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					   Accelerated Debt Reduction Plans
         Advantages, disadvantages; do-it-yourself, and structured plans.




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  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).
  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.

Loan Rate Term Pmt Total                                               Interest
                                                                                        Savings
10,000 12% 60 mo. 222 13,346                                            3,346

In this example, if extra principal payments of only $10 are made each month,

10,000 12% 57 mo. 232 13,167                                             3,167            $179
                                                                         the borrower pays $179 less
                                                                         interest, and pays off the loan
                                                                         about 3 months early.
If $50 extra principal is paid each month, the borrower pays             2,582            $764
10,000 12% 47 mo. 272 12,582                                             $764 less interest, and pays the
                                                                         loan off more than a year early

If $100 extra principal is paid each month, the borrower pays
10,000 12% 38 mo. 322 12,069                                             2,069         $1,277
                                                                        $1,277 less interest, and pays the
                                                                         loan off almost 2 years early.
  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:

Bal    Rate Pmt Term                                                Interest            Savings
136,283 8% 1000 30 yr.                                              223,717

136,283 8%             1010 29 yr.                                  212,773              $10,944
If $10 extra principal is paid each month                           $10,944 less interest is paid, and the loan
                                                                    is paid off about one year early


136,283 8%             1050 25 yr.                                  180,817              $42,900
If $50 extra principal is paid each month                           $42,900 less interest is paid, and the loan
                                                                    is paid off about 5 years early

136,283 7.75% 1283 15 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).
 Bi-Weekly (b/w) Payment Programs:
A convenient way to make extra principal
payments, if:
Your paydays are Bi-weekly
    If   you don’t get paid every other week, don’t bother with bi-weekly! (See the following slides).

Yourlender accepts extra principal (most do without penalty).
Reputable money handler (some have misused funds).
Low 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                       $ 4,000 setup fee
The Advantage of
Bi-Weekly Payments:
Since there are:


365 1/4             days in an average year, and


 14                days in a biweekly period, there are


= 26.09             bi-weekly periods in an average
                    year.


If a person makes   26.09      half payments bi-
weekly in an average year:




                        13
that is the equivalent of     .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.
 About

 every         11 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).


*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.
 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.


  Loan                  Rate                 Pmt                   Term Total Paid                                    Save
 100,000                   8%               733.77 mo.              30 yr.            264,157
 Consider the advantage of paying this loan bi-weekly:



 Bi-weekly: 26.09 half pmts each yr.                        22.65 yrs 216,832                                     47,325
 733.77 ÷ 2 = 366.89 26.09 times per year                     the new term               the new total              less interest
                                                                                                                        paid
                                                            (by paying 17,000 early, you avoid paying $47,325 of interest)



                                              66.04   add .09 of a payment each month.
 Extra Principal
 Pay 1.09* x 733.77 =                        799.81          22.5 yrs 215,948 48,209
*1.09 = 1/12 of 13.05 pmts
(which is the av. number of full payments                        new term               new total paid            interest saved
made each year in a bi-weekly plan).
                                                                                                                    (not paid)
                                   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:

Mortgage    $ 87,724 734 pmt 8% 20 yrs. remaining
Car loan      13,056 415 pmt 9% 3 yrs. 50,756 if you keep paying 1352 (no
Other debts                                                       rate debt
               8,000 203 pmt 18% 5 yrs. refi) focusing on highest Total first.
                                                                  Interest
Total debt  108,780 1,352           If you just keep paying
                                    the old debts as agreed: 95,000
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:

New loan 111,780 782 new pmt 7.5% new rate 30 yrs.                                           new term fees
                                                                                             Interest &
you “save” (delay paying)            493 each month, but do you really save?                  173,000
The total of interest and fees paid (assuming you pay according to the new terms):
                                                                                             Interest & fees
If you refinance, but keep paying: 1,352                                       9.75 yrs.
                                                                                               50,000
                                                                   payoff in
 Getting out of debt quicker, by focusing
 first on highest rate debts                                                    After .8 yr. more,
                                                          After 1 yr., start    apply the amount
                                                          applying the amount formerly going to the
                                                          formerly going to     doctor ($40) and to
Let’s suppose someone had
                                                          the doctor ($40) to the dentist ($50) to
the following debts. They                                 the next highest rate the next highest rate
could meet the payments, but                              debt (the dentist).   debt (the credit card).
with no money to spare:                                    After 1 year          After 1.8 years
Existing      Balance Payment Rate Remaining               New      New New      New     New New
Obligations            (p & i*)           Term (yrs.)      Bal.     Pmt. Term    Bal.    Pmt. Term


1st Mort      78,721     651      8.5% 22.9 yrs.           77,554 651 21.9       76,547 651 21.1
Auto Loan     10,239     250      9.0%       4.1 yrs.       8,072 250      3.1    6,194 250 2.3

Trailer        5,451     150       9.8%     3.6 yrs.        4,126 150      2.6    2,970 150 1.8
Credit Card    6,539     120      18.0%      9.5 yrs.       6,253 120      8.5    5,984 210 3.1
Doctor          400       40      21.0%       .9 yrs.           0      0    0        0      0      0
Dentist        1,200      50      19.0%     2.5 yrs.          794     90   .8        0      0      0
Totals      102,550    1331       (*p&i stands for principal & interest)
 Getting out of debt quicker, by focusing
 first on highest rate debts                                              After .7 yr. more,
                                                    After 1.9 more yrs, apply the amounts
                                                    apply the amounts     formerly going to the
Let’s suppose someone had                           formerly going to the doctor, the dentist,
                                                    doctor & dentist to   the credit card, trailer
the following debts. They                           the credit card:      & auto loan to the
could meet the payments, but                                              mortgage loan.
with no money to spare:                             After 3.7 years         After 4.4 years
Existing      Balance Payment Rate Remaining          New New New            New New New
Obligations            (p & i)           Term         Bal. Pmt. Term         Bal. Pmt. Term

1st Mort      78,721    651      8.5% 22.9 yrs.     73,863 651 19.2         72,760 1,261 6.2
Auto Loan     10,239    250      9.0%    4.1 yrs.     1,153 250       .4        0      0      0
Trailer        5,451    150      9.8%    3.6 yrs.        0     0      0         0      0      0
Credit Card    6,539    120      18.0%   9.5 yrs.     2,745 360       .7        0      0      0
Doctor          400       40     21.0%    .9 yrs.        0     0       0        0      0      0
Dentist        1,200      50     19.0%   2.5 yrs.        0     0       0        0      0      0
Totals      102,550    1331                                                 Out of debt in 10.2 yrs.
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:
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).
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.
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.
    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             NWFin                 Diff
 Re-financed       $147,000                   $147,000            
    “Closing Costs” $3,000                    $17,000              $14,000
    New Loan       $150,000                   $164,000            
    Rate                8%                       10%               $3,000
    Prepay Penalty     $0                        $7,000                7,000
    Total Loss                                                       $24,000
Variable vs. Fixed Rate
Variable 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.
  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?
Avoid Closing Traps                          especially if delayed




          Take        your time
          Don’t   just (sign, sign, sign)


          Understand
           what you are
           signing and
           why.
          Expect delays, and keep all your other
          obligations current.
          Could be the most important 3 hours of
          your financial life.
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 and the borrowers
  lose their homes.
 Don’t risk your home for speculative
  investments!
 Equity Investments:                                    Suppose a person with plenty of equity
 takes out a new mortgage and lets the company “invest it”

160000                          $150,000         value of home
140000
                                                                                      Invest
120000                          New      mortgage
                   Low                                                 Higher Equity
                                  Equity
100000
 80000             rate                                                rate         (proceeds
 60000                                 Interest to make payments
                                                                                          of loan)
 40000
 20000                          Existing      mortgage
        0
Remember:

1. The greater the rate, the higher the risk!
2. If you can’t afford to lose it, don’t invest it!
 Equity Investments
160000              $150,000   value of home
140000
120000              New   mortgage        Far too many
100000                                     programs, have lost
                                           the investment,
 80000                                     leaving the victim to
 60000                                     pay back both the old
                                           and the new
 40000
                                           mortgage.
 20000              Old   mortgage
       0
Remember:

1. The greater the rate, the higher the risk!
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!
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!
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?
Ifyou still don’t understand it,
get some help before signing!!!
For more information,
 You may contact the Utah Department of
  Financial Institutions.
     801 538-8830
     www.dfi.utah.gov

				
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