Other Household Debt

The debt you incur for your household – your mortgage, car loan(s), and loans to buy large-ticket items such as furniture – represents a significant financial decision that can impact your cash flow for many years. Many of these loans are secured, meaning that, if you do not make payments on the loan, the creditor can seize the asset and use the proceeds from the sale of the asset to pay back the debt. Because an asset secures the debt, the interest rate on this debt is often lower than credit card debt.

Understand your credit

Lenders use credit reports and FICO scores in addition to income and expense information when making the decision to loan you money.

  • Credit reports help companies determine your ability to take on additional debt by detailing the debt you currently have, the amount of the monthly payments you make, and whether you have had any issues making payments in the past.

  • FICO scores are a numerical indication of your ability to take on additional debt and are used by creditors to evaluate whether to extend credit and determine the interest rate to charge you for the loan. FICO scores use a 300-850 point scale, with a higher score indicating better credit-worthiness.  Unlike credit reports, you usually need to pay to get your FICO score.

How do you boost your FICO score?

  • Pay your bills on time.

  • Make sure there are no mistakes on your credit reports.

  • Keep old credit accounts open even if you are not using them regularly – creditors look at the debt-to-credit limit ratio and the average age of your accounts.

  • If you are looking for a mortgage or car loan, try to have these inquiries done within a few weeks of each other; they will count as one inquiry in your score calculation.


Financing a Car: Loans vs. Leases

You need a new car. Should you buy or lease? While the monthly costs for a lease are generally lower than those for a standard auto loan, there are other factors to consider. Let’s look at the pros and cons of loans and leases.

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  Pros Cons
Lease a New Car
  • Lower down payment
  • Low maintenance costs
  • Monthly lease payments usually lower than loan payments
  • The residual value of the car is set at the beginning of the lease; so, you know the buy-out amount up front
  • Drive new car every three years
  • Higher financing costs
  • limited allowable mileage per year, with substantial charges for mileage over the limit
  • Pay extra for excess wear and tear
  • Significant fees if you end the lease early
  • No cash value at lease termination
Buy a New Car
  • Own the vehicle
  • No mileage restrictions
  • Trade car in at will
  • Once loan is paid, monthly payments end
  • Cash value at trade-in, if any, is yours
  • Monthly loan payments are usually higher than lease
  • Trade-in value is based on the car’s condition
  • Responsible for all maintenance, especially as car ages

Financing a Home - Mortgage

For many people buying a home is the most critical financial decision they make. Financing that home often represents their largest monthly expense and a decades-long financial commitment. It’s important to understand the mortgage options available to you.

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Fixed rate and adjustable rate mortgages are the two main types of mortgages, but there are many other types of mortgage products available, such as interest only mortgages. Always research and understand the features and terms of the mortgages you are considering.

Type of Mortgage Pros Cons
Fixed-rate mortgage No surprises. The interest rate stays the same over the entire term, usually 15, 20, or 30 years. If interest rates fall, you could be stuck paying a higher rate, unless you refinance.
Adjustable-rate (ARM) or variable-rate mortgage Usually offers a lower initial rate of interest than fixed-rate loans. After an initial period, rates fluctuate over the life of the loan. When interest rates rise, generally so do your loan payments.
Interest only mortgage Interest-only payments are typically made during the first 5-7 years of the loan. These payments will be lower than both fixed and ARM mortgage payments. After the interest only term is over, you will begin to pay both principal and interest, which can significantly increase the loan payments.

What’s in my mortgage payment?

Mortgage payments generally consist of:

  • The principal payment* and interest on the outstanding loan balance
  • Homeowners insurance – generally your annual cost divided by 12
  • Real estate taxes – generally your annual cost divided by 12
  • Mortgage insurance – if your down payment on your house is less than 20%, your lender may require you to pay mortgage insurance. Learn more at Consumerfinance.gov
  • *Note: interest only mortgages do not require principal to be repaid during the interest only term, typically the first 5-7 years, of the mortgage.

What are closing costs?

There are many potential costs associated with buying a home in addition to the purchase price.  These include title search fees, loan origination fee, legal fees, escrow for insurance and taxes, and other costs. These costs are paid at closing. If you are selling your house, you may also pay commission to the real estate broker. Learn more at consumerfinance.gov

Tips & Resources - Other Household Debt
  • Each year, you are entitled to a free annual credit report from the three main reporting companies at annualcreditreport.com. Every four months, get a free credit report from one of the three companies. This allows you to check for errors on your credit report three times a year.
  • Check out creditkarma.com for a free credit score. Check with your credit card company, bank, or financial software company, as some supply the FICO score to you free of charge.
  • Many dealers offer both leases and loans for used cars. A used car may be a more economical choice.
  • Even if your lender allows you to finance a more expensive home, you don’t have to maximize your loan amount. Buy the home that comfortably allows you to pay your mortgage and your other monthly expenses.

 

This material is for informational purposes only and is not intended as investment, tax, financial, legal or other advice. Your personal decisions should be based on the recommendations of your own professional advisors. 

Unless otherwise noted, websites referenced herein that are outside the www.cpg.org domain are not associated with The Church Pension Fund and its affiliates (collectively, the Church Pension Group) and the Church Pension Group is not responsible for the content of any such websites.

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