Canceling any credit card before you apply for a loan is a bad idea. It affects your credit score negatively. A lower credit score will result in higher interest rates and higher fees on your upcoming loan. It doesn’t hurt you for the account to stay open but it can hurt you if you close it.

Do this instead: Pay the credit card off or transfer the balance to another card. If you’re never going to use it again, cut it up or store it somewhere. Don’t cancel it. You can cancel the credit card once you’ve determined that you’re not going to need a loan anytime soon.

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Student Loans: Not As Fun As Advertised.

A lot of student loan companies offer incentives for people who setup automatic payments for their monthly payments. People with automatic deductions from their paycheck or bank account are less likely to default on payments. Auto-pay your monthly student loan payments to knock off some percentage points from your interest rate.

For my automatic student loan deduction, I get .25% (that’s point two five) off of my student loan interest which saves me a few hundred dollars per year. The added bonus is that the student loan payments are paid every month without me having to think about it.

Check with your specific lender if they offer such incentives.

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1. What is a home equity loan?

A home equity loan is a loan that is borrowed using your home’s equity as collateral. The amount of equity you have in your home can be calculated by taking your home’s value and subtracting off how much money you still owe on your mortgage. Since you are using this equity as collateral, if you fail to pay back the loan, your creditor can sell your house to get its money back.

2. How much money can I borrow?

Well, that depends on several factors, including your credit history and current income, but usually lenders will let you borrow until you reach a loan-to-value (LTV) ratio of 80%. The LTV ratio is is simply how much money you are borrowing (original mortgage + home equity loan) divided by your home’s value. For example: if your home is worth $100,000 and you owe $50,000 on your mortgage, your LTV ratio is 50%. So you will be able to borrow $30,000 for your home equity loan and your total loans ($50,000+$30,000 = $80,000) divided by your house’s value ($100,000) will be at the 80% LTV ratio.

3. Why do people usually take out home equity loans?

The most common reasons people take out home equity loans are for paying off high interest credit card debt, major home repairs, college tuition expenses, medical bills, or even just to buy a car or boat.

4. What are the advantages of a home equity loan?

• Lower interest rate than other types of loans
• Ability to get a relatively large amount of money (depending on the amount of equity you have in your home, of course)
• Payments are often tax-deductible

5. What are the disadvantages of a home equity loan?

There are none! Go get a home equity loan right now!

Only kidding. The main disadvantage is that you’re putting yourself in jeopardy of losing your house if you can’t pay back the loan. So if you’re confident in your ability to pay back the loan, or if you just don’t mind losing your home and living on the street, then there aren’t too many downsides to taking out a home equity loan.

6. What is the difference between a home equity loan and a home equity line of credit (HELOC)?

A home equity line of credit is just that - a line of credit. You get approved for a certain credit line, you can borrow up to that amount, and you only pay back what you’ve borrowed. A regular home equity loan is just a lump sum loan that must be payed back in a certain amount of time.

7. Is a home equity loan right for me?

It all depends. See what kind of rates are available. If you’re currently paying off some high-interest credit cards, a home equity loan might save you some money.

8. Where can i find the best rates for home equity loans?

Bankrate has a nice feature than lets you compare home equity rates in your area.

9. What is the airspeed velocity of an unladen swallow?

What do you mean? An African or European Swallow?

10. How many stockbrokers does it take to change a light bulb?

Dear God! It burnt out!! Sell all my GE stock NOW!!!!

(Ok, so that was only 8 real questions about home equity loans, but 10 is just so much nicer than 8.)

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Best way to apply for a loan: Make a picket sign.

For anyone looking for a loan, watch out. Wikipedia points out an important fact about secured loans.

A secured loan is a loan in which the borrower pledges some asset (e.g. a car) as collateral for the loan.

This means that they can take and sell whatever you pledged if you slip up and can’t make a loan payment. The only thing the lender can do if you have unsecured debt is make a black mark on your credit history. Bad credit still sucks but losing your stuff sucks more.

Related links: Unsecured UK loans

Secured Loan [Wikipedia]
Unsecured Loan [Wikipedia]
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This house only $100 a month!

Walther Updegrave of CNN’s Money warns people about the increasingly popular interest-only mortgage. Interest-only payments mean that you don’t have to pay off any of the principal. This means lower payments at the cost of building your home’s equity.

An IO loan lets you off the hook for principal payments only temporarily. Depending on the specifics of the IO loan you get, typically five, or seven or 10 years down the road you’ll have to begin paying off principal. The result is that your monthly payment can jump 40 to 45 percent.

You’re basically paying rent for the first few years when you’re not buying into your house’s principal. The only time an interest-only mortgage option is beneficial is when you use the extra monthly cash for good reasons such as paying off high-interest credit card debt or another investment that will give you higher returns.

Regular home-buyers need not apply.

Starting with an interest-only loan [CNN Money]
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I was told by my fiance that we’re buying a house THIS fall sometime. Oh yeah, she also told me that the date she wants to get married is also this fall. Last but not least: We’re going to Hawaii for our honeymoon.

If it were up to me, I would buy the smallest, dirt cheap house available. I would get married at city hall. And I would honeymoon at White Castle. Not going to happen.

I’ve never priced out the price of a wedding (nor do I want to). I’ve also never bought a house before. It’s time to do some major research. There’s going to be more home-buying articles in the upcoming months (up from zero).

I talked to one of my home-owner friends yesterday. She told me she financed her home with a Federal Housing Administration (FHA) loan. An FHA loan is a federal assistance mortgage loan in the United States insured by the Federal Housing Administration. The loan may be issued by federally qualified lenders.

FHA primarily serves people who cannot afford a conventional down payment. Typically, these are popular among first-time homebuyers (aka me).

I did some research and here are some advantages and disadvantages that I found to FHA loans.

Advantages of an FHA Loan

You only need 3% down payment.

First time home buyers usually don’t have a large chunk of downpayment to throw down on a house. You only need 3% down with an FHA loan. A $200,000 dollar house only requires a $6,000 dollar down payment. Horray!

They allow a higher debt-to-income ratio.

Lenders have a limit on how much debt you hold versus how much income you bring in. Obviously, more income and less debt is the most ideal situation. Word to the wise: Pay off your high-interest debt before buying a house.

Your credit doesn’t have to be as good as it would for a conventional loan.

A lender has a lesser risk loaning money to someone with a lower credit score since the loan is insured by the government. But your credit is great, right? Right.

Rates for an FHA loan are typically the same as a conventional loan given the same credit score.

This means that if I have a FICO credit score of 650, then both the conventional and FHA loan should offer the same interest rate. My credit score is higher than that but it’s nice to know that the FHA loan doesn’t penalize you.

The loan is assumable by someone else.

A mortgage loan that allows a new home purchaser to undertake the obligation of the existing loan with no change in loan terms.

Disadvantages of an FHA Loan

You essentially pay 2 mortgage insurance premiums (aka PMI).

There’s a one-time chunk of PMI that you need to pay. There’s also an additional monthly PMI that you have to pay which could add up to a huge chunk to your monthly payment.

The property needs to meet certain requirements.

FHA-insured loans are available in urban and rural areas for single family homes, for 2-unit, 3-unit, and 4-unit properties, and for condominiums. Also, the property can’t be worth more than a certain value.

There’s a maximum amount of money you can borrow depending on your area.

There’s a calculator here that will tell you the limit of what you can borrow in your area.

You could face a recapture tax on the property if you sell too soon.

Recapture is a Federal income tax that borrowers may have to pay if they sell or transfer their CHFA-financed home within 9 years.

For more information on FHA loans, visit the official website (http://www.hud.gov/).

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MSN has an article How To Hassle The Pal Who Owes You

According to the money-etiquette survey conducted by Ipsos market research and commissioned by PayPal, 63% of respondents have seen someone skip out on paying back a friend, and 57% have seen a friendship or relationship end because of it.

You won’t have to hassle your friends to get your money back if you lend it sparingly. I’ve had a good track record when I’ve loaned money to friends but I haven’t had a perfect record. I’ve been burned a few times so I developed a few rules for lending to friends.

Guidelines for lending money to friends:

1. Write it down so you don’t forget.
2. Let them know when you want to be paid back.
3. Don’t lend it to them unless you can trust them with your ATM PIN number.
4. Remind them at least once a week.
5. Don’t ask why they don’t have your money. Reminders should suffice if #3 is true.

I learned a couple things from borrowing from friends too:

• Don’t borrow from friends unless you’re dying or in jail.
• If you have to borrow, pay them back that same day.

If you can’t get your money out of your buddy, you need to take it mob style. “Yeah you got money to pay for fake mustaches eh?”

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