Saving on mortgage interest

Now that rates are on the rise, you’ll want to do everything you can to save on interest payments when you take out a mortgage for a new home. If you borrow $100,000 at 8 1/2 percent for 30 years, you’ll pay $176,809 just in interest over the life of the loan. Obviously, any portion of that amount you can divert to your retirement fund would be to your financial benefit.

To save on interest payments and build a more secure future, keep in mind one basic principle: The quicker you reduce the balance, the less interest you pay. This requires a consistent strategy to divert more payment dollars toward principal reduction and less toward interest.

Is paying off your mortgage always the best way to go? You’ll have to decide. For many homeowners, satisfying their mortgage is an important goal that goes beyond pure quantitative analysis. They want the security that goes with not having a monthly house payment. But for others, paying off an 8 1/2 percent mortgage is nothing more than making an investment with an 8 1/2 percent return. You won’t gain much financially by paying off your mortgage if you can get a higher return by putting extra cash into a mutual fund or other high-yield investment instead. But this strategy is riskier and takes a lot off effort in planning and tracking the performance of various funds.

For homeowners who want to build risk-free equity in their homes, we offer several alternatives to the 30-year mortgage that’ll take the bite out of interest payments.

Taking out a mortgage with a shorter term than the usual 30 years can give you more money for your retirement. The interest on 15-year loans is typically about 1/2 percent less than for 30-year programs, making them more attractive and easier to qualify for. The savings can be substantial. An 8 1/2 percent 90,000 mortgage over 30 years will carry an interest tab of $159,128 (see the table, below). Shorten the same loan term to 15 years and you will pay $69,528 in interest – a saving of $89,600.

The payments on a 15-year mortgage are not double that of a 30-year loan, but only 26 percent higher. (They’re less if you factor in the lower interest rate you’re likely to get on a 15-year package.) That means you don’t have to earn double the income to qualify for die shorter loan.

If you can’t quite handle the higher payment of a 15-year loan, a 20-year mortgage is a good compromise. The savings are still impressive. A $90,000 loan at the same 8 1/2 percent rate will save you $61,678 if you shorten the term from 30 to 20 years.

Choosing the right lawyer can make a big difference

Karen Mayo says her bankruptcy attorney saved her life. Phil Flom says his bankruptcy lawyers ruined his.

It’s been about 10 years since Mayo and Flom went through what sometimes is called “straight bankruptcy” – freeing themselves of debt under Chapter 7, or liquidation, of federal bankruptcy laws. Both had been fairly comfortable financially before being forced into bankruptcy by unforeseen circumstances. Both say they have managed to rebuild their finances somewhat since then, although each says it’s been a painstakingly slow process.

And both say their relationships with their attorneys – Mayo’s good, Flom’s bad – set the tone for how their bankruptcy cases unfolded.

phoenix bankruptcy lawyers and trustees say the biggest mistake people make in hiring a lawyer is failing to clearly understand what they’re getting for their money. Most people wouldn’t dream of buying a house without knowing whether the price includes the washer, dryer, range and refrigerator. They wouldn’t rent an apartment without asking who picks up the tab for the heating bill.

Yet it’s not uncommon for people to assume that the fees they pay to a bankruptcy attorney cover not only the basics of filing petitions, completing schedules and appearing at creditors’ meetings and in court, but also other services such as financial counseling and fighting mortgage foreclosures.

Ian Ball, a Twin Cities bankruptcy attorney, says that in his line of work he has “clients for life” because of problems that can arise even after an individual’s bankruptcy plan is confirmed in court. He says he explains to potential clients that they can be billed for things that come up after their bankruptcy plans are confirmed, although that is negotiable because he understands they may be financially strapped.

That’s particularly true for Chapter 13 of federal bankruptcy laws, under which individuals can work out a plan to repay their creditors over an extended period of time.

Stephen Creasey, an attorney who works with the state’s Chapter 13 trustee office, offers this example of how people can be hurt if they don’t clearly understand what services they’re buying from their attorneys: Assume a debtor files and gets court approval for a repayment plan, then falls behind on mortgage payments a couple of years later. The mortgage company tells him it’s going to foreclose, and in a panic, the debtor calls up his bankruptcy attorney assuming that the attorney can iron out the problems.

The attorney may be able to straighten things out, Creasey explains, but it’s going to cost the client extra. The client is furious, figuring the original fee covered any problem that would ever surface connected with repayment of debts.

“It’s very important that an attorney and client have a very clear understanding of what’s covered by the fees, and how accessible that attorney will be to handle things that may come up over time,” Creasey said.

Bad advice

Flom says one of the biggest problems with the first attorney he hired (he later fired him and hired someone else) was getting advice on how best to protect assets he had accumulated, especially a Red River Valley farm that had been in his family for more than 100 years.

Flom, who has always been self-employed, had found himself in financial trouble because he was behind on mortgage payments on his home in the Twin Cities. Those problems were a result of tax liens related to a dispute Flom had with the Internal Revenue Service. An acquaintance referred him to a tax attorney, who suggested that Flom file bankruptcy.

Because Flom owned a small business, the attorney advised him to file for bankruptcy under Chapter 11 of the bankruptcy code. The attorney, who didn’t specialize in bankruptcy law, may not have known that because Flom was self- employed, he could have filed for Chapter 13. Flom said he later was told that if he’d filed for Chapter 13, he might have had a better chance of keeping his farm. As it was, his case dragged on for four years and eventually was converted by the second attorney, who also didn’t specialize in bankruptcy, to a Chapter 7 liquidation. The farm was sold for $75,000, far less than its $200,000 market value.

Flom acknowledges that he probably was somewhat naive in choosing his attorneys. He says he assumed that if they were lawyers “they knew the law.” He advises anyone facing bankruptcy to hire an attorney with a proven track record in bankruptcy practice, someone who regularly works with the intricacies of the bankruptcy code.

“There’s nothing wrong with coming right out and asking an attorney how many {bankruptcy} cases he has done, if he does them occasionally or if he specializes,” Creasey says. In addition, Creasey says, people should ask how much experience an attorney has with particular types of debt problems, be they tax arrears, mortgages or credit card debt.

Shopping for a lawyer

Molly Shields, a Twin Cities attorney who also is a Chapter 7 trustee, says competition among lawyers for clients currently means that some people can “shop for price.” But she cautioned that it’s better to do that if you have an uncomplicated case. It may be worth it to pay more in fees to get the right lawyer to handle a complicated case.

Karen Mayo’s Chapter 7 filing was a reasonably straightforward case, but she credits her attorney for making it much easier for her. Mayo, who now works as a residential services coordinator at a senior citizens’ development, had just earned a teaching degree but didn’t have a steady job when her husband left her about 10 years ago. She was left with thousands of dollars in medical bills he had accumulated, plus the expenses of raising four children.

“I paid the people who screamed the loudest” – the health care providers, Mayo said. That left her with little money for other things, such as clothes for her kids, and as a result her credit card debt began to climb. In addition, she was still responsible for paying a student loan.

An acquaintance referred her to a family practice attorney who advised her to file for Chapter 7. It cost her $600, but it wiped the financial slate clean of everything but her student loan.

“What I remember the most is how much time he spent explaining the theory behind bankruptcy, how it was designed to give people a fresh start. He was extremely patient and kind, advising me on the importance of moving toward establishing a good credit rating once the bankruptcy was over,” she said.

Mayo said she’d advise people looking for a bankruptcy attorney to get a word-of-mouth referral. “I’d put more stock in that than any advertising,” she said.

Mayo’s good experience also shows how important it is to feel comfortable with your attorney. Ball says the right chemistry between clients and attorneys is essential to a good working relationship.

Flom can testify to that, too. Looking back, he says he should have known that things weren’t going well with the attorney he eventually fired.

“If the guy had been a doctor, you would say he had the bedside manner of a mortician,” Flom said. “There just was no relationship.”