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Michelle Singletary
Washington Post Columnist
Thursday, August 28, 2008; 12:00 PM

Personal finance columnist Michelle Singletary hosted an online discussion with Carolyn Warren, author of "Mortgage Rip-Offs and Money Savers" (John Wiley & Sons), on Thursday, Aug. 28 at Noon ET.

This Story

In her last book club column, Michelle wrote: "Part of the reason we're in this mortgage mess is that many borrowers naively believed what mortgage professionals were telling them and didn't verify the information or shop around for a better deal."

A transcript follows.

Read Michelle's past Color of Money columns.

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Michelle Singletary: Welcome all. I'm sure today's discussion will be interesting.

So let's get started.

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Pittsburgh, Penn.: I'm getting ready to purchase a new home in the $400,000 range - may put up to 50% down to "buy down" the monthly payment. Currently searching for mortgage lenders. Have good relationships with "local" banks, however, just wondered about the many on-line lenders and whether their offers are truly a cost savings over local financial institutions. Saw a promotion yesterday for Bank of America stating how they "waive" five of the fees other banks commonly charge for . . . so many online mortgage offers. Can you really save significant money by acquiring an online mortgage??

Thank you!

Carolyn Warren: I list 7 disadvantages of an online lender in MORTGAGE RIP-OFFS AND MONEY SAVERS. I can't list them all here, but I encourage you to review that.

It sounds like you're conscientious about getting the best loan possible, but are spending far too much time spinning your wheels. Follow my advice on making three phone calls and asking one smart question to get your best deal.

Remember, you need to review the GFEs on the same day so you're comparing apples with apples.

"Waiving 5 fees" is a marketing tactic. Any lender will waive 5 fees, or even all fees -- but you will pay for it in the long run through YSP, as explained in chapter 5.

Best wishes to you.

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Chicago: Hi Michelle, love the chats. Can you take an out-of-your-way question about estate planning? SO and I are talking about marriage, and one of the things we are talking about is a joint will. Realistically, we want the will to cover all cases from now (us in our mid-20s with no debt, good income and savings, retirement age parents on both sides, no kids) to the next 10+ years (kids are finally out of diapers so we have enough sleep to re-draw a new will). The order we want is this: 1. one of us passes away: estate goes to the surviving spouse & any children 2. we both pass away with surviving children: estate goes to children in some sort of trust fund till they reach adulthood 3. we both pass away, no children, any of our parents are alive: estate goes to taking care of the surviving parents in some way

In case of #2 and #3, do you have any particular financial advice for us on how to tell our executors to handle the money? We will talk to a lawyer on all the legal stuff, but is there any specific thing we should direct the money to? Tell our executors to put money only in reliable CDs? College saving plans for children? Long-term care for parents? Thanks for taking such a long question!

Michelle Singletary: These are all good questions and don't kill me but the answers are all "it depends."

If you want to manage how your parents or children spend the money after you are gone then you need to spell it all out in the will or trust.

The best thing is to meet with a lawyer and find out how best to distribute the money according to your wishes.

Just a final note: If your parents are financially responsible there may not be a need to dictate how they should spend the money left if there are no children.

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San Jose, Calif.: I have a terrible credit score right now, (low 500s I would guess) I have made many costly mistakes in the past. I'm now on the road to recovery, by the end of this year, I will be totally caught up with all of my debts (2 car notes and a mortgage) I will also have paid off completely my $4,000 credit card debt.

My question is, if I stay the course for a year, 18 months, or 2 years, what should I expect in terms of my new credit score? I ask because I am getting married and plan to sell my current home and would like to buy a new home with my new husband. We have a solid plan with regards to saving a substantial downpayment, I just wonder how my credit score will be realistically so I'm not expecting too much too soon. I'm not expecting a number per se, but a reasonable outcome, i.e. will I qualify for a new mortgage?

Carolyn Warren: GOOD for you for having the incentive to raise your score and a solid plan in place!

Be sure that you don't close off any of your credit cards when they're paid off, because you want to keep the "longevity points." Closing off a long-standing credit card will make you lose points, as many folks have been shocked to discover. So even if your balance is zero, keep the account open for the points.

Within one year of making on-time payments, I would expect you to have a score good enough to qualify for an excellent FHA loan. (Minimum 580.)

I am licensed to do FHA and conventional loans in California, so when you're ready, contact me at my website, www.askcarolynwarren.com

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Landover Hills, Md.: Hi Michelle,

I always enjoy your live chat. I have to say though that I am not surprised that borrowers "especially younger ones" do not read over their loan paperwork. Our society has made it quite clear that people are no longer responsible for their actions or lack thereof. If you can't make your mortgage we'll bail you out. If you can't pay your credit cards just file bankruptcy. If you don't go to school we will pay you to go etc... I'm not sure about anyone else but I know that I am getting pretty tired of paying for others pure laziness. I think parents need to teach their kids the value of a dollar and how hard it is to make, that is why I take my daughter and son with me in the summer on certain jobs, they can help and make themselves some money. I caught my son sitting and talking on the phone while on the clock one Saturday, I "fired" him from that job so he got to see his sister go every workday with me for 6 weeks and make herself a nice little bundle. My wife thought I was being unreasonable. Not being your kids "friend" and enforcing "Tough Love" is not a pleasant thing for any parent. Look how Big Momma raised you.

Carolyn Warren: I agree that young people need better education about financial things.

However, when it comes to loan signings, I've found that people of all ages are confused about what is important to read carefully and what they can skim over. Of the 50+ pages of documents, there are two things you need to read line by line.

They are the HUD-1 Settlement Statement and the Loan Note.

The HUD-1 tells you the loan costs, and the Note tells you the terms, including a possible prepay penalty, of your loan.

Most of the other paperwork is "boiler plate" info that you can skim over.

Carolyn

Michelle Singletary: Also, I agree with your wife, you're a bit too tough.

First the give-aways you've mentioned are WAY overstated. There are lots of people who stay put and struggle to pay their mortgage. There are lots of people who don't walk away from their debts -- the majority in fact.

And I think you were too quick to fire your son. Heck if every employer fired an employee for taking a personal phone call on the job well...none of us would have a job.

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St. Louis, Mo.: What is a U.S. Treasury bond called TIPS?

Michelle Singletary: Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index.

Go to www.treasurydirect.gov for more information about this investment.

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Rockville, Md.: Michelle- I just read your book, Your Money and Your Man, and it was wonderful. Probably one of the most down to earth and uncomplicated explanations of how a young couple (especially young, but older too) should be handling their money. I gave it to my 24 year old daughter who likes to pretend that money doesn't matter, and it even got her attention. I haven't read Carolyn's book yet, but it sounds fascinating. The reviews on Amazon are very positive. Could you explain a bit about YSL's? I've worked in the finance industry for years (not with mortgages, though) and I had never heard of them.

Thanks.

Carolyn Warren: I believe you mean YSP, which stands for Yield Spread Premium.

Basically, a Yield Spread Premium is money paid to a mortgage broker by the wholesale lender for selling the borrower an interest higher than par rate.

Par rate is the lowest rate of the day you can get without buying down the rate.

If par rate is 6% and the loan officer sells you a rate of 6.5%, the loan officer will pocket extra commission money, called YSP, for selling you a rate over par.

This makes for possible abuse, such as the story of the loan officer who confessed to me over filet mignon that he'd just made $40,000 off of one loan in YSP. That's an outrage!

However, YSP is not always a bad thing. When you understand how it works, you can use it to YOUR advantage as well.

Therefore, YSP should not be illegal.

Michelle Singletary: I've written quite a bit about one company, Financial Independence Group, renamed Cash Flow Strategies, that took advantage of African American customers by overcharging them using YSPs.

You can find the series on my Post page.

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Chicago, Ill.: Our mortgage is up for refinancing as of February 1st, 2009. Should we refinance now at today's rates or wait and see what happens in the next few months? (I know there is no "magic" answer!)

Thank you.

Carolyn Warren: Rates are very good now. It's impossible to predict what rates will be next year -- we don't even know who is going to be President next year.

The safe route would be to refinance now. Take a look at a current offer and then make your final decision.

Michelle Singletary: And do you mean it's "up for refinancing" or that your ARM is resetting?

I ask, or really state that because you don't have to refinance. Just be sure to work all the numbers. ARMs are resetting lower now because the prime rate has been lower.

Still Carolyn is right. If you are worried about not being able to afford a potential for higher mortgage payments explore your refinancing options now. And start with your current lender.

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Silver Spring, Md.: Hi Michelle,

My husband and I saw a beautiful home for sale ($795,000) on the eastern shore and the sales sheet says that it is a possible short sale? We think that means the owners are foreclosing but we don't know anything about a short sale.

What is that and should we run for the hills? Thank you, Donna

Carolyn Warren: A short sale means the current owner is selling the property back to the bank for less than what they owe.

There are some good bargains to be picked up now in short sale properties. Your Buyer's Agent can advise you about the market value and price for any given property in your area.

Who knows, you may be able to get a "steal of a deal." Good luck to you!

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Reston, Va.: Hello! I just wanted to say "Thank you" to Michelle. I contacted MMI about a debt payment plan with my creditors, and they have set up a package that will get me out of all my credit card debt inside my 5 year time plan. Also, as I get any bonuses or tax refunds, I can speed up the process.

I had been afraid of doing this, but after a personal meltdown and using a credit card too much a couple of months ago, I messed up a lot of work that I had done to get back on track. Now, if I don't have the credit card, I can't use it.

Question - after closing out my 3 oldest accounts, will my credit score go back to normal within the next 3-4 years? Thanks!

Michelle Singletary: Good for you for taking control.

At first your score will take a ding for closing out those older accounts. But yes, if, going forward, you pay your bills on time, your credit score should jump back up over the next several years.

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Rockville, Md.: Hi, Michelle. I'm submitting my question early for a change...My husband and I bought our first townhome about a year and a half ago, and we're both working full time and are managing the monthly payments just fine. However, at the time of purchase, we didn't have cash for a down payment (yes, because we were paying for a huge wedding) and opted to finance 80-20. Our 30-year mortgage has a reasonable interest rate of 6.25% but our home equity loan has a high interest rate of over 9% and is structured to be paid out over 15 years with a huge balloon payment for the remainder after 15 years. We are building up an emergency fund (with a goal of two months' income to be achieved by November) and are saving to start a family (so that we can entertain the possibility of subsisting on a single income). How important do you think it is to attack the principal on the home equity loan with early payments? We get a chunk of our interest payments back through our tax return, but in the long run, is it more worthwhile to keep our assets liquid or to aggressively put extra cash into our home? The only other debt we have is a student loan, but the interest rate on that is under 3%. Please advise!!!!

Michelle Singletary: If I were you I would definitely aggressively pay off the home equity loan (and with variable rates falling I'm surprised you are still being charged 9 percent unless it was locked in at that rate). If you have a variable rate check to make sure your lender is adjusting correctly.

And I would never say "but the only other debt we have is..."

Get rid of that student loan debt too.

If you can wait, do it all before you have a kid. If you do get rid of the home equity and student loan debt, then you can have the freedom and choice of one of you staying home.

So after building up that two months of emergency cash, put every extra penny, savings into getting rid of the two debts.

Good luck.

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Baltimore, Md.: Hi Michelle

Love the chats. I am a new reader to your column. Can you point to where you list the monthly book selection.

washingtonpost.com: Color of Money Book Club Archive

Michelle Singletary: Here you go. And welcome! Glad to have you as a new reader.

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Pittsburgh, Penn.: For someone buying a new home at age 56, any advice on the 15 vs 30 year mortgage? Obviously smaller monthly payments on the 30 and higher interest deductions come tax time. Any criteria for evaluating?

Thanks.

Carolyn Warren: If you can afford the higher payment on the 15 year loan, it is clearly your better choice, because you will save yourself tens of thousands of dollars in interest payments and accrue wealth through equity so much faster.

The only reason to choose the 30-year over the 15-year would be if you needed the lower payment for a comfortable lifestyle or to meet your other obligations.

The higher interest deduction is not a reason to choose paying more in interest! If you want an additional tax deduction, you can donate money to a non-profit, such as a church or children's hospital.

I highly favor the 15-year fixed rate loan for those who can make the payment.

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San Diego, Calif.: Hi Michelle,So I just got married 2 weeks ago, and I'm basically in charge of getting our "married" finances together. Do you have any websites, archives, or general advice of some of the first things I should be doing? And should we file jointly? I've heard that actually hurts you if you don't have kids. Thanks

Michelle Singletary: First, congrats. How wonderful.

The tax question first. I would suggest you seek the advice of a tax professional. Cost isn't that much and you get a much better answer than asking little old me. If you're good at the tax thing you could do mock returns filing separately and then jointly to see how it works out.

As for your first question, try my second book, "Your Money and Your Man." Don't let the title fool you, it's a book for men and women. Anyway, there are several chapters about how to bring your money together as a couple.

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San Antonio,Texas: Why are so many alleged experts on mortgages not recommending seeking protection under the U.S Bankruptcy Code?

In most cases this is the only way to keep your home.

Carolyn Warren: Bankruptcy is a last resort for most people who want to preserve their credit rating. Also, it provides temporary protection only.

Michelle Singletary: And it doesn't always result in keeping the house. You can only keep the house if you can afford the monthly payments. For many people, they aren't bankrupt, they just can't manage their money.

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Future First Time Home Buyer: Quick question on how the news that home prices are declining impact those who may want to purchase a new home in the next year or two.

So home prices fall, but mortgages (i.e. current homeowner's commitment) hasn't changed. So even if prices fall say 30%, there is no incentive for the home owner to list the house for less than is owed. At least that is my logic.

So how does someone who is a position to take advantage of lower home prices (great credit, 20% down payment, etc) actually take advantage of those prices?

Thanks. And love the chats.

Carolyn Warren: A home owner cannot sell for less than what they owe without bringing in cash to the closing.

But many folks have equity in their home and are able to offer a good price. Also, there are REOs and short sales available for bargain prices in some neighborhoods.

Be sure you have a good buyer's agent representing you to get the best deal. A buyer's agent is free to you and absolutely necessary.

Happy house hunting!

Michelle Singletary: Thanks for the lovely comment.

And one other thing, the reason why you still don't see a lot of selling bargains is because homeowners are trying to get what they owe on the homes. Further, some people still think it's 2006 and are trying to get inflated prices for their homes.

But if you have a great credit score, good job, and huge downpayment you should be able to find some good deals. May take some looking.

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Store Credit Cards - Credit Limit: Hi - I opened up a store credit card at a home improvement store to take advantage of a 10% off savings and 6 month, 0% interest. I will pay off the entire amount before I hit 6 months. I received a credit line of $15,000 (thought they said $1500). I do not intend to really use the card. Is the high credit line impacting my credit store? Should I ask them to lower it? Should I just cancel the card once the garage door is paid off? Or, should I just not worry about it?! Thanks.

Michelle Singletary: Actually the damage is already done. When you opened that card they had to check your credit report (or reports). Such inquiries pull your score down although not by that much.

So unless you are in the market for new credit, close the account when you are done. And I say unless you are in the market for new credit because often closing accounts can bring your score down too.

Moral of this story: Stop getting credit for the discount. Could cost you more in the end.

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Baltimore, Md.: Hi Michelle, Love your chats and your advice. You tell a lot of us what we need to hear, even if it isn't what we WANT to hear!

St. Louis asked a question about TIPS. In your response, I think you meant to say that the interest rate (not principle) varies according to inflation rates (that fast typing again!). I would hate to see folks scared away from TIPS, as they can play a valuable role in a balanced portfolio.

Keep up the great work!

Michelle Singletary: Actually the wording came directly from the treasury. Here's further explanation:

When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.

How TIPS Are Tied to Inflation

Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal is adjusted by changes in the Consumer Price Index. With inflation (a rise in the index), the principal increases. With a deflation (a drop in the index), the principal decreases.

The relationship between TIPS and the Consumer Price Index affects both the sum you are paid when your TIPS matures and the amount of interest that a TIPS pays you every six months. TIPS pay interest at a fixed rate. Because the rate is applied to the adjusted principal, however, interest payments can vary in amount from one period to the next. If inflation occurs, the interest payment increases. In the event of deflation, the interest payment decreases.

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I'm going to rent for the rest of my life, I guess...NYC: Can you help me to make sense of this? My husband and I have begun the process of buying our first home - we rent an apartment currently. Our credit is good, high 600s or so. Our income isn't the highest (he works, I stay home with our child), but we pay all our bills on time, and have been aggressively paying down debt for the past few years. We have 2 months living expenses in savings. Money is tight, but we're making it.When we applied for the mortgage, the lender originally said we looked good and could start looking in the 300s or so. He just called me and said it came back from underwriting and it was actually in the 150s. Where we live (NYC metro area), 150s won't do for our small and hopefully growing family...so basically, we're not going to be buying our first home anymore. He said that with the market conditions, things are tight. I assume tighter than he anticipated, if he originally told us double what underwriting came up with. When I did online mortgage calculators, I also came up with 300s for our financial situation.

Is this housing crisis really this bad that a first-time homebuyer can't get into a low-priced ($300s is really low for here) home? Is this indicative of the economy right now, or is our credit not good enough? Is this my fault, in other words?

I guess I'm just frustrated and am looking for specific things I can do to be working towards this goal of home ownership - what do you suggest?

Carolyn Warren: I hear your frustration loud and clear!

For a first-time home buyer, the FHA loan is a good choice. You'll need a down payment of 3.5% of the purchase price. Gift money from family may be used.

The debt-to-income ratio for FHA is 43%. That means your new house payment plus your credit cards, auto and student loans cannot be more than 43% of your gross income (before any deductions).

Knowing that formula, you can structure your income and debts to meet the requirement.

Don't give up. You CAN become home owners. Your credit is good and you are saving money. It sounds like you're on the right track.

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Rockville, Md.: Does it ever make sense to temporarily decrease the amount of money you're putting in your 401K in order to pay some credit card debt? I'm already receiving the full matching amount, so that wouldn't be affected. The main reason I'm hesitant is that the 401K contributions decrease my income for tax purposes, and I'm worried that I might go over the AMT threshold if my income increases very much.

Michelle Singletary: I think it does make sense sometimes to decrease the amount IF you have done everthing you can to find extra money to pay off the credit card debt.

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Scarsdale, N.Y.: What do you think of mortgage equity accelerator programs like Equity Advantage where they say you can pay your mortgage off in 5-7 years instead of 30 years using a first lien HELOC?

Carolyn Warren: They're a "smoke and mirrors" scam. In spite of what they claim, you can pay off your mortgage just as fast and save yourself just as much $$$ without running your money through a HELOC.

I signed up as a rep for one of the biggest leaders in equity acceleration, and had to withdraw after I saw "behind the scenes" and their software, because I could not sell it with a good conscience. Obviously, I could say a lot more, but that's my short answer.

Michelle Singletary: I'm TOTALLY with Carolyn on this one.

Why pay someone the huge amount these programs cost, when you could do the same thing yourself by just making extra mortgage payments?

PLUS the whole thing revolves around you getting a home equity loan -- MORE DEBT.

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Herndon, Va.: I own my home with a payoff amount of $29k but I am without a car which is very needed. Should I focus on the mortgage payoff then getting a home equity line for the car? Or just buy something used at this time? My credit score is just fair. I am in a rebuilding process.

Michelle Singletary: Don't do the home equity thing. Why put your home at risk for a car?

With so little left on the house use the extra money for the payoff to get your car.

And make it a used car.

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Closing credit cards: Does closing a card affect your credit score even if it's an inactive card? I had a store card that had no charges for over two years that I finally canceled.

Michelle Singletary: Closing credit cards has to do with how much available balance you have compared to the debt you are using on the cards. If you aren't carrying any debt, you should be fine.

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Ashland, Va.: Hi! A related question, but not totally on topic. I recently purchased a home and have gotten lots of offers in the mail. Several of them appear to be from my lender telling me to get mortgage insurance. First, what are your thoughts on getting mortgage insurance? The second part of this is that one of the offers is not to pay the mortgage off outright, but to actually give my family a steady stream of money so that they could continue to make mortgage payments. I'd never heard of this before. What are your thoughts?

Carolyn Warren: These are almost always over-priced and/or unnecessary programs. I would toss them all into the paper recycle bin.

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Friendly Maryland: As time goes by many people have forgotten how little they knew when they purchased their first home. They have forgotten how much they depended on the real estate agent and the mortgage brokers for advice and guidance. Now we have another group of home buyers who are just as naive and trusting. Unfortunately, greed is the name of the game and unsuspecting or gullible or incredibly naive or still believe in Santa Claus homebuyers got taken by greedy people in the real estate industry.

Michelle Singletary: True that!

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HSV: Michelle, I submitted a question a couple of weeks ago about life insurance. My husband and I are going to move forward on each getting a $250K ROP policy. We will get back a total of $20K which we plan to give to our son. But, should we also get a small universal life policy ($25K each) to cover the cost of a funeral, etc? Do we need both? What do you think?

Michelle Singletary: You don't need both.

And check the price for a regular old fashioned term policy. You may get more coverage for less money (and the difference you could save and give to your son).

By the way, the average cost of a funeral is about $5,000.

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Store Credit also: I opened a store credit card to get the clothes basically at no cost so there was no balance on the account. They mailed me a store credit card plus a major credit card by them (both which I immediately cut up) with a combined credit limit of over $14,000. Now, I'm a stay at home mom and don't bring in any income so I was surprised to get the cards in the first place. We're refinancing our home in January (have to). Should I cancel the cards they sent but I never used (or even activated) for a better credit score? Thanks.

Michelle Singletary: Don't cancel the cards for now. Wait until after you refinance.

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Credit Question Again: I have credit cards that have been "charged-off" and therefore closed. I have no more cards. I'm trying to get everything paid off, even the charged-off ones, but I guess this ruins my longevity part of the score. The accounts show as closed by issuer.

Is this correct?

Carolyn Warren: You may be unknowingly hurting your credit score by paying off your old charge-offs. There are several factors here, including how old they are. But if you update a 5-year old collection by paying on it, your score will go down!

If you want to send me an email after the chat, I can give you more info.

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Alexandria, Va.: Hi, Michelle -- Love your chats, but I have trouble locating the most recent when I miss a week or two. This link, from clicking on discussions and then choosing your name, has not been updated with any chats since January. Can you ask the techies to fix it? Thanks!

washingtonpost.com: Thanks for letting us know. We'll fix that link. Meanwhile, you can always find Michelle's chats here.

Michelle Singletary: Hope this helps.

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Las Vegas, Nev.: Hi Carolyn and Michelle.

I live in a city with a huge foreclosure problem. Luckily, that is not my problem. However. I still have a question. I am about to pay off completely my first mortgage on my house. Only a few grand left. The problem is I have a retirement home in another state which is in dire need of remodeling and renovation. I will probably have to take out a mortgage, hopefully small, to do that. What do you recommend as far as getting a new mortgage? My credit is good, not excellent. and I know friends in this state who are having trouble refinancing their homes because of the tight money situation. Any advice you have is appreciated. Ted

Carolyn Warren: You can do a cash out refi on either property, but it sounds like you'll get your best deal on your owner-occupied property. Since you have so much equity and good credit, there should be no problem whatsoever.

Michelle Singletary: While I see where Carolyn is going, can I suggest you save for the repairs and renovation and not take on debt?

Unless there is a roof about to cave in or NOT doing the repairs will damage the property, don't pull out money from your homes.

SAVE for the repairs you want.

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Rockville, Md.: Can a retired person with a working spouse and about a thousand a week in income from retirement resources hope to get a mortgage? We are in an apartment and are thinking about a condominium in a year or two. Not much of a down payment saved, but our credit union has plans without large down payments. (NFCU)

Carolyn Warren: Retirement income counts just like W-2 income counts.

If your debt-to-income ratio is about 43% or less, you should qualify for a mortgage.

Compare your credit union with a local mortgage broker. Mortgage brokers can go to wholesale lenders, and CUs are not always the best deal.

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Washington, D.C.: I am using my emergency cash savings of $40,000 to pay off my monthly student loan of $1,000 monthly. After paying off my mortgage and other bills, including my IRA, 40lK and other charge bills I am hard pressed and must go to my savings to pay off the loan. Is that OK?

Michelle Singletary: Hold back some money for an emergency ( you don't want to eliminate your entire cash cushion).

Then use as much of the savings to pay down the student loan debt.

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Jacksonville, Fla.: My question is about auto repos. I have an auto repo and when I got the paperwork from the new company stating what I owe, I set up a payment plan with my bank and I called the number on the letter. They said I owe $9,000 and asked if I could send half now and make payments. I told them if I could afford half of that I wouldn't have given up the SUV. I told him that I would send $50 now and every month. He said OK, I will put this down as you are voluntarily paying what you owe. My bank sends $50 every two weeks, now it is $10,000 plus and all they could sell the truck for was $3,000. I ran into medical situations and I trying to work with Household Auto but they didn't work with me, so I told them to pick it up. I am thinking about now just sending $25 every two weeks, because of my dealings/problems with Countrywide. What is the worst that can happen? If they try to garnish my pay will I get the chance to go to court? Thanks in advance

Michelle Singletary: Hey, check my eletter for today. I answered your question there.

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Texas: Michelle, I love your advice (and your style). This question doesn't have to do with mortgages really, but just a note on savings. You always say to keep a "life happens" fund separate from emergency funds, and I have tried to do that. Last week, right before we could move into our first home (which we put 20% down on), the water heater broke and flooded. Four days and $1700 later, I really just wanted to cry because I always hate to use savings for non-budgeted expenses - but that's what it's there for, right? And our other savings are still all right. This is just a year for spending money so far, even if it's for the right things. Hopefully we can get back to saving up again soon. In any event, I just wanted to affirm that yes, the "life happens" fund really is a useful thing to have!

Michelle Singletary: Oh how wonderful.

Your situation is exactly why I came up with the life happens fund. It helps to have this extra stash of money so you don't have to tap your "I've lost my job" fund.

Thanks for sharing.

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Rockville, Md.: Ms. Warren, do you have any advice about what types of people are better off NEVER buying a home?

Carolyn Warren: Interesting question, because I am biased toward home ownership. People who retire owning their home free and clear are much better off than people who pay rent through their 70s, 80s, and beyond. Having home equity in your retirement years brings you security.

That said, a person who is moving every 24 months is not a good candidate for buying a home, unless they want to keep it for an investment property for later.

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Pennsylvania: I work for a newspaper just like you. My company had massive layoffs this summer and I survived the first cut. But many predict another round is coming at the end of this year and the industry is very shaky.

My question: Is it a good idea to stop contributing to my 401K for now and save that money in a regular savings account, or should I keep putting 10% into it? And what else can I do to position myself better in case I get hit by a layoff? Changing jobs won't help me much in the short-term because my training is very specific to newspapers. (I am exploring other careers but retraining will take awhile.) I want to know what I can do to be proactive, considering that going to another newspaper could result in the same thing... another layoff.

The good news: I have socked $10K into emergency savings and don't plan on touching the $26K in retirement savings no matter what happens. I own a house I can afford even if I lose my job because I have roommates, whose rent covers my mortgage and all other home expenses (except the oil bill and maintenance costs). I don't have any dependents.

What worries me: I have $3K in credit card debt at 8 percent interest, $750 left on my car loan, and $5K in student loans. I have been chipping away at it all, but should I be putting more into savings instead?

Thanks for any advice you can give me. -A loyal reader

Michelle Singletary: First, I certainly hope you keep your job. It's hard out here and especially in our industry.

For the short-term I would stop the retirement payments if you are reasonably sure layoffs are coming and you may be hit. And I say that only because of your other obligations. You've done well to clearly live within your means. So while you are waiting to find out about the job take the money you are putting into retirement and get rid of first the balance of car debt, the credit card debt, and student loans (pay off the debt with the lower balance first).

Then once all that is paid off and if you still have a job go back to contributing to your retirement fund. If after that you get laid off, you will be in good shape because you won't have that debt.

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Anonymous: With perfect credit, plenty of cash down and previous history as homeowner I want to get the best deal. How can I negotiate a better rate without incurring hidden fees? Are there "standard fees" that I shouldn't question?

Carolyn Warren: You negotiate your loan offer by reviewing the written Good Faith Estimate. I recommend comparing three -- two from mortgage brokers and one from a bank. Also, see page 101 for the list of legitimate and bogus fees.

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New York, N.Y.: My husband and I live in Brooklyn NY and are looking to buy our 1st home across the river in NJ. There's nothing affordable in NY's 5 boroughs - and if it is affordable, it's certainly not safe! Our combined gross is $112k. No dependents. Own our own car, no CC debt. Only debt is a $3000 school loan which I should be done paying by year's end. Our lowest credit scores are 700 and highest 773.

We've researched the area we're interested in (Essex County, NJ) and the only down side is the high property taxes and potential increase in commuting costs. We're going to look at price range of $300-$350k. We live within, and often, below our means. We've lived in a rent controlled apartment and so, have been able to save the full 20% down payment. We made some initial contacts with lenders (haven't allowed them to run our reports but gave them all our particulars) and just with that initial contact, they're all over us - constantly calling us at least once a day - almost begging us to come on board with them. They're telling us all sorts of things and I'm getting a little anxious with them all over us. I'm confused as to whether or not we should make this purchase now. If we buy now and prices keep falling, whatever equity we've put into the house ... won't we end up losing it? But yet we want to put down as much as possible so that we can have a very low/manageable monthly payment and still be able to save. I don't know if we should even put down the whole 20% ... ?

I've read and researched for the past 6 months or so now and it seems like if I ask 5 people the same question, I get 5 different answers. We're afraid of making a wrong move.

Any thoughts? Thanks!

Carolyn Warren: I think your efforts at predicting the future are confusing you and causing you fear.

My suggestion is to choose a home you will enjoy living in for the long run. If you love your home and want to stay there, you don't need to worry about what's going to happen with the value 6 months or 12 months from now.

In today's market, you need to look at the big picture.

Best wishes to you.

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Mitchellville, Md.: Hi Michelle! My husband and I got married almost 2 years ago. We have no kids, but have $39k in auto loan debt, $15k in student loan debt & $15k in credit card debt. I just recently got a raise and we have been putting an additional $150-200 on the min payment for the card. We own a rental property (my house before moving in to his) and are thinking about selling it to walk away with about $75k. My thought was to pay off $13k on the auto loan (my truck)and $15k for the student loan, then put the rest in a CD. However, he does not have a retirement fund (I have a TSP putting about $75 more over the matching funds). Should we take a portion of that $ to start a retirement fund for him? Or save it as an addition to our "emergency fund" (current bal= $4k). Thanks!

Michelle Singletary: If you are comfortable with a savings cushion of $4,000 I would take the money from the house and pay down ALL the debt -- the cars, credit card and student loans.

Then when you are free of that bondage you can begin to help start saving for your husband's retirement. You'll have $6,000 left over.

Go for debt free (minus the one house). And going forward don't let me see you with $15,000 on a credit card.

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Arlington, Va.: Collections. My significant other has gotten a couple of collection calls for a bill form 1998 for $120. They don't send documentation or provide other information. This doesn't show up on his credit report, is there anything he should do?

Carolyn Warren: He has the right to request a Debt Validation so he knows the charge is legitimate. Is it really his? Is the amount owed correct?

His main goal is to keep it off his credit report. $120 is a small sum, and a newly published collection could drop his score significantly.

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D.C.: Hi-- Love the chats! They are motivating me to get myself on the right track!

I have a bit of a dilemma. I owe quite a bit of cc debt. I have a little extra cash flow now (about 5k), and I am wondering what I should do with it -- add to my emergency fund of X months worth of expenses, or take the money and pay down the credit cards? Or is some combination of the two my best bet? I have only one months worth of expenses in savings currently.

Thanks.

Michelle Singletary: If you've got a good, stable job, take the cash and pay down or off the debt. One month's of emegency funds is a good start.

So go for the debt.

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Rockville, Md.: Hi Michelle. I'm very confused about a previous question on equity accelerators. Do they all require a home equity line? My husband and I did one out of convenience (the fees really weren't that high), but I'm pretty sure it didn't require a home equity line. Help!

Carolyn Warren: Several types of home equity acceleration programs have popped up lately.

The ones I'm against are the ones who charge big fees for their software, such as $3,500 and require you to open a HELOC, which costs you even more, and run your money through it.

They have fancy charts to convince you to buy into their over-priced programs, and in my opinion, they're not worth it.

That said, I am all in favor of paying off your mortgage early and saving yourself tens of thousands of dollars. You can do this for free simply by sending in extra money toward your balance.

Michelle Singletary: You might have signed up for a biweekly program, which has relatively low fees typically $200 to $300 set up and then monthly fee.

Still money you don't need to spend.

Paying down your mortgage is easily a do-it-yourself thing.

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NoVa: Hi Michelle,

We moved into a townhouse 7 weeks ago. We are making some repairs (it's an older townhouse in an older, nice neighborhood), and have saved $16,000 in an emergency fund, but are trying to save for living expenses. The mortgage in $3,900/month, but I have trouble guesstimating how much other expenses would be, having only lived in the house a short time.

Could you advise?

Thank you very much!

Carolyn Warren: I recommend all home owners have a minimum of three months' house payment saved. Six months is even better.

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San Antonio, Tex.: Okay, I'm back again. Please explain your previous response on Bankruptcy?

Those who fall behind on their mortgages, credit rating is already in peril. On the other hand those who wish to keep their homes can set up a five year plan to repay arrearages, keep their property and get a fresh start on their mortgages.

In addition, most creditors don't report on your accounts during the plan and upon completion your credit file is updated to show your debts have been paid in full.

By now I think you will conclude, I'm speaking from experience rather than sharing what I heard or read.

Because I know your concern for your readers, which I am a faithful one. Please discuss this issue in a future segment.

I see so many people lose their homes because of a lack of knowledge.

Keep up the great work.

Michelle Singletary: You are right. I don't have the space or time to really go into this. For some filing a Chapter 13 can work. That's where you are put on a payment plan and you can save the house.

For others with that a bankruptcy won't help.

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Washington, D.C.: Michelle, I need your advice on a touchy issue. Long story short, I loaned a friend $5,000 two years ago when she was going through a divorce to help her pay her lawyer (she told me she was afraid her ex was going to take away her kids, and I feel really sorry for her). We both signed a promissory note in which she agreed to pay the loan back at the end of this year at zero interest. Well, her divorce is now final, but she has indicated to me that she probably won't be able to pay me back because she didn't get the assets in the divorce that she expected. However, she is working full time and enjoys a nice social life, going to concerts and shows with her boyfriend, and bought a new car last year so she is definitely not destitute. When I mention the loan, she either ignores me or changes the subject. So, what are my options here? She lives out of state, although the promissory note allows me to bring it to collection here in DC. Should I file in small claims court, take it to a collection agency, or just write the loss off to experience, as I really doubt that she is going to re-pay me voluntarily. I realize I made a huge mistake in loaning her the money in the first place, but I need to figure out how to collect as much as I can. Thanks for any advice.

Michelle Singletary: I'm really sorry this happened to you. Your friend is a louse.

That being said, if you want to continue to have her as a friend count this as a very expensive lesson. Let the money go.

But if you want to kick her to the curb pursue her in small claims court. At least file to let her know how serious you take her disregard for paying you back.

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USA: Hi Michelle, one more question on closing credit cards. I have 4 cards: 1 for normal use (never carried a balance, paid in full every month), 1 not in use but opened longest at 7 years (always paid in full on-time while it was in use), and 2 store cards that were used once and paid off immediately. I am in the market for my first home in 3-9 months (no debt, have saved up 20% down/emergency fund/life happens fund/general savings/retirement contributions). Should I close my 2 store cards now or wait till after the home purchase?

Carolyn Warren: NO, do not close any of your credit cards, as it can't help your score and may hurt it.

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Clinton, Md.: A have a contract on a condo at the National Harbor with a delivery date of February 2009. Is there a way to re-negotiate a price if the prices drop lower than the the purchase price listed currently on my good faith estimate?

Carolyn Warren: I don't understand if you're referring to the price of the condo or the price of the loan.

Your purchase and sale agreement is a contract.

Your Good Faith Estimate can be negotiated.

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New York, N.Y.: What is considered a "good" credit score these days?

Carolyn Warren: Great question!

For a conventional loan, 720 is required for the lowest interest rate.

For an FHA loan, 620 is preferred, but you can get a loan with a slightly higher interest rate with a 580 score.

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D.C. again: And if the job front is shaky, how does your advice change? (sadly it is). Should I try to get as close to 3 months in the savings and then start piling everything I can into the cc debt?

Also, do you have any suggestions on online resources regarding student loan consolidation? I'm not sure if this is a good idea for me.

Thanks so much for your advice!!

Michelle Singletary: If the job front is shaky you need to stock pile as much cash as you can if you think it will take a while for you to find a job. So it would help to pay down or off as much debt as you can.

Try this website for good advice on student loan consolidation

www.finaid.org

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Michelle Singletary: I can't believe how fast time went. So sorry if I didn't get to your question. But keep reading my column and eletter because you may find an answer in either one soon.

Carolyn has agreed to answer more questions offline and I'll put the answers either in my print column or in my eletter or both.

Thanks so much for joining me today. Great questions and comments.

Clearly lots of people are trying to do this personal finance thing right.

Take care and come back in 2 weeks.

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