Private Student Loans – Should I Seek One?

Private student loans should be the last stop in trying to get the money to cover your college bills because they will cost you far more in the end than most other forms of financing.

Unfortunately for college students, financial aid packages from many schools do not cover the entire cost of education. Based on your FAFSA (Free Application for Federal Student Aid), schools will determine if you are eligible for Federal grants and loans (Stafford Loans, Perkins Loans, Pell Grants, Federal Work Study, etc.) and these will be added to your package first.

Eligibility for grants and scholarships from some states will also be determined by the FAFSA. You have the choice to accept or reject any of the grants and loans in your package, though acceptance is usually called for, since the interest rates on these government loans is usually much cheaper than any private student loans you will find.

Once you have added up all the scholarships, grants and loans, you may find that you still need an additional sum to get through the year. At this point a private student loan may be your only option. Also known as alternative student loans, they are available from many private companies.

One major difference between the private and the government loans are that the private loans depend on your credit rating. The better your rating, the lower the interest rate you can expect to receive. The better your rating, the lower the loan fee you can expect to pay to get the loan. If you have a poor credit score or none at all, then you may still be able to secure a good rate by having a creditworthy cosigner.

You will need to be certain of the terms of your loan, since there are many different terms available depending on the lender. Repayment may start immediately, or be deferred until graduation. Even if deferment is allowed, interest begins accumulating immediately, so the balance will be increasing until you graduate and start making payments. Some lenders will allow you to pay interest only while you are still in school, which will help to keep the payments down later.

If you do have a cosigner, they need to be aware of the possible consequences of their involvement. If you are unable to make your payments, they may be required to make the payments themselves, since they have taken on the responsibility by cosigning. It could also affect their ability to get a loan while the private student loan is still active. The reason is that their debt to income ratio will be higher, since your loan shows also on their credit report.

In conclusion, if there are other alternatives available, private student loans are not the way to go. If not, then a good credit rating or a cosigner will at least help you to get the best possible rates and terms. Contact several lenders and compare the interest rates, as well as the other payment conditions.


Multiple Home Loan Choices: Weapons of Mass Destruction or Tools to Save Money?

Some encouraging signs are emerging in the U.S. housing market: there are significantly more loan choices available today than anytime in the last two to three years. While it is way premature to say that the mortgage market is in a perfect shape, the above is a positive sign of a new trend starting to take root. For one thing, when it comes to home financing, the more choices and the better chance that the loan product will be optimized to end users’ needs, and that is a good thing. Why? Short answer: because it can save borrowers thousands of dollars on interest, improve affordability, and reduce the overall rate of loan defaults.

At the depth of this latest Great Recession, it seemed that the only loan programs available to purchase or refinance residential properties were standard “bread-and-butter” 15 or 30-year fixed mortgages. These types of home loans were proclaimed the “safest” and the best way to go for those who dared to obtain a mortgage loan at all. All the other “exotic” loan products, such as Adjustable-Rate-Mortgages (ARMs), Option ARMs, or Intermediate ARMs (30-year mortgages with interest rates fixed for 3, 5, 7, or 10 years) were declared “weapons of mass destruction,” invented by Wall Street’s “fat cats” and sold by shady mortgage brokers.

With mortgages interest rates at historically low levels, how can anybody go wrong with a long-term fixed rate loan? Isn’t that the best and safest way to go? Not necessarily. The “one size fits all” model did not work very well in the old Soviet Union and it does not work well in the mortgage world either. The problem with offering only long-term fixed mortgages is that not all borrowers have long-term home or mortgage ownership plans.

In fact, according to the National Association of Realtors, the average length of home ownership in the U.S. is only about 6-8 years. It is still less in transient states such as California, Nevada, or Florida. But that is not all. The average life of a loan is also shorter due to a possibility of refinancing. So what? The problem is that the longer the fixed term of the loan, the higher the interest rate. For example, the interest rate on a 30-year mortgage fixed loan is about 1.00% – 1.25% above the rate on a seven-year fixed loan.

For example, in 2010, the average home loan amount, for purchase or refinance, in San Diego, CA was around $400,000. The difference in the interest rate of 1.125% means $4,500 per year. If the borrower can reasonably anticipate that he/she will keep the property for let’s say five to seven years, there is really no good reason to get a 30-year fixed mortgage. It is an overkill. Understandably, nobody has a crystal ball to know the exact length of homeownership a few years in advance. That is why it is recommended to add some extra fixed term to your loan for security, especially if you do not trust ARM loans, but it does not need to be 30 years!

For instance, if one estimates that he/she will keep the house for five years, the seven-year fixed might be sufficient. By the same token, if one thinks that he/she will move in seven years, loan fixed for 10 years should do the job. The bottom line is simple: the more optimized the fixed term of your loan, the more money you will save in interest. And this is real money, which will stay in your pocket, no some imaginary savings.

However, borrowers are not the only beneficiaries of such mortgage loan “precision shot.” Lenders can also benefit from this scenario because lower interest rates mean lower monthly payments, which in turn translate into better affordability and lower default rates. In spite of some public misconceptions, lenders do not make more money on the Intermediate ARMs as compared to the Fixed Rate Mortgages. Quite to the contrary. Historically speaking, long-term fixed mortgages have been the most profitable for the lenders because these loans generate higher yield based 30-year term, yet they are very seldom kept for the entire term.

In conclusion, more home loan products are becoming available to homebuyers and homeowners, who now have a better chance of selecting their mortgage financing to match their individual home buying or refinancing needs. Borrowers should ask their mortgage professionals about availability of different loan programs and request a detailed explanation of their pros and cons. “One mortgage hat” does not fit all, borrowers should optimize the term of their mortgages according to their individual financial needs and homeownership plans.