I heard the news about another interest rate hike and thought it was about time to look into refinancing my mortgage. I contacted my mortgage company first.

“I am interested in a fixed mortgage rate.” I said.

“May I ask why that is?” The broker asked politely.

“I don’t want to deal with the risk of rising interest rates. At my age, I cannot afford the risk.”

“Looking at your last ten years of history, you have done pretty well with the adjustable rate. In fact, you had paid less in interest than most people with a fixed loan. May I suggest that we look at some adjustable rates, which are even less than the rate you’re paying and with caps you don’t have to worry about the interest rate hikes. I think we can save you a few hundred dollars off your monthly payment.”

At this point the broker took a breather so that I can say, “No thank you. I am only interested in a fixed rate mortgages.”

“I don’t understand. Are you not interested in saving money?” He asked before launching into a lecture that had a mix of economy 101, budgeting 1, a dash of fortune telling and a healthy and totally unrealistic optimism of future trend in interest rates.

When he was done I explained to him that I recall the 18%-19% interest on mortgage loans in the early 1980’s that he seemed too young to remember. I pointed out that on a $100,000 loan, the 18% interest is $1,500 per month on the mortgage interest alone. If you have a $200,000 loan the interest alone would be a back-breaking payment of $3,000 per month.

I knew he thought I am out of my mind thinking about an 18% mortgage interest rate in today’s environment. At the end we ended the phone conversation without any resolution. The gap in understanding wasn’t about fixed rate mortgages vs adjustable rate mortgages (ARM). The gap was in age, experience, expectation, hopes and fears; a gap too wide to bridge.

To understand this gap, let’s look at the adjustable rate mortgages. This type of mortgage loan is usually lower than the fixed rate and the lower rate means lower payment that in turn means easier qualification.

When lenders are considering your mortgage loan application, they look at what percentage of your income is available for repaying their loan. With an income of $5,000 per month, a $2,000 loan payment is 40% of your income and a $1,000 payment is 20% of your income. The closer you get to $1,000 or 20% of your income, the easier it is to qualify for the loan. This easier qualification appeals to younger people who are just starting and those with income limitation.

Adjustable mortgage rates appeal to young people with an innate optimism, hopes of increased income and the high possibility of moving to a different home in a short period of time. They need to look at what they can afford to pay and cannot worry too much about the distant future. To them anything is better than renting which is absolute waste of money.

There are also those older individuals who have suffered from some set back in life and do not enjoy a high credit score or do not have a very high income. Since a poor credit score increases the interest rate a bank offers to potential borrowers, a fixed rate may be too high for these individuals to consider.

Let’s take a look at some terms that help you understand ARM better.

Margin - This is the lender’ s markup and where they make their profits. The margin is added to the index rate to determine your total interest rate.

ARM Indexes - These are benchmarks that lenders use to determine how much the mortgage should be adjusted. The more stable the index is the more stable your adjustable loan remains. Consider both the index and the margin when you are shopping around.

Adjustment Period - Refers to the holding period in which your interest rate will not change. You will come across ARM figures like 5-1 that means your mortgage interest remains the same for five years and then it will adjust every year.

Interest Rate Caps - This is the maximum interest a lender can charge you.

Periodic caps - The lenders may limit how much they can increase your loan within an adjustment period. Not all ARMs have periodic rate caps.

Overall caps- Mortgage lenders may also limit how much the interest rate can increase over the life of the loan. Overall caps have been required by law since 1987.

Payment Caps - The maximum amount your monthly payment can increase at each adjustment.

Negative Amortization - In most cases a portion of your payment goes toward paying down the principal and reducing your total debt. But when the payment is not enough to even cover the interest due, the unpaid amount is added back to the loan and your total mortgage loan obligation is increased. In short, if this continues you may owe more than you started with.

Negative amortization is the possible downside of the payment cap that keeps monthly payments from covering the cost of interest.

As you compare lenders, loans and rates remember Henry Moore who said, “What’s important is finding out what works for you.”

Home equity line of credit is like a huge credit card that allows you to borrow against the equity of your home. This means two things. First, your home should be worth more than the amount of loan borrowed against it and the second, this type of loan should be considered even more carefully than the a credit card debt.

The home equity line of credit contract uses your home as collateral for the loan, which means you risk losing your home if the term of the home equity line of credit is not met.

There are other risks that a person in a financial jam may not consider, for example a large final payment also known as a balloon payment. Optimists of the world believe that miracles can come in play and somehow the need for a balloon payment will be satisfied. I like to take steps when I can to make sure that the higher powers can help me. This is why I would suggest that you also look at a second mortgage as well.

Let’s look at a basic difference between home equity line of credit and second mortgage.

Home equity line of credit allows you to keep borrowing and paying from your account through out the term of the contract. It is just like a revolving credit. You can also pay the minimum payment and no one will bother you. Chances are that by the end of the loan term, you owe the bank the maximum you could borrow, the full amount of home equity line of credit and then you have to make decisions, much later in life and perhaps with fewer resources.

On the other hand, a second mortgage has a fixed time frame. At the end of the period and assuming that you have kept up with the payment schedule, you will have finished with the loan and you will not need to find alternatives and come up with new plans. It is done and finished.

Let’s review some of these items.

The first was an application fee of $29.00 to open the account that may seem reasonable to a person who is desperate to rebuild his or her credit.

The next point covered was annual fees. According to the author of the article, one credit card company charges $150 per year for the privilege of allowing the members carry their card. And finally the $6.50 per month fee in addition to the annual fee.

Ouch and double ouch! We haven’t even begun talking about the interest rate charges. The impact of bad credit should be limited to that - bad credit - and not necessary spill over to cloud your judgment to make bad decisions as well.

My suggestion is to take a deep breath, move away from the computer, grab a cup of coffee or tea, get a notepad and a pen and go to your dining table. Begin with writing down why you are looking for a bad credit credit card. Don’t judge yourself or your motives. This is a brain storming session and not a self worth analysis.

A few examples of what you may come up with are:

<ul><li>I want to reestablish my credit.</li><li>I have maxed out my credit cards and need a new credit card to pay the old one.</li><li>I cannot take advantage of online bargains without a credit card.</li><li>I need a credit card as a form of identification when I write checks.</li><li>I need to fix my bad credit. </li></ul>

This list is different for everyone and based on your answer, you may have options you have not considered before.

Let me give you couple of alternatives to bad credit credit cards.

If you need to take advantage of online bargains, you can apply for a debit card from your bank, savings institution or credit union. A debit card works just like a credit card but it is secured by the funds in your account.

If you need to reestablish your credit, you can use catalog unsecured credit cards that allow you to shop with thousands of merchants. Most of these cards do not even require employment verification and do not check your credit history.

Most people with bad credit history have not learned how to manage money and planning is part of money management. A note pad, a pen and the time to think through things and put them on paper is one of the best money management strategies.

You notice that the ad is designed to appeal to a wide variety of clientèle with one thing in common, which is a hardship has placed them in a vulnerable spot and they want to believe there is a way out.

Government sites are there to let everyone know that there is a solution but at the same time, you the customer, need to do your homework. So what is this homework?

First of course is keep a cool head, then get information and check the secure credit card offers with a bit of healthy skepticism.

Let’s start with what is a secured credit card?

Most credit cards are give you a line of credit based on your credit history. They do not ask you to place anything on the line except your good name and your signature.

But what if your good name is tarnished and your credit report shows it? Then cash is required. A secured credit card issuing company requires you to open, fund and maintain an account as security for your line of credit.

This required savings deposit could be as much as several thousand dollars. And your credit line, the amount you can use, could be as low as half of what you deposit.

Hopefully you get an interest on that deposit but when was the last time that the savings account deposit even came close to the charges on your credit card.

You may also have to pay application and processing fees to get started.

Does this mean to avoid a secured credit card at all costs? Not at all, it just means to watch out for scams. Don’t send money to an organization you know nothing about. Don’t call a 900 number for information. Read the fine print and above all, keep a cool head.

Are you there yet?

Before jumping on the foreclosure investing train considers a few items. Let’s take a look at the benefits first.

You can buy homes from the owner prior the ending of the foreclosure. This stage is called pre-foreclosure. Chris Tunnessen at Foreclosure.com writes, “During this time, the property still belongs to the homeowner, but the lender has initiated foreclosure procedures because payments have not been made and the loan is considered to be in default.

This is a critical time for not only the homeowner, but the lender as well. More important, it represents a tremendous opportunity for you to make money.”

The next stage is when the bank has completed the foreclosure process and owns the property. With a righteous foreclosure list you can get huge bang for the buck at this stage. The reason is simple. Most banks do not want to foreclose on a home. It is an expensive and lengthy process. Once they do complete the process, they want to get rid of their bank foreclosure listings quickly by dropping the price for a quick sale.

A friend of mine bought two of these properties in lovely and expensive Orange County, California, both for about 25 % below the market value. When he sold these properties a few years later, he made more money than people will see working ten years.

But there were problems which brings us to the disadvantages.

The biggest one is that you may have to buy the property “as is.” In many cases as it was in my friend’s case, there are undisclosed and sometimes hidden problems.

People tend to get real upset when they lose their pride and joy, their piece of American Dream, their home to a bank. In these emotional states homeowners of foreclosed properties can take what they consider to be their belongings. And they may go to the extremes.

You need a good inspector on your side who can do more than a shallow survey of the property. This is extremely important especially when you consider the next point.

In some states, it is the law that sellers prepare and provide a Residential Property Disclosure to all buyers. This disclosure brings everything to light so that you know what you are getting in to and if they do not disclose something, you have recourses for the potential damages.

In some states corporately owned homes such as bank foreclosure listings may not be required to have an accompanying property disclosure. So it is up to you to take an expert with you who knows how to find out about hidden and undisclosed problems.

Also the bank more than likely wants to sell the property “as is.” So don’t count on them making any repairs and find out what the total cost of the repairs are before you commit yourself.

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In addition to this obligation there are other terms expressed in the mortgage contract but the most serious breach of contract happens when the borrower does not pay the mortgage payment.

Then the financial institution is forced to begin the steps that can ultimately end with them obtaining the ownership of the real estate property. This procedure is commonly referred to as a bank foreclosure.

In many stories about this unpleasant legal procedure portray the financial institution as a huge, heartless giant who is throwing out little old ladies out in the street on Christmas eve.

The truth is that a bank foreclosure is necessary for the financial institution to maintain its integrity and to protect the interests of its investors, depositors and employees. It is also important to remember that bank foreclosure is a long and tedious process that provides ample opportunities for borrowers to negotiate with the lenders to find alternative solutions to bank foreclosures.

For the most parts banks are in lending money business and not in real estate business and the last thing they want is to end up owning another piece of real estate. Knowing this, if you are facing bank foreclosure, begin educating yourself about alternatives that I will discuss in the next article. Knowledge is one of your greatest allies in a bank foreclosure proceeding.

It was on a Thursday afternoon that I received a call from my real estate broker. He had the unpleasant task to let me know that the buyer needed a few days extension on the escrow to obtain a mortgage loan to complete the purchase of my old home. This was less than five days before the scheduled close of the escrow and the buyer wanted about two weeks extension.

This seemed like a minor difficulty. However, what that broker did not know was that I was in escrow to buy another house and I needed the funds from the sale of the first house to complete the purchase of the second.

I had to call my wife to discuss the options, none of them seemed promising.

Some of the questions we had to deal with were:

• Was there anything the buyer was not telling us that impacted his ability to obtain a mortgage loan?

• How could we close the escrow on our new home without the funds available from the sale of our old home?

• How could we handle two mortgage payments if by some stroke of luck or Karma, we did buy the new home and still had not sold the first home?

• Could we afford to handle two mortgage payments and for how long?

• Would we be forced into renting our old home and how would that impact the later sale?

You can imagine the emotional roller coaster ride we were on. It all ended well with minimal emotional scarring but the following lessons may help you.

• Get enough information about the buyer to confirm both their intent to buy and their ability to buy. Making an offer and even entering escrow does not indicate either. Ask any seasoned mortgage broker and they can tell you dozens of stories about how many things could go wrong with escrow.

• Think about a back up plan even if it is to walk away. Luck and karma are good but I also like good planning.

• Schedule enough time between the closing date of the house you are selling and the one you are buying. This is called staggered closing as opposed to simultaneous closing. The disadvantage of staggered closing is the cost. If the time between closings is too long, you may end up moving twice and renting a place in the middle.

• Ask for enough earnest money deposit so that the buyer of your home has enough to lose for not fulfilling his/her contractual obligation. This was a major factor that helped me. The buyer did not want to lose several thousand dollars for a few days of extension. On the other hand, place as little earnest money deposit as you can on the home you intend to buy. I know it doesn’t seem fair and sometimes, it may not even be possible. But this is a world of negotiations.

• Line up “bridge” financing just in case you end up with two mortgage payments. One mortgage on the house not sold and the other for the one just purchased.

One of the main reasons folks refinance their mortgage is to take advantage of lower interest rates. Let’s take a look at this carefully.

For a $100,000 fixed thirty year loan, the monthly payment would go down about $63 if you went from a 6% loan to a 5% loan. Assuming that you would continue with the same loan without interruption for thirty years, the projected savings would be around $22,582 if you refinanced.

Does anyone stay in the same house with the same mortgage for 30 years?

Based on a government survey that I have to admit is about 14 years old, an average American moves 11.7 times in a lifetime. This would reduce the chances of staying in one home for thirty years very slim. I have moved 14 times so far. How many times have you moved in your lifetime?

The real question is how long are you expected to stay were you are? I leave that up to you to answer. I would mention that if you stayed in the same home for 5 years, the projected savings for the same loan I mentioned before drops down to around $3,780.

This brings us to the second question. What is the mortgage refinancing cost?

Those who have gone through at least one mortgage refinancing know that there could be dozens of costs including but not limited to the loan itself, the inspection process of the home, a clean escrow and title search, etc.

When you ask your potential mortgage company about costs, write them down and at the end ask them if there is any other costs that was not covered in your conversation. Then review the written documents related to truth in lending. Also remember to count any payment that is paid out of the funds in the escrow as cost even though you do not write a check for it directly.

After this type of review chances are that you will pay a few thousands dollars for your mortgage refinance. Once you have that number, you can make a judgment whether or not to refinance.

To make things a little more interesting, at 30% tax bracket and the deductible interest on your loan that projected savings $3,780 I mentioned gets closer to $2,646.

And if you have been in your home for only 3 years, the refinance process resets the clock on a 30 year loan to zero, which means on the basis of staying in your home for thirty years, you are now going to pay an additional $12,883 because of your mortgage refinance.

As you look at these numbers you may notice that refinance based on lower interest rates loses its luster quickly. I don’t mean to say that no one ever should use mortgage refinance as a tool. I am agreeing with what Mark Twain said, “Get your facts first, and then you can distort them as much as you please.”

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Contact your credit union or small loan company, find out if your company offer any short term assistance. I know it could be hard to tell friends and family members about your financial hardship but swallow your pride a little bit and ask them for help. Just make sure that you don’t swallow your pride too much by not paying them on time.

If you are borrowing to pay other debts or other bills, why not just ask your creditors for more time to pay your bills? Find out what they will charge for that service including late charges and additional finance charge or a higher interest rate.