APR or Annual Percentage Rate should be known to everyone, at least by those who are having loan, mortgage, credit card etc., which deals with interest rate. In order to avoid bugger lenders or different credit card companies and compare the percentage rates on different loans or credit cards.
What is APR?
APR is the Annual Percentage Rate is the interest rate calculated for a whole year, rather than just a monthly fee/rate, as applied on a loan, mortgage, credit card, etc. APR tells you how much you are going to pay annually for the amount borrowed, so it is the cost of loan in terms of percentage. If your loan has a 10% rate, you’ll pay $10 per $100 you borrow annually. All other things being equal, you simply want the loan with the lowest APR.
Why it is necessary to know APR?
The fees included within the APR vary from one lender to another. The fees included within the APR involve charges related to the making of the loan and other fees such as title fee, escrow fee, attorney fee, tax service fee, home inspection fee, recording fee and credit report fee. The fees for the preparation of loans include loan processing fee, underwriting fee, document preparation fee, private mortgage insurance, loan application fee, credit life insurance and appraisal fee. Lenders often mislead borrowers by charging hidden fees. In order to reduce the confusion, US Government made the provision that the lenders have to quote APR to potential borrower, as per the Truth in Lending Act.
For example if the APR is 36%, the percentage is 3% per month, but the interest rate or cost of funds for the entire year may be greater than 36% due to the effects of compounding. By law, a credit card company or other lender must inform the customer of the APR before any agreement is signed. The APR provides the customer with a convenient number against which to compare the cost of funds for other loans or investments.
So you have to do some research work before applying for any loan, mortgage or credit card and find out which is having lowest APR.
How is APR Calculated?
APR is the equivalent interest rate considering all the added costs to a given loan. Naturally, it is a function of the loan amount, the interest rate, the total added cost, and the terms. The APR would equal the interest rate if there is no additional costs to a given loan.
1) For example, consider a $100 loan which must be repaid after one month, at 5% interest, plus a $10 fee. If the fee is neglected, this loan has a (year-long) effective APR of approximately 79% (1.05^12 =~1.7958). If the $10 fee were considered, the interest increases by 10% ($10/$100) for the month, with the effective APR being approximately 435% (1.15^12 =~5.3502, as 535%-100%=435%). Hence there are at least two possible "effective APRs": 79% and 435%.
2) For example, a credit card company might charge 1% a month, but the APR is 1% x 12 months = 12%. This differs from annual percentage yield, which also takes compound interest into account.
What are APR Limitations?
Unfortunately, all other things are not equal. APR can include more than just the interest cost of a loan. On a mortgage, APR might include Private Mortgage Insurance, processing fees, and discount points. There are other fees and charges that may or may not be included in a given APR quote. Therefore, you need to look closely at each and every APR.
You can’t simply rely on an APR quote to evaluate a loan. You need to look at each and every charge and expense related to your prospective loan in order to judge whether or not you’re getting a good deal. In addition, look at the bigger picture – you need to know how long you’ll be using a loan to make the best decision. For example, one-time charges up front may drive up your actual cost on a loan – even though an APR calculation might assume those charges are spread out over a longer lifetime (and therefore the APR would look lower).
APR Calculator:
1) Loan Amount (C):----------- 2) Extra Cost (E):---------- (The Extra Cost (E) is the lump sum of all extra costs involved in the loan, which include points, application fee, closing cost, processing fee, title fee, and so on. In short, it's the money you borrowed that you never saw.) 3) Interest Rate % (R):------- 3) No. of Months (N):------- 4) APR (A):------------------- 6) APR (A):----------------- Calculator
The calculator first calculates the monthly payment using C+E and the original interest rate r = R/1200:
P = (C+E)r(1+r)N/(1+r)N-1
The APR (a = A/1200) is then calculated iteratively by solving the following equation using the Newton-Raphson method:
For Creditors all secured debts are Good Debts and for Debtors Good Debts are those which builds wealth over the long run.
Question: Can Debts build wealth?
Not all debts are bad. If used precisely Debts can be huge source in wealth building. Good Debts can be considered as a sort of investment, which generates income at a later stage.
Good Debts is secured with a valuable asset, like a home mortgage or, perhaps, a car loan, and so considered an investment. Home loans are good because over time a home’s value increases. Student loans are also considered Good Debt because they are also like an investment. Students who graduate with a college degree earn, on average, higher incomes than those that don’t. Home loans and college loans are good for another reason: they usually have very agreeable terms. Both types of loans come with very low interest rates, and borrowers repay the debt over a long period. The typical home loan, for instance, carries a 30-year term. The interest on college loans is so affordable that the graduate can repay their loans slowly over a long period as they gradually earn more money and build their personal wealth.
"Mortgage debt is Good Debt. You're borrowing money, but you're getting a tax advantage and can write off interest on an asset that's appreciating over time. Plus, you get to live there."
One of the secrets, therefore, to being smart with your money is to differentiate between Good Debt and Bad Debt.
1) Good Debt: Having a mortgage, getting a home equity loan or line of credit to fund a home renovation or remodeling job. Bad Debt: Borrowing money to trick out your car to impress your friends, or just yourself.
2) Good Debt: Getting student loans to attend college. Bad Debt: Using your credit cards while at school to buy groceries, throw parties or accumulate stuff. Many students are saddled with insane amounts of debt after they graduate. Average credit card debt after graduating from college: $3,000.
3) Good Debt: Leverage in real estate or using the bank’s money to invest in real estate. You can use leverage by borrowing funds to get into real estate investing with the expectation of turning in a profit. Bad Debt: Leverage in Wall Street or borrowing money to buy stocks. In my opinion, buying stocks on margin is a bad idea. This is a subjective opinion because I’m sure there are a lot of successful margin players out there. As an average investor, I’d avoid trading on margin like the plague. There’s a difference between using a loan to invest in real estate versus investing in the stock market: if the real estate market drops, you are not forced to pay off a mortgage in short notice. With a drop in stock prices, you’ll be subject to margin calls that will force you to raise more money to hold on to your position or else force you to redeem at poor market prices. Using leverage takes a good amount of risk, the question here is if the risk is reasonable and if you’re fairly comfortable taking it.
4) Good Debt: Applying for a business loan and borrowing for business. Many ventures need cash flow that they don’t have at the moment to run their operations or expand their facilities. Using loans to grow a business is a sensible approach to take. Bad Debt: Using your credit card to go on vacation, travel or to just have a good time; borrowing for pleasure. Once the vacation is over, you’re left with fun memories and a financial obligation to pay up.
While the differences often seem logical, it is a logic that is apparently missed by many people.
Therefore, Good Debt helps borrowers by increasing their wealth and by building a healthy credit history. Borrowers who repay their debt diligently earn a good credit score and become eligible to borrow more good debt in the future. Good Debt is investment debt that creates value.
Bankruptcy is the legally declared financial status of an individual or an organization, who is unable to pay off their debts. Generally, Bankruptcy is initiated by the debtor, in order to get relief from the creditor’s permanently, but in order to recover their substantial amount of debt the creditors as well can file Bankruptcy case against the debtor. The Bankruptcy case initiated by the debtor is called Voluntary Bankruptcy and the one filed by the creditor against debtor is called Involuntary Bankruptcy.
A Harvard Study reported that half of US bankruptcies were caused by medical bills. The study was published online in February of 2005 by Health Affairs. The Harvard study concluded that illness and medical bills caused half (50.4 percent) of the 1,458,000 personal bankruptcies in 2001. The study estimates that medical bankruptcies affect about 2 million Americans annually — counting debtors and their dependents, including about 700,000 children.
Bankruptcy is a federal court procedure that is designed to aid businesses as well as the consumers to wipe out their debts or repay them under the protection of the Bankruptcy court. Businesses don’t like it, but for consumers, it can be a life saver. Bankruptcy is the last option and should be the last option while trying to get hold of yours scattered financial situation, since it has a very negative impact on yours credit report and affect you in the future for all your financial dealings, as most lenders view this differently. But for sure it allows you to start over again.
Let's start by exploring the different types of bankruptcies. There are four different filings you can make: Chapter 7, Chapter 11, Chapter 12 and Chapter 13.
Chapter 7
Its the most common form of Bankruptcy in US. Chapter 7 Bankruptcy, sometimes call a straight Bankruptcy is a liquidation proceeding. As per this chapter, the debtors are allowed to keep certain type of property, this kind of asset is known as exempt property and the property they must give up is known as non exempt property. The debtor turns over all non-exempt property to the Bankruptcy trustee who then converts it to cash for
distribution to the creditors. The debtor receives a discharge of all dis-chargeable debts usually within four months. In the vast majority of cases the debtor has no assets that he would lose so Chapter 7 will give that person a relatively quick "fresh start". One of the main purposes of Bankruptcy Law is to give a person, who is hopelessly burdened with debt, a fresh start by wiping out his or her debts.
Non exempt property may include:
1. Pricey musical instruments provided the debtor is not a professional musician. 2. Family heirlooms. 3. Collections of valuable items like stamps and coins. 4. Bank accounts, bonds, cash and other investments. 5. A second or vacation home 6. A second car or truck.
Exempt property include: 1. Household appliances. 2. Vehicles, up to a certain value. 3. Reasonably priced requisite clothing. 4. Reasonably priced requisite household goods and furnishings. 5. Jewelry, up to a certain value. 6. Pensions. 7. A part of unpaid but earned wages. 8. Equipments (up to a certain value) that are needed in the debtor’s profession. 9. Damages awarded for personal injury. 10. A part of equity in the debtor's home. 11. Public benefits, including social security, and unemployment compensation, public assistance (welfare) that is accumulated in a bank account.
If a debt is secured by property, such as a home mortgage or an automobile loan, then you get to decide how to handle that debt. For example, in the case of a vehicle, you could: Keep the automobile and the debt as long as you are current and continue keeps your payments current.
* "Redeem" the automobile which means pay it off at its current "fair market value"
* Return the vehicle, include any balance due in your Bankruptcy and pay nothing further on the vehicle. The choice is yours.
Essentially what the new laws ask of people who are filing a Chapter 7 Bankruptcy is twofold. First, they must take an approved credit counseling course within six months before filing. They must also complete an approved financial management course before any debts can be discharged.
What are the most common reasons given for filing a Chapter 7 Bankruptcy? Well, of course, it's the accumulation of excessive debt! But seriously, here are the most common reasons why people get into such debt:
In 99% of the Chapter 7 cases, the person filing Bankruptcy keeps all of their property.
Chapter 11
Chapter of the Bankruptcy Code that is usually used for the reorganization of a financially troubled business. Used as an alternative to liquidation under Chapter 7. Chapter 11 Bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. Bankruptcy affords the debtor in possession a number of mechanisms to restructure its business.
Chapter 12
Chapter of the Bankruptcy Code adopted to address the financial crisis of the nation's farming and fishermen community. Cases under this chapter are administered like Chapter 11 cases, but with special protections to meet the special conditions of family farm operations and fishing.
Chapter 13
Chapter 13 is more commonly known as a reorganization Bankruptcy. Chapter13 Bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years.This type of Bankruptcy appeals to individuals who have non-exempt property that they want to keep. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.
There are many reasons why people choose Chapter 13 Bankruptcy instead of Chapter 7 Bankruptcy. Generally, you are probably a good candidate for Chapter 13 Bankruptcy if you are in any of the following situations:
1. You have a sincere desire to repay your debts, but you need the protection of the Bankruptcy court to do so. You may think filing Chapter 13 Bankruptcy is simply the "Right Thing To Do" rather than file Chapter 7.
2. You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 Bankruptcy. You can make up missed payments only in Chapter 13 Bankruptcy.
3. You need help repaying your debts now, but need to leave open the option of filing for Chapter 7 Bankruptcy in the future. This would be the case if for some reason you can't stop incurring new debt.
4. You are a family farmer who wants to pay off your debts, but you do not qualify for a Chapter 12 family farming Bankruptcy because you have a large debt unrelated to farming.
You have valuable nonexempt property. When you file for Chapter 7 Bankruptcy, you get to keep certain property, called exempt. If you have a lot of nonexempt property (which you'd have to give up if you file a Chapter 7 Bankruptcy), Chapter 13 Bankruptcy may be the better option.
You received a Chapter 7 discharge within the previous eight years. You cannot file for Chapter 7 again until the eight years are up.
A Chapter 13 can be filed if:
* The debtor received a discharge under Chapter 7, 11 or 12 more than four years ago. * The debtor received a discharge under Chapter 13 more than two years ago. * You have a co-debtor on a personal debt. If you file for Chapter 7 Bankruptcy, your creditor will go after the co-debtor for payment. If you file for Chapter 13 Bankruptcy, the creditor will leave your co-debtor alone, as long as you keep up with your Bankruptcy plan payments. * You have a tax debt. If a large part of your debt consists of federal taxes, what happens to your tax debts may determine which type of Bankruptcy is best for you.
As of October 17, 2005, new Bankruptcy laws took effect for all three types of Bankruptcy. When it comes to Chapter 13, you cannot file this way unless the following conditions are met:
* The debtor received a discharge under Chapter 7, 11 or 12 more than four years ago. * The debtor received a discharge under Chapter 13 more than two years ago. * When a motor vehicle was purchased within 910 days (2 1/2 years) of the filing and a secured creditor has a lien on it, the creditor retains the lien until payment of the entire debt has been made.
The following debt is NOT discharged:
* Debt for trust fund taxes; * Taxes for which returns were never filed or filed late (within two years of the petition date); * Taxes for which the debtor made a fraudulent return or evaded taxes; * Domestic support payments; * Student loans; * Drunk driving injuries; * Criminal restitution; * Civil restitution or damages awarded for willful or malicious personal actions causing personal injury or death.
All tax returns for the four years prior to filing Chapter 13 must be filed.
Disadvantages Of Bankruptcy --> Of course, there are disadvantages to filing for Bankruptcy. As per the Fair Credit Reporting Act, a record of this stays on the individual's credit report for up to 10 years. During the pendency of a Bankruptcy case the debtor is not permitted to obtain additional credit without the permission of the Bankruptcy court. Moreover, creditors may not be willing to risk lending money to such an individual.
There are some advantages to filing for Bankruptcy. By far the most important advantage is that debtors may obtain a fresh financial start.
The cashout refinance is a mortgage refinance which is a greater amount than your present mortgage amount. You can go for a cashout refinance to get the home equity that you have gathered throughout years. Suppose you have a mortgage balance of $ 50,000 and you have home equity of 70,000 dollars. So to get the home equity, you can go for a cashout refinance. You can take out a mortgage loan of 100,000 dollars. Thus your new mortgage loan is greater than your existing mortgage balance.
Why would you for a cash out refinance?
There may be several reasons for doing a cashout refinance but it depends upon your needs and situations.
1. If you want to buy a new property or a car and you want easy cash, you can use your home equity and go for a cashout refinance.
2. You can invest the money that you get after cashout refinance to gain more profit.
3. You can pay off your high interest rate credit card debts through the money that you get after cash out refinance.
4. If you need immediate cash to pay off your medical bills or your child’s college fees then cashout refinance is a good option available for you.
5. You may even lower the interest rate of your existing mortgage through the cashout refinance.
So depending upon your situation, if you need easy cash and you think that cashout refinance is a good choice for you then just do a bit of research on the market and talk to different lenders so that you can get the best rates and terms available in the market. Hope it helps learn about cashout refinance. Feel free to ask any questions and share you suggestions.
We all know what refinance is. Cash out refinance is a type of refinance that we can choose if we are in need of some easy cash. Now the question may come - what is Cash- out refinance?
What is cash out refinance? If you refinance and take cash out more than the existing unpaid loan amount, then it will be called cash-out refinance. So to get the Cash-out refinance, you should have enough equity on your home to back it. Most lenders and banks will not approve you for the cash-out refinance if you have not completed one year or more after taking the existing loan.
Pros of Cash- out Refinance:
1. You can utilize the money after cash out refinance to fulfill your sudden needs like paying medical bills or your child’s college fees.
2. You can invest the money and get better returns.
3. You can buy a new property or some thing else with the money.
4. You go out for a vocation. You can go for a world tour which can be your life time experience.
6. You can pull cash out to make improvement on your house.
Cons of Cash-out Refinance:
1. It is not always too easy to get approved for cash-out refinance. At least you will have to wait for a year after taking the loan to get a cash-out refinance.
2. The interest rates may get higher than your existing loan after the cash-out refinance.
3. You may have to pay pre-payment penalty if you go for Cash-out refinance.
Like all the other things, cash-out refinance has also some pros and cons, but it is a great help if you are in need of urgent money and you have enough equity. If you have completed one year after taking the loan and you will have to pay medical bills or your child’s tuition fees or you want to pay off your credit card debts, then the Cash-out refinance is the best solution that you can choose.
If you pay off your present loan with another loan with different terms and condition, this is called Refinance. This is mainly done to reduce the interest rates or cost of the loan. Sometimes it is also done to pull out the home-equity so that it can be used to pay off some high interest rate credit card debts. It can also be done to increase or decrease the time period of the loan. You can also turn the mortgage from ARM to FRM by refinancing. Even you can opt for refinancing to lower the monthly mortgage payments by increasing the total duration of the loan period. And if you want to pay off the loan early as you are getting a lower interest rate, you can opt out this option of refinancing.
By the way, sometimes your lenders can claim prepayment penalty if you are going for refinancing before a certain period of time. So you have to calculate whether you are actually getting any benefits after refinancing as you will also have to pay the prepayment penalty. Last but not the least, if you want to refinance then first go to your lender and check out whether he can offer you what rates and terms you want. If he or she can’t offer you what you want then you can shop for the lenders and check out who can offer you the best rates and terms. There is another kind of refinance which is called Cash-out refinance. This type of refinance is mainly used for home improvement or paying off any credit card debts or student loan.
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