When considering applying for a line of credit, the pros include diversifying your credit sources, which has a positive impact on your credit score. It also allows you to access funds you may need for large purchases, like buying a car. Conversely, a line of credit is too often treated like free money. Such easy access to funds leads some borrowers to rack up consumer debt for things they don’t really need. In addition, outstanding balances will limit borrowing power on other loans, such as a home mortgage.

If you are considering withdrawing from your 401(k) or retirement savings to pay down debt, there are a few things to ponder. If you have a big debt to pay off, you may choose to either put off contributing to a retirement or savings fund, or to withdraw money from an existing fund. On the upside, paying down debt is a good thing, and the sooner it is paid off, the greater the savings in interest expenses for the borrower. However, withdrawing funds set aside for retirement will rob you of the benefits of compounding. Also, pulling the money out of your savings could leave you in a very bad position should something unexpected, like a job loss or illness. The earlier you start saving, the more money you will be able to accumulate for retirement. Properly invested, money saved now is almost always better than more money saved later.

When making choices on investing your money, there are a few things to look at. If you are nearing retirement age, a better option might be investing in invest in risk-free or nearly risk-free vehicles. This way, the risk of losing your hard-earned cash is extremely low. Although you are missing out on the opportunity to have your money work for you, the closer you are to retirement, the more conservative you should be in order to protect your investment. The younger you are, the riskier you can afford to be, because you have the time to make up any losses, and the higher risk may be warranted because it helps combat the effects of inflation on your portfolio’s gains.

If you are contemplating paying off a major loan, that’s a wonderful accomplishment that will save you months, or years worth of interest. But if you are thinking of going this route, make sure you take a look at your interest rate. Some loans have such a low interest rate that you’d be better off putting your money in a savings account that earns you a higher return and paying off your debt monthly. This is a good idea if your savings interest rate is higher than your debt interest rate and you are disciplined enough to pay the debt off on time, every month, and not to spend your money on luxuries instead. Remember, responsibly paying off monthly debt helps you to establish a good credit history. This is especially helpful if you don’t have a credit history or you are trying to rebuild a bad one.

Financial choices often have hidden consequences. Make sure you do your research so your financial situation will be the best it can be.

For example, if in your quest to remain debt free, you are turning down “good debt”, you are doing yourself a disservice. Good debt is debt that allows you to leverage your investments, for example, taking out a mortgage to buy a house. This is a financially beneficial move because houses and property tend to appreciate over time, and owning your home can lower your living expenses compared to renting. Another example would be taking out a student loan for post-secondary education. While student debt can be a huge responsibility, it is also an investment in yourself that boosts your potential earning power.

It is important to remember that any debt that is excessive or used to purchase wants instead of needs should likely be avoided. Additionally just because the debt is good instead of bad, does not mean that you should borrow all of the money that is available to you. Use good judgement when you make decisions to borrow money. Even if the debt is considered a good debt you should work to pay off your debts as quickly as possible.

One of the most important real estate tips involves knowing your costs. You should plan for extra expenses, at least $2,000 for “unexpected costs” when buying any real estate. Also, you need to know what your ongoing costs will be to honestly compare properties. This is true whether you are buying a home for yourself or investing. For example, property tax and insurance rates can be very different from one property to another, especially if they are in different towns. One house can cost twice as much to heat. Mortgage rates can be substantially higher on a home if it is classified as a mobile home (and some double-wide mobiles look like standard “stick built” houses). Calculate what you’ll be paying at closing, of course, but also know what your ongoing expenses will be.

By no means are we out of the woods just yet, but we are beginning to see glimmers of hope, according to the White House. Banks are freeing up lending and homeowners are taking advantage of low mortgage rates.

Global economists are in agreement that the recession has reached the bottom or is very close to the bottom. Some are saying we have begun a very weak recovery already and are predicting a moderate improvement in 2010.

It seems almost self-evident that everyone borrowed too much, creating a level of debt that is crushing our economy.

Do we really have the hope that the economy may pull out of recession by the end of 2009?

US officials are hoping that the sharp decline in economic activity may be slowing, but 2009 continues to be a difficult year. In a report today, employers cut a larger-than-expected 467,000 jobs in June and the unemployment rate climbed to a 26-year high of 9.5 percent.

How much worse do things have to get before they start getting better?

Income Protection Insurance

In its most popular form, income replacement is called ‘disability’ insurance, which helps replace income for those who are injured and unable to work.

There are insurance companies that will sell unemployment income protection policies, however. You can choose a policy that will start replacing a portion of your income, usually about 1/2 or 2/3 of your normal monthly earnings, approximately one month after you become unemployed. Rates can be high for this insurance, but the money you receive while unemployed can save your home and support your family while you find other work.

Mortgage Protection

This type of insurance will continue to pay your mortgage or a portion of your mortgage should you become disabled and unable to work or become unemployed. Though most mortgage protection insurance policies pay your full mortgage upon your untimely death, there are policies available that will simply take over payments if you become financially unable to do so.

Savings

You should have an emergency savings account with at least three to six months of living expenses available. If you suddenly lose your job, you will need this savings account to continue paying your mortgage and supporting your family. If you do not have an emergency savings account, set one up today and begin contributing funds into it as soon as possible.

Annuity

Annuities are a type of investment option, usually through insurance companies, where you pay a lump sum or a monthly amount into the annuity, and at an agreed time, the insurance company begins paying you a regular monthly income. The payments to you are based on the interest returns on your money and how long you wish to receive payments. If you have a lump sum of money that you can afford to put into an annuity, the returns can be greater than leaving the money in a small interest-bearing savings account.

Protecting your income due to unforeseen events should be a high priority for everyone. Save or buy insurance or an annuity so that you will have income if you are out of work for any reason.

When you file either a Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an order (called the Order for Relief) that includes a wonderful thing known as the “automatic stay.” The automatic stay directs your creditors to cease their collection activities immediately, no excuses. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending—typically for three to four months. However, there are two exceptions to this general rule:

1. If the lender obtains the bankruptcy court’s permission to proceed with the sale, they will file a “motion to lift the stay”, and you may not get the full three to four months. But even then, the bankruptcy will typically postpone the sale by at least two months, or even more if the lender is slow in pursuing the motion to lift the automatic stay.

2. Unfortunately, bankruptcy’s automatic stay won’t stop the clock on foreclosure notices already filed. Most states require advanced notice before a foreclosure sale can be held (or a motion to lift the stay can be filed). For example, if you live in one of the states that does and receive a three-month notice of default, then file for bankruptcy after two months have passed, the three-month period would elapse after you’d been in bankruptcy for only one month. At that time the lender could file a motion to lift the stay and ask the court for permission to schedule the foreclosure sale.

If your home is in foreclosure, Chapter 13 Bankruptcy will stop the foreclosure any time prior to the sale. Bankruptcy does not eliminate mortgages on your property without payment. Rather, bankruptcy will restructure a plan to repay the amount that you are behind on your mortgage.

In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in chapter 13.

Keep in mind that some of your creditors may have a “security interest” in your home, automobile or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.

There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth. In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt.

Considering everything involved in protecting your home from foreclosure, you should seek legal council from a bankruptcy attorney.

by Mike Licht, NotionsCapital.com

The nation’s mortgage melt down has evolved into America’s real estate crisis amid falling home prices, record foreclosures and weakening consumer confidence. This threatens to produce the nation’s worst economic disaster in history. Do economists and the government know how to prevent further hardship, or are they on a wild goose chase funded by our tax dollars?

Before you opt to refinance, do your financial research. A little due diligence goes a long way to big savings. There are many factors to consider before you refinance.

Negotiating the best borrowing rate starts with a strong credit score. You can achieve this by paying your bills on time, cutting back on borrowing and maintaining a low loan balance by as much as 30% of your limit. You don’t need a flawless credit record, but you need a credit score of 720 to access the lowest interest rates.

Your debt loads relative to income have to be smaller than in the past, and you must fully document income and assets, which is very different from a couple of years ago.

You generally need to have an equity stake of at least 20% in your home. In the most challenged markets, you need much more. 

Consider the pros and cons of your situation before moving forward.

Pros:

 - you may be able to lock in a lower interest rate than you currently have

 - you may be able to reduce your monthly payment

 - it will allow you to switch to a different type of mortgage (ex: adjustable rate mortgage to a fixed rate mortgage)

 - you may be able to cash out a portion of your home equity

 - you may be able to extend or reduce the length of your loan

Cons:

 - you will have to pay closing costs, which can be substantial

 - the closing costs could counteract any savings you’d get from refinancing

 - your new mortgage could end up being larger than the one it’s replacing

 - you could end up paying more in interest if you extend the length of your loan

 - a cash-out refinance will reduce the amount of equity that you have in your home

 - if you take out a substantial amount of equity, your monthly payments could go up

It’s important to note that interest rates and points are inversely related, basically the greater the points paid at closing, the lower the interest rate: paying points and fees essentially means you are buying the interest rate down.

You should also consider the following:

 - Are the savings to be generated from refinancing the loan significant? If your mortgage’s current interest rate is at least 2 percentage points higher than the prevailing market rate, then you should take advantage of a refinancing loan. For this is the acceptable safety margin, in balancing the costs of refinancing your mortgage against the savings.

 - What is considered an acceptable length of time to live in your house before you can realize significant savings? Some financial experts have determined three to five years. It doesn’t make much sense to realize 2 years into your home occupancy, and you will find a harder time finding a lender who will work with you.

A mortgage refinance can provide an excellent opportunity to rework your mortgage into something that works better for you. Examine your goals, weigh the pros and cons, then find a lender that can meet your needs.

NEW YORK (Reuters) – One in five U.S. homeowners with mortgages owe more to their lenders than their properties are worth, and the rate will increase as housing values drop in states that have so far avoided the worst of the crisis, a new study shows.

About 8.31 million properties had negative equity at the end of 2008, up 9 percent from 7.63 million at the end of September, according to the study, released Wednesday by First American CoreLogic. The percentage of “underwater” borrowers rose to 20 percent from 18 percent.

Another 2.16 million properties could go underwater if home prices fall another 5 percent, the study shows.

First American said the value of residential properties fell to $19.1 trillion at year-end from $21.5 trillion a year earlier, with half the decline in California. Forty-three U.S. states and Washington, D.C., were included in the study.

While states such as California, Florida and Nevada were particularly stressed, the study showed worrying signs of deterioration in relatively healthy parts of the nation.

“The economic slowdown is broadening,” said Sherrill Shaffer, a banking professor at the University of Wyoming at Laramie and a former Federal Reserve official. “As more people lose jobs, it will be more difficult to sustain the levels of pricing and home ownership, and that is a big factor driving down housing prices in more parts of the country.”

Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio remained the most stressed states, with 62 percent of underwater borrowers and just 41 percent of mortgages.

Other areas, though, also face more stress. Connecticut, for example, saw a 25 percent increase in homes with negative equity, while Washington, D.C., had a 44 percent increase.

“Even I continue to be surprised at the tentacles of this financial and economic debacle,” said Robert MacIntosh, chief economist at Eaton Vance Management in Boston. “More people are being laid off, resulting in reduced income and therefore less consumption. That leaves fewer people with money to buy homes, and the mentality is that people believe they should wait six months rather than buy now. Less demand means falling prices.”

Roughly 68 percent of U.S. adults own their own homes, and about two-thirds of these have mortgages. Many economists expect the nation’s unemployment rate to rise above 9 percent before the recession ends, up from January’s 7.6 percent.

CALIFORNIA, NEVADA UNDER STRESS

California had 1.9 million borrowers with negative equity at year-end, more than any other state, followed by Florida’s 1.28 million. About three in 10 borrowers in both states were underwater.

By other measures, Nevada was the most stressed, with 55 percent of owners having negative equity and borrowers on average owing 97 percent of what their homes are worth. About 28 percent owe more than 125 percent of their homes’ value.

Michigan had 40 percent of its homeowners underwater, while Arizona had 32 percent.

New York fared best, with just 4.7 percent of borrowers with negative equity and an average 48 percent loan-to-value ratio, though this could change as employment and bonuses slide in the financial services industry.

According to the S&P/Case-Shiller Home Price Indices, prices of U.S. single-family homes slumped 18.5 percent in December from a year earlier, the biggest drop in the 21-year history of the data.

Many lenders are taking steps to keep borrowers out of foreclosure. The Obama administration has backed legislation that could broaden powers of bankruptcy judges to modify mortgages for troubled borrowers. Among major lenders, only Citigroup Inc has supported such a plan.

MacIntosh expects housing prices to keep falling until “well into” 2010. “There is no magic bullet or magic arrow here,” he said. “It is a question of trying to come up with ideas and seeing what happens. It could take a long time.”

First American CoreLogic is an affiliate of title insurance and real estate services company First American Corp.

Source: Yahoo!News (Reporting by Jonathan Stempel; Editing by Bernard Orr and John Wallace)