Need advice about paying off your debts? TODAY financial editor Jean Chatzky gives answers to the most common consumer debt questions.
Q: My husband and I purchased our home two years ago. We have received numerous solicitiations promising to lower our interest rates, get extra money out of our home's equity and lower our monthly payments. Does it makes sense to refinance in the current market?
A: Whether or not it makes sense to refinance depends on the interest rate now. Bankrate.com has a nice tool on their Web site that lets you calculate whether or not it's in your best interest to refinance. Right now, 30-year fixed rate loans are hovering around six percent. That means if your loan is higher than six and a half percent, you may want to shop around.
That said, according to the FTC many of the solicitations are deceptive.
Some are made to look like they are from your own mortgage company that has decided to lower your rate, when they are really from other lenders wanting you to refinance with them. Many don't disclose the true terms of the deal as the law requires, so you should always follow up with questions. Be wary of mail that touts a low "fixed" rate but doesn't mention how long it will be fixed (it can be an introductory period as short as 30 days).
Also, an exceptionally low rate should be a red flag and is often a payment rate, not the interest rate, and only applies during the loan's initial period. Some offers also fail to disclose the terms of repayment, and things like whether the payment will increase and what a final balloon payment might be. And, finally be very aware of two types of language: The exclamatory type. Solicitations that say things (particularly with exclamation points) like: Mortgage rates near 30-year lows! Rates as low as 1%! You are paying too much! Who doesn't want to reduce their mortgage payments? Loan amount $300,000 — pay only $900 per month!
Also, watch out for mail with language like: Important Notice From Your Mortgage Company. Open Immediately — Important Financial Information Enclosed. Please do not discard — account information enclosed. Appearances can be deceiving. Mailers that have information about your mortgage and your lender may not be from your lender at all, but rather from another company that wants your business. Companies can legally get your information from public records. Before you respond to any offer, review it carefully to make sure you know who you're dealing with.
Q: I have a 2-year-old son and my husband and I have put $6,000 in his savings account. When we have saved $10,000, we want to put it in something that is long-term and would give a high interest rate, but would not have high penalties for taking money out. We do not know the best option to get the most for our investment.
A: I have a question for you: Why are you waiting until it reaches $10,000 to do something long-term when you could do something long-term now? I'd start a 529 College Savings Plan. (The Web site savingforcollege.com can help you find a good one.) This is a good choice for many reasons. First, control of that money stays with you rather than with him. Putting too much money in a child's name can hurt when it comes to receiving financial aid, you can get hit with the kiddie tax, and when your child reaches the age of majority he could use it for whatever he wants — not college. You want to be sure that the money is used for education.
Q: Our mortgage was $4,500/month. We were not able to pay our property taxes. Our new lender refinanced us at a lower rate, but we owe thousands of dollars in property taxes. When we originally bought the house, the "shark lender" told us that we could refinance and add our taxes into our loan. We are not able to do this. Are we going to lose our home?
A: You should be able to work out a payment plan with the local tax collectors, just like you might work one out with the IRS. The one hitch is that they usually want this year's taxes paid before next year's come due. That may mean that you'll have to find the money somewhere — by working part time, borrowing from a relative, or selling other assets (like that second or third car). As burdensome as that may sound, remember anything you do for a short while is nowhere near as bad as losing your home.
For everyone else out there, this is a cautionary tale. You shouldn't buy anything — a house, a car, a pet — without asking yourself to look beyond the price tag and consider the cost of not just purchasing it, but owning it. With the house: What does it cost to live there in taxes, insurance, utilities, lawn care, upkeep? Harvard's Joint Center of Housing Studies estimates you should bank on putting one to two percent of the value of your home into maintenance each year.
Q: I see a lot of questions about credit score and debt, but none on judgments from medical bills. I have a judgment on my credit. I want to get this paid off but I am unable to at this time. I have no credit cards and don't want to try to take out a loan. How can I do this and repair my credit score?
A: I know we all talk so much about credit scores that they seem to be the most important thing. In your case, it is not. The most important thing is figuring out a way to pay that bill so that you can get medical care in the future if you need it. Call that doctor or hospital and try to work out a payment plan that you can actually stick to. But do this knowing that once a judgement is on your credit report, paying it off will not necessarily translate to a higher score. That's true not only of judgments, but of collections as well.
Now, back to your score — if you're concerned about it, it's probably because you want to take out a mortgage or a car loan in the future. To bring it up, it would be a positive to have at least one credit score — it will help you establish a more well-rounded credit file. But because you don't have a good score right now, don't look at a traditional credit card, look at a secured card. You'll be asked to deposit enough money into a bank account to cover the credit limit (you can keep it low), but if you pay on time for 18 or 24 months, many secured cards will convert to traditional cards. Twenty-four months from now, that judgment will have paled; if you can do this as well, your score should be significantly higher.
Couldn't get your questions answered here or on-air? To locate the nearest National Foundation for Credit Counseling (NFCC) agency near you, call 800-388-2227, or visit their Web site at debtadvice.org. Additional resources can be found at msnmoney.com.
Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .