Financial Literacy 2008 - Protecting your identity
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Family saves home with money makeover

Last year, Phil and Stacey Fleming saw the balance on their option adjustable-rate mortgage increase by $30,000. An option ARM permits borrowers to choose how they wish to make their payments each month: a traditional, fully amortizing payment; an interest-only payment; or a minimum monthly payment that is often not enough to cover the interest due.

The Flemings


The challenge: Used an option ARM to buy their home; mortgage now larger than when they bought house.

The plan: Get finances in shape to make refinancing to a fixed rate possible.

This year, the result: Able to increase savings while refinancing to a low-interest, fixed-rate mortgage.
The Flemings were unable to make the interest-only payment on their loan, let alone make a dent in the loan's principal balance. As they made minimum payments each month, the outstanding balance continued to grow.

Further, the Flemings were drawing from a home equity line of credit to pay for home improvements despite having $5,600 in credit card debt, two car loans and very little saved for retirement.

But much of that changed when Bankrate's Greg McBride stepped in with a plan.

What did they do?

The Flemings started by putting the brakes on home improvement projects and whittling down miscellaneous spending from $1,700 to about $650 per month.

Phil admits the soaring cost of food and fuel has made it hard for the family of five to save more. But they are getting a handle on their budget by "getting creative with coupons and watching the bottom line on purchases."

Savings from reduced miscellaneous spending and a cost-of-living adjustment added to Phil's school-district salary allowed the Flemings to ditch their option ARM and refinance to a low-interest, fixed-rate mortgage.

Phil admits he was "scared to death" of taking out a fixed-rate mortgage because of the higher monthly payment. But after researching mortgage products on Bankrate.com, the Flemings found a lender who approved them for a 30-year fixed-rate loan at 6.1 percent interest.

"There were virtually no closing costs," he says. "Had we not done that, the resetting of the (rate on the) loan probably would have sunk us."

The Flemings next used their income tax refunds to pay off a credit card with a zero percent promotional rate that was about to expire.

Greg's suggestions
  • Get on a budget
  • Establish a savings cushion
  • Refinance into a 30-year fixed-rate mortgage
  • Start saving for retirement
  • Eliminate all credit card debt
  • Change up life insurance policies
Phil says eliminating that credit card payment -- coupled with paying off his son's orthodontist -- freed up about $240 per month.

Stacey terminated the life insurance policies on herself and her son and used the remaining cash value to pay down some of the debt on the home equity line of credit, or HELOC. The Flemings continue to make minimum payments on that loan. Phil increased the value of his life insurance policy to the maximum allowed by his employer.

Phil says neither he nor Stacey have signed up for a retirement plan at work. However, Stacey did adjust the tax withholding on her salary and managed to free up about $200 more per month.

Phil's car is paid off and he is receiving a 50 percent subsidy from his employer to help pay for his graduate studies.

"That's freed up almost $400 per month," he says.

Even with all the extra available money coming into the household budget, however, the Flemings say they find it hard to save.

"The cost of living across the board has killed what we would have potentially put into savings," Phil says.

He adds that Stacey is putting less than $100 per month into the family's savings account.

Still, the picture is getting brighter for the Flemings. They are managing their budget better and putting some money into savings.

Overall, the Flemings say, McBride's advice has helped them "immensely."

"We were able to save hundreds of dollars following his (Greg's) financial advice," Phil says. "But the most important thing is we were able to save our house."

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MORTGAGE HOME EQUITY AUTO CDs CREDIT CARDS
Product Rate Change Last week
30 year fixed, 0 point 4.19%  0.07 4.26%
15 year fixed, 0 point 3.23%  0.04 3.27%
5/1 ARM 3.34%  0.11 3.45%
 
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Product Rate Change Last week
30K FICO-based HELOC 4.38%  0.01 4.39%
50K FICO-based HELOC 4.11% --0.00 4.11%
100K FICO-based HELOC 3.96% --0.00 3.96%
 
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60 month used car loan 2.63%  0.10 2.73%
48 month used car loan 2.90%  0.07 2.97%
60 month new car loan 3.16%  0.06 3.22%
 
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Product Rate Change Last week
1 Year CD 0.90% --0.01 0.91%
2 Year CD 1.10%  0.02 1.08%
5 Year CD 1.74% --0.00 1.74%
 
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