Highlights

• There is more than one way to put extra money toward mortgage principal.
• Explain that the extra money is for principal and not for future payments.
• Talk to the lender first if you want to prepay a six-figure lump sum.

A lot of homeowners want to pay off their mortgages before the end of the loan term. This is especially true for borrowers who want to repay their home loans before retirement. There are a number of ways to accomplish a mortgage payoff.

The two easiest ways to put more money toward a mortgage are to set up automatic payments from a bank account or use the lender’s website, explains Jerald Banwart, senior vice president of customer operations at Wells Fargo Home Mortgage in Des Moines, Iowa.

“For those who have a plan to pay off their loan, we will go out and withdraw the money from your account to make your payments … or you can go online anytime on our website,” he says.

Automatic payments can be made monthly, bimonthly or biweekly to match the borrower’s employment pay periods, if that’s the borrower’s choice.

Extra money can be paid in other ways as well. Banwart says borrowers can add an additional sum to a scheduled payment, mail in an extra check between payments, call the bank’s customer service telephone number, or even walk into a branch and arrange the transaction in person with a teller.

Loan must be current

Technically, what most homeowners think of as an extra payment isn’t really a payment because it’s not one of the scheduled installments. Rather, it’s extra money applied to principal, called “curtailment” in bank parlance.

“They’re not really making another payment,” Banwart explains. “They’re sending in funds to pay down the principal.”

Borrowers generally can apply extra funds to principal as long as their loan is current, meaning all the scheduled payments are up to date, adds Vicki Parry, assistant vice president of mortgage and equity servicing at Navy Federal Credit Union in Vienna, Va.

If a prior payment is late or has been missed or the loan is delinquent, the extra funds must be applied to make up that difference before additional principal can be paid.

The same isn’t true for an escrow or impound account used for property taxes and homeowners insurance, however. Banwart says a shortfall there can be paid in a lump sum or spread over a number of future payments, but it needn’t be made up in full before additional sums can be applied to principal.

Clear instructions

Borrowers who want to send in extra money don’t need to call the lender or loan servicer ahead of time.

“There’s really no reason to call and say, ‘Hey, I’m going to do this,’” Banwart says.

That said, communication is crucial to ensure the additional funds are applied to principal and not to the next scheduled payment. Clear instructions are especially important if the borrower’s intention might not be clear, he adds.

“As long as you have a way of telling us either via a coupon or online or through the branch, you can be assured it will be done correctly,” he says. “It’s when you just send in a check and don’t say what to do that issues can arise. We’re doing our best to guess what you wanted.”

Two situations likely to cause confusion: The borrower wants to pay an extra amount exactly equal to the scheduled payment, or the borrower wants to pay an extra amount right before the next scheduled payment is due.

Curtailment limits

Borrowers who want to apply a relative large extra sum to their principal — perhaps because they’ve received an inheritance, bonus or other windfall — can do so, but a few cautions are in order. Some lenders limit the amount that can be paid online to protect against fraud or a typographical error. Wells Fargo, for instance, caps online principal curtailment to $99,999 per transaction, in part to guard against customers accidentally trying to pay $100,000 instead of $10,000.

Another caveat is that the additional money can’t equal or exceed the loan balance, according to Hugh Suhr, a spokesman for SunTrust Mortgage in Atlanta. A loan payoff figure is a moving target due to interest calculations, and thus it’s best discussed with the bank in advance.

No money back

Here’s one more tip: Borrowers who send in extra money by mistake might be able to reverse that error if they contact the lender with haste. But extra money sent in long ago generally can’t be reapplied to current or future payments if, say, financial difficulties arise.

“If it’s within 30 days, it’s typically not an issue,” Banwart says. “But if someone is coming back and asking for the last five years of curtailment, the answer is going to be ‘no.’”

I’m turning 50 this year and currently am 18 months into a 15-year fixed-rate mortgage. Although I have an attractive interest rate of 3.625 percent, in today’s environment I can refinance, take about $25,000 cash out and maintain the same payment. I could use the cash toward catching up on my 401(k), individual retirement accounts, then other expenses and investment as required. This seems to be a cheap way to do this, so the cash-out refinance seems a no-brainer that would add only about 18 months to my original mortgage. Thoughts? Thanks.
– Mark Mortgage

Dear Mark,
As I write this, Bankrate’s national average for a 15-year fixed-rate loan is 3.48 percent. For you to have the same payment on a new cash-out refinance and new 15-year fixed-rate mortgage, the interest rate would have to be around 2.625 percent, or a full percentage point lower than your existing loan.

If you can justify the refinancing on its own, then the cash-out decision comes down to whether you can expect to earn more after-tax on your investments than you pay after-tax on your mortgage. You’re borrowing to invest. That makes sense only when you earn more on your investments than you pay on your loan.

I did a little back-of-the-envelope calculating. It may not exactly represent your situation, but it should be close. I assumed you could get the new mortgage at 3 percent.

The cash-out refinance has you paying an additional $2,545 in total interest expense. You realize $3,531 in savings from refinancing the existing mortgage but effectively pay an additional $6,076 in interest expense to borrow the $25,000 and repay it over 15 years. Together, those numbers give you the net increase in interest expense of $2,545. I’ve ignored the tax impact and any closing costs.

The refinancing decision on its own is a nip-and-tuck, depending on the loan’s closing costs and how long you plan to be in the mortgage. You have to decide if your after-tax investment yields are expected to be higher than the after-tax rate on your mortgage before you commit to the cash-out part of the new mortgage.

Debt Collector Watch
It seems that debt collectors have caught on to how difficult it is to hide on Facebook. According to MSN Money, debt collectors are infiltrating social network pages, contacting you, your friends and family through the site to force you to pay what you owe.

One debt collection agent, Michelle Dunn, confirms that this is a strategy used by debt collection agencies today. “If you look like a really good-looking girl, a lot of people would accept a friendship even if they don’t really know the person,” she explains. Luckily the The Fair Debt Collection Practices Act, designed to protect consumers against abusive practices by the debt collection industry, does offer you some protection in this area. Although it is not forbidden for collectors to post on your Facebook wall or ask your contacts of your whereabouts, they cannot post about your debt, because that is a serious breach of privacy.Nevertheless, it should be common practice not to accept friend requests from people you don’t know, and of course, if you do owe money, in order to avoid being found and potentially harassed on Facebook, you should answer mail or calls or from collection agencies in the first instance. Ignoring the problem will not make it go away.

Job hunting
When you’re applying for a new job, polishing up your resume may not be enough anymore. Rather, you should check what information is out there about you on the web. Facebook profiles are routinely being checked by your future employers. According to a survey carried out by Careerbuilder in 2009, 45% of employers check your social media presence when hiring, and some 35% of employers reported that they have found content on social networking sites that meant they did not hire the candidate. As social media has only grown over the past few years, we can only imagine that this figure would be much higher today.

More than half of the employers questioned said that provocative photos were the biggest factor contributing to a decision not to hire a potential employee, while 44% of employers pinpointed references to drinking and drug use as no-go areas. While this might seem obvious, you can never know what a company might deem “provocative.” It seems wise to keep all content absolutely clean, otherwise who knows what job prospects you are thwarting.

Passwords Please
In an even more worrying development in Maryland, a man has recently been asked to hand his Facebook login details over to his employee. He was outraged and made a complaint to the American Civil Liberties Union. As a result the updated policy at the Maryland Department of Corrections states that job candidates won’t be asked to share their login or password information, but job applicants will be asked to log into Facebook “voluntarily” as an interviewer looks over their shoulders.

Legal Snooping
Beware what you post on the web, because, as a Staten Island woman recently discovered, the legal profession is snooping too. Dorothy McGurk claimed that she couldn’t work, rarely left home and didn’t socialize because of injuries from a 1996 car accident. The dancer, on disability, had been seeking lifetime alimony of $850 a month from her husband due to this accident. Unfortunately, Facebook revealed that all was not as it seemed, and showed that she was in fact working as a belly dancer. When the Facebook evidence came to light as evidence in court, the alimony was lost.

The Bottom Line
Unfortunately, many of us fail to realize that content we post on the Internet is really out there in the public domain. If you do want to continue using Facebook, what can you do to protect yourself from unwanted prying eyes? Be sure you’ve checked those privacy settings. It is sensible to keep any personal content away from the public eye. Also, be careful what you are making available to your networks. It might seem safe enough to let people who graduated from the same college as you view your profile, but this will include several thousand – if not tens of thousands of – people who you have never met nor know, and who may have ulterior motives when checking out your profile. Keep it clean and professional. Ask yourself: would you want your future employer to read this? If the answer is no, don’t post it. There’s really nowhere to hide on the world wide web.

Bach heavily promotes the idea of homeownership, saying that everyone needs to own where they live. “About 40 percent of Americans are renters,” says Bach, “and the fastest way to wealth in America is buying where you live.”

Bach cites some shocking numbers to back this up. “The average renter has a median net worth of $4,000, and the average homeowner has a median net worth of about $150,000.”

Manning also emphasizes what a good time this is to build wealth through debt. “This is the most advantageous time ever to be in debt,” says Manning, “in terms of opportunities to get low-interest loans or to renegotiate or refinance.”

Duh, debt?

One of the reasons so many Americans seem mired in bad debt (Bach reports that the average American carries approximately $8,400 in credit card debt) is that financial education is practically nonexistent. “This type of commonsense stuff isn’t taught in school,” says Bach, “and most Americans don’t realize how bad high-rate credit cards are hurting them.”

Fitzgerald advises teaching your children the difference between good debt (debt that’s used to buy assets that grow in value over time) and bad debt (debt that’s used to buy things that will lose value) early on.

Gelb opts for a more hands-on approach. “Give your children an allowance (without strings) beginning when they’re in kindergarten and offer them the opportunity to perform extra jobs around the house for money. Stop buying them everything, and teach them how to make choices with their own money-buying decisions.” The mistakes they make will help them learn and grow.

“People are getting in debt before they have a job,” says Manning. “Education is important. We used to encourage kids to save, and that has been missed. Students now refer to their credit cards as ‘yuppie food stamps’. They see cards as entitlement, and see they will be in debt all their lives.”

Fitzgerald recommends teaching by example. Treat credit cards like emergency safety nets and your children will likely learn some money management skills. “If you have to use your credit card, immediately revise your budget, paring back on nonessential spending. Allocate the saved dollars to a pay-off plan to bring your debt balance down to zero as soon as possible,” she says.

Leslie Hunt contributed to this story.

Not to mention what that debt could potentially do to your credit rating. “Total personal debt should not exceed 36 percent of your total income,” says Gelb.

Keeping the debt-to-income ratio in mind, it’s also important not to miss payments. “Missed payments are trouble,” he says. “A representative of Citibank said if you don’t pay within 30 days, they report that to the credit bureaus.”

When it comes to buying durable goods that won’t contribute to wealth generation, Bach offers a basic rule of thumb. “My grandma used to say that if you’re going to buy something that doesn’t go up in value, and you can’t afford to pay cash, then you can’t afford it.”

Exacerbating the bad debt factor is that people will apply for store credit for the savings offers that say if you open a credit card account today, you can take 10 percent to 20 percent off the cost of your purchase. What people often don’t realize is how much of that savings will be destroyed by the high interest rate on the card if they fail to pay for the items immediately.

“You can open a store credit card account,” says Bach, “and what they’re not telling you is that after the first few months, the rate jumps to 20 percent or greater.”

Driving into debt

Another bad debt area is auto debt. While most people need an automobile, and the ultimate cost of an auto is higher than many people can pay in one lump sum, the way people go about it — namely, purchasing more car than they need — turns it into bad debt.

When is it worth it?

“What we would normally consider bad debt can turn into good debt in certain circumstances,” says Catie Fitzgerald, a personal finance coach and registered investment adviser in Henderson, Nev. “If you use debt to buy a car that gets better gas mileage than your old vehicle, you could end up better off financially.”

Bach considers auto debt a Catch-22. “People borrow to buy cars before homes,” says Bach, “and that’s unfortunate. For most people, their first major loan is a car loan. That’s guaranteed to go down in value. So you really want to borrow less. For example, instead of rushing out to borrow to buy a $50,000 BMW, you’d be better off buying a $25,000 car.”

The best debt

The best type of debt is debt that builds wealth over the long run, and the No. 1 example of that is mortgage debt.

• Paying bills late
• Not paying the minimum amount required
• Keeping debt levels too high
• Owning too many credit cards
• Not alerting current or potential creditors if you’ve moved or changed names
• Not periodically checking your credit reports
• Not using your full legal name in financial documents

Ways to Improve Your Credit Score

• Pay your bills on time
• Keep your balance low in relation to your available credit
• Make more than the minimum payment
• Don’t open too many new accounts over a short period of time, especially if you have a short credit history
• Pay off credit card debt rather than moving it around to other cards
• Review your credit report regularly and correct errors

Reasons You Should Care About Your Credit Score

• Decides if you will be approved for credit cards, loans and mortgages
• What interest rate you’ll get on these loans
• The cost of your car insurance
• In some cases, whether you get that job or apartment you’ve been hoping for

Top 5 Credit Myths

• Myth: My score will drop if I check my credit
• Myth: Once I pay off a negative record, it will be removed from my credit report
• Myth: My poor score will be with me forever
• Myth: Paying off my debt will add 50 points to my credit score
• Myth: Closing old accounts will improve my credit score

The amount of personal debt in this country is ever-increasing, and a large part of the reason is that credit has never been easier to get. Whereas credit card issuers previously looked for customers who could repay, today card issuers relish the chance to reel in those who’ll continuously charge beyond their means at 18 percent or 20 percent.

But debt is a complex concept. Not all of it is good — a fact a surprising number of Americans fail to realize until they’re in the hole — and yet not all of it is bad. When used intelligently, debt can be of tremendous assistance in building wealth.

One of the secrets, therefore, to being smart with your money is to differentiate between good debt and bad debt. While the differences often seem logical, it is a logic that apparently is missed by many Americans.

“When you buy something that goes down in value immediately, that’s bad debt,” says David Bach, CEO of Finish Rich Inc., and author of “The Finish Rich Workbook.” “If it has no potential to increase in value, that’s bad debt.”

Good debt

“Good debt is investment debt that creates value; for example, student loans, real estate loans, home mortgages and business loans,” says Eric Gelb, CEO of Gateway Financial Advisors and author of “Getting Started in Asset Allocation.”

Robert D. Manning, a professor of finance at the Rochester Institute of Technology, also recommends taking on debts that are tax-deductible and debts that produce more wealth in the long run.

“If you are talking about reducing current debt, that’s where it starts to get nuanced,” says Manning. “If you take a home equity loan because you have 17 percent credit card, and you go with a 6 percent loan that’s tax-deductible, that’s good debt.”

These general rules of thumb set some clear delineations — buying a home or refinancing to get rid of excessively high rates is usually good debt, as is generating debt to buy high-return stocks, bonds and other investments.

Bad debt

The concept of bad debt comes in when discussing the purchase of disposable items or durable goods using high-interest credit cards and not paying the balance in full.

“The trouble is most people are not organized enough to retire the entire balance before the due date,” says Gelb.

Every month that you make a partial payment on your credit account you are charged interest. The disposable or durable item you purchased continues to lose value, and the amount you paid for it continues to increase.

“When you buy clothes, they’re probably worth less than 50 percent what you pay for them when you walk out the door,” says Bach. “So if you borrowed to pay for them, that’s bad debt.”

Continued In Part 2

WHO
The settlement says that it will offer relief to an estimated 1.5 million home owners.  It does not currently specify how far underwater your home must be to qualify.)  At least $17 billion of the assistance funds, provided by the banks, will be distributed to borrowers in the form of a principal reduction of up to $20,000 or a refinance resulting in lower interest rates.  About an additional 750,000 people whose homes were improperly foreclosed on between 2008 and 2011 will receive a cash payout averaging $1500 to $2000.

Unfortunately if your loan is owned by either of the government mortgage giants, Freddie Mac or Fannie Mae, you do not quality.  The settlement applies only to privately held mortgages issued by Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo, or Ally Financial.  Another nine mortgage lenders are expected to join the agreement over time.

WHEN
Home owners must be patient for this aid.  Banks are required to comply within the next three years or face penalties, but the process is lengthy.  It will take at least six to nine months to identity qualified borrowers.

HOW
To obtain this mortgage relief, you must meet the requirements.  Your lender should get in touch with you.  If you feel you qualify for assistance, contact your lender to see if they have any information.  Also, start gathering the required paperwork – including pay stubs, tax returns, and asset statements – to expedite the process if and when you become eligible.

Good Luck!

Roxanne Gennari, a sales associate with Coldwell Banker Residential Brokerage in Princeton Junction, N.J., says local real estate markets across the country vary in their strength.

"Since no one knows when the market will truly level out and values will start to climb, buyers are trying to insulate themselves from buying an overvalued home," Gennari says. "Buyers are looking for the best deal they can get. In many cases, they only want to buy if they can get a house at a certain price."

Buyers want a first-floor bedroom

Whether it is a master suite or a guest room or even a flexible room that can be converted into a bedroom someday, many homebuyers look for a first-floor bedroom. This trend, predicted for a decade or longer, finally seems to be coming to fruition now that baby boomers are getting older.

"The baby boom generation wants a first-floor bedroom because they are forecasting that they will stay in their home longer," says Gary Rogers of Re/Max on the Charles in Waltham, Mass. "In addition, we're seeing more extended family members moving in together, especially since people are staying healthy longer and living longer."

Leisa Frye, a Realtor with Better Homes and Gardens Real Estate Metro Brokers in Roswell, Ga., says homebuyers in her area prefer a guest suite on the main level rather than a master suite, unless they are elderly.

"Buyers in their 30s, 40s and 50s usually want the master bedroom upstairs, so they can be near their kids," says Frye. "If there are no health issues, they want to be upstairs, but they also want a bedroom and a full bath on the main level for their elderly parents and in-laws who live with them or even just visit."

Roxanne Gennari, a sales associate with Coldwell Banker Residential Brokerage in Princeton Junction, N.J., says local real estate markets across the country vary in their strength.

"Since no one knows when the market will truly level out and values will start to climb, buyers are trying to insulate themselves from buying an overvalued home," Gennari says. "Buyers are looking for the best deal they can get. In many cases, they only want to buy if they can get a house at a certain price."

Buyers want homes with open floor plans

Buyers in Georgia look for homes built in 2000 or later, mostly because the floor plans of 21st-century homes reflect the way people live today, says Leisa Frye, a Realtor with Better Homes and Gardens Real Estate Metro Brokers in Roswell.

She says buyers don't particularly want formal living rooms because they don't have formal furniture. A living room frequently is converted into a study or another family room.

"Everyone wants an open kitchen and family room, or at least a direct view from the family room into the kitchen, so that the family can be together even when someone is cooking," Frye says.

Buyers in the San Francisco area prefer a great room and an open floor plan, says Ben Coleman, broker/owner of Century 21 Hartford Properties.

"A lot of older homes in this area weren't built to be open, and have small rooms and small closets," Coleman says. "Those homes that have been renovated or can easily be changed into a more open design are extremely desirable."

Coleman says natural light is important to buyers, especially in combination with open rooms.