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Super low interest rates aimed at getting consumers to buy mortgages, cars, computers
and skinny, big-screen TVs are encouraging a lot of people who really can’t afford those
slick TVs to whip out their credit cards.

“Low rates make you want to put more purchases on your card. It makes it seem like you have more money,” says Sister Veronica Catherine Ann George of Westin, Mo.
Yep. Even people you might not suspect of running around racking up debt have their moment of weakness. Or, in Sister Veronica’s case, many moments.

“The bottom line was I had too many credit cards. They were easy to get and came whether I ordered them or not. Before I knew it I had almost $18,000 in credit card debt.”

Sister Veronica cut up those cards a few years ago, but millions of other Americans, lured by low-interest-rate credit cards, are still saying, “Charge it!” Others are signing financing contracts for $3,000 TVs, home improvements and appliances.

The Federal Reserve reports some astounding consumer debt figures: the outstanding credit card debt at the end of 2004 was $796 billion, over three times higher than in 1993. Plus there are over 1.5 billion credit cards in circulation — that’s an average of a dozen credit cards per household.

Kay Worden, a certified financial counselor with Consumer Credit Counseling Service, a credit counseling network agency, says that kind of increase is a huge red flag.

“People use credit cards to enhance their lifestyle and increase their level of living. That’s not what credit cards are for; they’re not to keep up with the neighbors,” Worden says.

“Wise use of credit is fine. Does it fit my budget? What’s my goal for paying it off? Will I just pay the minimum? No. I’ll pay $100 per month and get it paid off in six months.”

Chris Viale, general manager of Cambridge Credit Counseling, the outfit that helped Sister Veronica shake her credit card habit, says his business has doubled since 2001. His company gets 40,000 calls a month for credit or budget counseling vs. 20,000 two years ago. But the growing trend is in the number of consumers having to file bankruptcy.

“Right now, we’re seeing double the number of consumers who are contacting us too late — they’re already at the point where they must file bankruptcy.”

What’s the cause of this growing trend?

“We’re seeing the results of promos that started a couple years ago and are ongoing. Many lenders have incredible offers on credit cards and financing contracts: zero-percent interest; six months, no payments due. People assume they can pay it when the time comes. People are completely overextending themselves with unsecured debt. It’s a lack of personal finance knowledge. They don’t have an understanding of how credit works.”

Squandering equity
Another area where something good can turn into something bad is home equity loans. Low interest rates have a record number of homeowners spending the hard-earned equity they’ve built up in their homes.

That’s fine, says Mark Blomquist, director of counseling at Auriton Solutions in Roseville, Minn., if the money is being used wisely instead of financing a Maui vacation and a new home entertainment center.

“A lot of people take equity out of the home, pay off the credit cards and that makes great sense. Take debt at 21 percent and drop it down to 6 percent. But too many people go out and acquire more debt. They max out their credit cards again. Now they have no options; they miss a paycheck and they’re in trouble.”

Worden understands the temptation to use a home equity loan to clear up credit card debt, but she says homeowners need to think hard before doing it.

“They’re putting their house on the line and they’re turning short-term debt into long-term debt. People need to learn to live within their means before they consider tapping home equity.”

If you’re in the market for a new car or truck, don’t let the purchase put you deeper into debt than is necessary. Car dealerships with ads that scream, “Super low interest! or “$2,000 cash back!”, can make folks salivating over the thought of a new vehicle forget about exploring other options that might be a better deal.

“Educate yourself on the fine print,” says Worden. “Why are they offering a super low interest rate or cash rebate? Where are they making their money? It can’t all be for the consumer. Maybe they don’t come down on the sticker price. Calculate the difference. What will it cost me with the cash rebate vs. paying a low interest rate and a lower sticker price? Also, what did you get for the car you traded? Did you lose money there?”

Teased to debt

Viale says credit card issuers need to take some of the blame for the credit problems so many people are having.

“The subprime market that was created a few years ago literally extends credit to just about anybody. When you get pre-approved for a credit card you feel good about yourself, it gives you a sense of self-confidence. But they have teaser rates, 5.9 percent for six months and then it goes up to 29 percent.”

Viale cautions consumers to research the details of anything they’re considering buying on credit. Make sure it’s not a promotion with flexible rates or payments that can rise. And don’t assume that in a year from now you’ll have more income and can pay for it.

Worden says leave plenty of room in your budget for the unexpected.

“Of the clients coming into CCCS for help, we’re seeing an average credit card debt between $8,000 and $11,000. Some counselors have seen credit card debt as high as $100,000. If he’s making the minimum payment, that’s about $200. He sees a big-screen TV and figures he can pay another $100 a month, so he buys it.

“Now he has a visit to the emergency room and a $500 deductible. He puts it on a card. Suppose he’s paying $200 a month for gas and the price of gas shoots up and he has to pay $300 a month. Now, he can’t breathe.”

Sister Veronica is breathing easier. She’s learned a hard lesson, but she’ll soon have her creditors paid off.

“I feel more in control now. I realize credit cards aren’t for me, and when I get through with this mess I’ll never get another one. If they don’t take cash, I don’t need it.

The Appraisal Foundation - USPAP (Uniform Standards of Professional Appraisal Practice) defines an appraisal as “The act or process of developing an opinion of value.” This valuation is a determination of your property’s market value - what it will likely sell for on the open market. So how is this “valuation” determined? Why does the idea of getting an “opinion of value” create so much apprehension about the process? What can you do to make your home appraise better, if anything? What do you do if your home doesn’t appraise well? Below are commonly asked questions that hopefully will give some clarity about home appraisals.

What is a home appraisal?

A home appraisal is a survey of a home by a professional for their opinion of the property market value. In most cases an appraisal is done for a bank when a home is being approved for a loan for the home buyer. The home appraisal is a detailed report that looks at such items as the condition of the home, the neighborhood, what similar homes are selling for, and how quickly similar homes sell (to name a few). The appraisal may be a sales comparison or a cost/replacement opinion of value. There is also an income appraisal, but this is done primarily with commercial properties. The sales comparison will look at other properties in your neighborhood and what they are selling for and then figure how they compare to your home. With a cost/replacement opinion of value the appraiser is looking at what it would cost to replace the home if destroyed; this is more commonly used for new homes.
Important Note: An appraisal is not a home inspection! Appraisers only look for major concerns, they do not examine the home’s full condition (i.e. examine the roof, appliances, etc.). For this reason a home inspection should still be requested by the home buyer before purchasing the home.

Who is an appraiser?

Appraisers are licensed by individual states and are held to strict ethical standards. Appraisers are the third party whose purpose is to give their opinion of the market value of a home. Ideally the appraiser should not be connected with anyone involved with the home transaction.

Who picks the appraiser?

When an offer is made on the house the appraiser will normally be determined by the lender. The lender may have their own appraiser or contract with an independent party. Sometimes the bank will allow the seller to choose an appraiser, but only when that appraiser is already well known to them.

Can the seller get their own appraisal done?

Yes. The home seller may commission their own appraisal before selling the property to determine cost. However, this will cost anywhere from $300-500 and the bank most likely will not accept this appraisal but request another to be done by their own contact.

If not by appraisal, how do I set the price for my home?
Home sellers can set the price of their home with the help of a REALTOR(r) using a comparative market analysis (CMA); the CMA is not a substitute for an appraisal but will give a good idea on setting an asking price (usually 5-10% more than the market price for your area).

How can you prepare your home for appraisal?

Prepare for your home appraisal like you would for a home sale. You are in essence re-selling your home. Make sure all the maintenance you can do is done; this includes clearing and trimming the yard to painting the house - hopefully most of this was already done for the sale and should at most need only a minor touch up. Be polite to the appraiser and give them full access to your home; work with them not against. Inform the appraiser of your home improvements. Let them know about the new windows, new floors, the finished basement, etc. And finally, don’t be caught off guard. Do your homework! Know what similar homes are selling for in your neighborhood. This is something that should be done before setting your selling price. But in case your home has been on the market for a month or two, keep your research current. Let the appraiser know about similar homes and what they have sold for, especially if you know why a particular home that is like yours sold for less, let them know why your house is different.

What if the appraisal is low?

An appraisal that comes in lower then the asking price can jeopardize the loan and ultimately the sale. The lender will generally only loan up to 80% of the appraisers opinion of the home’s value. The most common result is that the seller can lower their asking price. Or the seller and buyer can negotiate and meet at a price in-between. If the buyer still wants the home badly enough, they may put more money down; but this may still not guarantee their loan as the lender will still view it as negative equity. The final option is to dispute the appraisal. Before disputing with an appraisal, do your homework. Look at the homes in your community that have sold in the last 6 months and see what the differences are that may make your home more valuable. Perhaps there is a sale that the appraiser missed, perhaps other homes do not have the renovations and improvements you have done, perhaps the appraiser is not familiar with your type of home or neighborhood, etc. Building this case may be a good idea even before the appraisal. This will prevent you from getting rushed by the timeline after the appraisal is done. This is something you can ask for your REALTOR(r) to help with as they usually have a vast knowledge of your market area. Once you have the case, present it to the lender. They will likely get a new appraiser or request the same appraiser to reconsider it. If you do not want the same appraiser, make sure to specify this and ask for a second opinion.

What other aspects of the appraisal can hurt the loan?

By in far, the appraisers opinion of the home’s value being lower than the asking price is the most detrimental. However, other factors may cause the lender to refuse the loan or require further contract negotiations. These concerns would result from property conditions that may require the home buyer to do more investing in the property to keep it valuable, such as upkeep on a private road. Your REALTOR(r) can help you with these types of objections and altering the contract to meet the lenders concerns.

Home Equity Line of Credit Loans

Home equity line of credit loans are a way of using the money that you’ve invested in your mortgage by borrowing against it. Essentially, a home equity loan is a ’second mortgage’ - a loan secured by your property. If you don’t make good on your payments, the lending company or bank can force the sale of your house to recover their money.
There are two major types of Home equity line of credit loans - home equity loans and home equity lines of credit, also called HELOCs. Most lenders that offer home equity loans offer both kinds. A home equity loan for $10,000 and a home equity line of credit for $10,000 are two completely different animals though they have a lot of similar features.
Home Equity Line of Credit Loan

If you apply for and are granted a home equity loan for $10,000 at 7% APR for 15 years, you will receive a check or a deposit to your bank account of $10,000. That is the full amount of the loan that you can ever draw on that particular application. Depending on the terms agreed upon, you may have one to several months before you have to begin repaying the loan. You’ll pay a fixed amount every month until the full amount of the loan and the interest charge is paid off. You’ll know from the very start how much you’ll be repaying.

Home Equity Loan - Line of Credit

A home equity line of credit - a HELOC - is much more like a credit card. When you apply for and are granted a home equity line of credit, the bank establishes a ‘line of credit’ - which functions just the way that a ‘credit limit’ does on your credit card. You may receive special checks or a plastic card with which to access your line of credit - but you don’t receive the full amount at one time.

In fact, you don’t have to take any of it immediately. You can draw on the line of credit at any time, up to the full amount of the line of credit throughout the agreed-upon life of the loan. Suppose that you’re doing some home repairs. You can use your home equity line of credit to pay for $2,000 worth of roofing tiles. That leaves you $8,000 in your line of credit. Three weeks later, you can use your line of credit to pay for $4,500 worth of windows - and still have $3,500 left that you can borrow against.

If you then start paying back on your home equity line of credit, that money becomes available to you again. If you pay back $1,000 of what you’ve borrowed, you now have $4,500 on your line of credit.

A home equity line of credit has two ‘phases’ - there is the draw period, during which time you can draw against the credit limit as long as you stay below the limit. During that time, you can elect to only pay the interest that accrues - or you can make payments on the principal to free it up. Once the draw period is over, you go into the repayment period. During the repayment period, you can’t draw against the line of credit any longer, and must make full repayment.