  
• Or, accelerate your pay-off by paying more, when
  you can
  

23
Discount Points

• Discount Points are prepaid interest that you can
  pay to decrease (discount or buy down) your
  interest rate on the mortgage
  
• One Point 1 of the loan amount
• S0, One Point on a 100,000 loan is 1000
• Generally, for each point, you can drop your rate
  by .25
  
• So how do you decide?

24
Should You Pay Discount Points?

• Calculate the difference between paying points
  and not paying
  
• Let's say you can get a 250,000 loan at 7.00
  with zero points, which will be 1,653 per month
  for 30 years
  
• If you pay one point, your lender offers to
  reduce your rate 1/4 to 6.75 , so your monthly
  payment drops to 1,612, or 40 less
  
• Now, divide the 2500 point you paid by the 40
  monthly savings
  
• 2500/40 62.5 months
• The result is the number of months it will take
  to "recover" the cost of the additional funds to
  drop your rate, which, in this case, is 62.5, or
  a little over five years, to recover that money
• Only pay discount points, if you will be staying
  in the house longer than the recovery time

25
How to Choose a Mortgage Type

• Depends on how long you plan on staying in the
  house and the monthly payment you can afford
  
• If you don't plan to stay 5-7 years, consider an
  ARM, Balloon Mortgage or Two-Step Mortgage to get
  lower interest rates early
  
• Easier to qualify because of a lower interest
  rate, but don't do it unless you can afford the
  maximum possible monthly payment
  
• Consider 15 or 30 year fixed rate if you plan to
  stay in your home for more than seven years
  
• If you believe interest will increase over life
  of your loan, Fixed Rate will probably be less
  expensive
  
• If believe interest rates will decrease, an ARM
  will probably be less expensive.
  
• Do calculation to see if you should pay discount
  points

26
Mortgage Loan Comparison
27
Up Your Score, Lower your Cost
9 APR costs almost 75,000 more than 6 APR
28
Prepare Before You ApplyMinimize Your Credit
Cost

• 1. Pay all of your bills on-time.
• 2. Work at same job live at same address for
  more than a year.
  
• 3. Repair any defaults or collections on credit
  report.
  
• 4. Get a credit card.
• 5. Take out a small bank loan.
• If necessary, talk to your bank about a secured
  credit card or loan
  
• All listings, good or bad, stay on your report
  for about 7 years.
  
• For home mortgage you need 1-2 years of spotless
  credit.
  

Its not just access to credit, its access at
the lowest rates.
29
Loan Consolidation

• Combine all loans into one
• Trade higher interest for lower interest
• Single monthly payment

30

Predatory Lending

• Borrowing from Peter to Pay Paul
• Tempting to borrow at storefront lenders
• Interest rates are high 500 or more
• Dont be tricked by low down payments, low
  payments

Difficult to get ahead if youre paying 20 for
a gallon of milk
31
Be Wary of

• Rent-to-Own Usually costs 2-5 times more than
  regular retail prices
  
• Payday Loans Can cost 45 times more than bank
  loan!!!!
  
• Title Loans Can cost 58 times more than bank
  loan!!!!
  
• 90 Days Same As Cash Used to entice us to buy
  before we can pay. Most deals end up as
  high-interest loans when they arent paid
  on-time.
• Credit cards Some cards have high interest and
  very high activation and other fees.
  
• Tax Refund Anticipation Loans Instant refunds
  can cost up to 1200 APR interest fees.

Avoid High Interest Fees.
32
The Car Payment Trap

• Pick your payment
• Excessive interest charges
• Yo-Yo loans car dealer changes to higher cost
  loan soon after car is purchased
  
• Upside down owing more on car loan than car
  is worth

Difficult to get ahead if youre paying 20 for
a gallon of milk
33
Consumer Protection Laws

• State and federal
• FirstGov for Consumers
• Federal Consumer Information Center
• Federal Trade Commission-Consumer Protection
• U.S. Consumer Product Safety Commission
• National Highway Traffic Safety Administration  
  
  
• U.S. Food and Drug Administration  
• Federal Deposit Insurance Corporation
• The Federal Reserve Board-Consumer Handbook to
  Credit Protection Laws

34
Consumer Protection Laws (cont.)

• U.S. Department of Housing and Urban Development
   
  
• U.S. Department of Transportation-Aviation
  Consumer Protection Division
  
• U.S. Postal Inspection Service
• Federal Deposit Insurance Corporation
• Consumer World
• NON-PROFIT ORGANIZATIONS
• Better Business Bureau
• Direct Marketing Association  
• Fraud.org--National Fraud Information Center  

35
Identity Theft

• Occurs when someone uses your personal
  information such as your name, Social Security
  number, credit card number or other identifying
  information, without your permission to commit
  fraud or other crimes.
• Guard your account numbers.
• Keep cards, checks, statements account numbers
  safe.
  
• Shred or burn statements.

36
How Identity Thieves Get Your Information

• Steal wallets and purses containing your ID
  credit/bank cards
  
• Steal mail, bank/credit card statements,
  pre-approved credit offers, new checks, and tax
  information
  
• Complete a change of address form to divert
  your mail
  
• Rummage through your trash for personal data
• Fraudulently obtain your credit report by posing
  as a landlord, employer or someone else
  
• Find personal information in your home
• Use personal information you share on the
  Internet
  
• Scam you, often through email, by posing as
  company or government agency that you do business
  with
  
• Steal your information from your workplace

37
How Identity Thieves Use Your Information

• They call your credit card company change
  address on the account.
  
• They run up charges on your account, but because
  the bills are being sent to the new address, it
  takes time before you realize it
  
• They open a new account, using your name, birth
  date and SSN.
  
• They establish phone or wireless service in your
  name.
  
• They open a bank account in your name and write
  bad checks.
  
• They file for bankruptcy under your name to avoid
  paying debts theyve incurred under your name, or
  to avoid eviction.
  
• They buy cars by taking out auto loans in your
  name
  
• They give your name to the police during an
  arrest. If theyre released from police custody,
  but dont show up for their court date,
  an arrest warrant is issued in your name.

38
How to Minimize Your Risk

• Order a copy of your credit report from each of
  the three major credit bureaus for free at
  annualcreditreport.com
  
• Place passwords on your credit card, bank and
  phone accounts. Dont use easily available
  information like your mothers maiden name, your
  birth date, the last digits of your SSN or your
  phone number, or a series of consecutive numbers.
  
• Secure personal information in your home,
  especially if you have roommates, or workers in
  in your home.
  
• Ask about information security procedures in your
  workplace. Find out who has access to your
  personal information and verify that records are
  kept in a secure location. Ask about the disposal
  procedures for those records as well.

39
How to Minimize Your Risk (cont.)

• Never give anyone your account number unless you
  can positively identify the person as
  authorized.
  
• Guard your mail and trash from theft
• Promptly remove mail from your mailbox
• Deposit outgoing mail in post office collection
  boxes or at your local post office, rather than
  your mailbox
  
• If youre planning to be away from home and a
  neighbor cant pick up your mail, call the Postal
  Service to have them hold it
  
• Tear or shred your charge receipts, copies of
  credit applications, insurance forms, physician
  statements, checks and bank statements, expired
  charge cards that youre discarding, and credit
  offers you get in the mail
• To opt out of receiving pre-screened credit card
  offers, call 1-888-5-OPTOUT (1-888-567- 8688)

40
How to Minimize Your Risk (cont.)

• Before revealing any personal information (for
  example, on an application), find out how it will
  be used, secured, and whether it will be shared
  with others
• Dont carry your SSN card leave it in a secure
  place
  
• Carry only the identification information and the
  number of credit and debit cards that youll
  actually need
  
• Pay attention to your billing cycles
• Follow up with creditors if your bills dont
  arrive on time
  
• A missing credit card bill could mean an identity
  thief has stolen your account and changed your
  billing address to cover his tracks
  
• Identity thieves may use phony offers or contests
  to get you to give them your personal information

41
Your Social Security Number (SSN)

• Your employer and financial institution will
  likely need your SSN for wage and tax reporting
  purposes
  
• Other businesses may ask you for your SSN to do a
  credit check when you apply for a loan, rent an
  apartment, or sign up for utilities
  
• Sometimes they simply want your SSN for record
  keeping, but you dont have to give it just
  because they ask for it
  
• If someone asks for your SSN, ask the following
  questions
  
• Why do you need my SSN?
• How will my SSN be used?
• What law requires me to give you my SSN?
• What will happen if I dont give you my SSN?

42
Opt-Out

• Notify the three major credit bureaus that you do
  not want personal information about you shared
  for promotional purposes
  
• Equifax, Inc.OptionsPO Box 740123Atlanta, GA
  30374-0123
  
• ExperianConsumer Opt-Out701 Experian
  ParkwayAllen, TX 75013
  
• TransUnionMarketing List Opt OutPO Box
  97328Jackson, MS 39288-7328

43
Opt-Out (cont.)

• Telemarketing --The federal government has
  created the National Do Not Call Registry--the
  free, easy way to reduce the telemarketing calls
  you get at home
• To register or to get information, visit
  www.donotcall.gov, or call 1-888-382-1222 from
  the phone you want to register
  
• You will receive fewer telemarketing calls within
  three months of registering your number
  
• It will stay in the registry for five years or
  until it is disconnected or you take it off the
  registry
  
• After five years, you will be able to renew your
  registration
  

44
Credit Card Security

• Keep cards statements account numbers safe
• If you have problems remembering your PIN Number
  and need to write it down, don't keep it with
  your card
  
• Destroy expired or cancelled cards

45
Computer Security

• Update your virus protection software regularly,
  or when a new virus alert is announced
  
• Do not download files sent to you by strangers or
  click on hyperlinks from people you dont know
  
• Use a firewall program, especially if you use a
  high-speed Internet connection like cable, DSL or
  T-1, which leaves your computer connected to the
  Internet 24 hours a day

46
Computer Security (cont.)

• Use a secure browser--software that encrypts or
  scrambles information have the most up-to-date
  encryption capabilities by using the latest
  version available from the manufacturer look for
  the lock icon on the browsers status bar to be
  sure your information is secure during
  transmission
• Dont store financial information on your PC
  unless absolutely necessary
  
• If you do, use a strong password - a combination
  of letters (upper and lowers case), numbers and
  symbols
  
• Dont use an automatic log-in feature which saves
  your user name and password so you dont have to
  enter them each time you log-in or enter a site.
  
• Always log off website, etc., when done

47
Computer Security (cont.)

• Before you dispose of a computer, delete personal
  information
  
• Deleting files using the keyboard or mouse
  commands may not be enough because the files may
  stay on the computers hard drive where they may
  be easily retrieved. Use a wipe utility
  program to overwrite the entire hard drive
• Look for Website privacy policies they answer
  questions about maintaining accuracy, access,
  security, and control of personal information
  collected by the site, as well as how information
  will be used, and whether it will be provided to
  third parties
• If you dont see a privacy policy, consider
  surfing elsewhere

48
Keep Records

• Youll need them to repair credit or prove legal
  matters
  
• Records to Keep in Safety Deposit Box
• Vehicle Titles Bills of Sales, Birth Marriage
  Certificates, Contracts, List of Insurance
  Policies, Copy of Social Security Card, Copy of
  Will, Tax Records
• Keep Tax Returns Supporting Records for, at
  least, 3 Years
  
• (In case youre audited)
• Household Inventory List
• Supplement List with Photos or Videotape

49
The Road to Financial Success
10. Maximize Retirement Savings/Pay-off Home
9. Invest in Home/Diversify Investments
8. Invest 15 of Income in Retirement Plans
7. Pay-off High Interest Debt
6. Invest in Emergency Fund
5. Improve/Fix Credit
4. Insure Against Loss
3. Develop Spending Plan
2. Set Family Goals
1. Set-up Bank Accounts
50
Family Services Center, Inc.

• Human services agency founded 1962
• 501(c)(3) non-profit organization
• United Way agency since 1964
• Mission is to strengthen support individuals
  families