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Oops and Boo-Boos

Posted by CC on January 17th, 2006

It’s tax season. At this time of year visions of W2 forms and big fat checks written to the IRS are dancing through most of our heads, and advertisers are counting on it. On Sunday, no less than four times during an NFL playoff that H&R Block ad ran about mistakes people make filing taxes (okay, maybe it was less than four times, but it sure seemed like more).

You know the one that I am talking about–kid’s mistakes have cute names like “oops” and “boo-boo” and adult mistakes (in the tax world) have scarey names like “fines” and “penalties”. As annoying as sitting through that commercial multiple times is, they have a point. Adult mistakes do have more ominous names, and not just tax mistakes.

House buying goofs can have similarly damaging consequences, and as the advertisement implies, it’s not that uncommon. Since we know that for most people (all people that I personally know and love) buying a house is the biggest investment they will ever make, it makes sense that it is done with a lot of care and planning. The fact of the matter is, however, that too many of us jump in head first and fail to do the research that is necessary to make educated decisions about the purchase as a whole.

So my point in this entry is this: do your homework! Do it, and do it well. There just isn’t a substitute for making well informed and well researched decisions when it comes to house buying.

How Much House Can You Buy?

Posted by CC on January 6th, 2006

Shop Wisely My Friends

Posted by CC on December 27th, 2005

When I think about shopping, I admit, I’m a total girl. I think dressing rooms and credit cards and linking arms with my friends as we skip through the mall. That’s why the word shopping never really fit for me when it came to mortgages. Shopping for a house, yes. For the financing…nope.

The thing is, regardless of my feelings about the wording, mortgage shopping is imperative. It’s vital. I read a statistic recently that said that at the end of a 30 year mortgage, you will end up paying more in interest the actual selling price of your house. If you were to borrow $125,000 at 8% for a 30 year mortgage, you will pay over $205,000 just in interest! Add that to your $125,000 initial loan, and you’ve paid over $330,000!

Now that my smart numbers have shocked you into the reality of mortgage shopping (no arm linking please!), here’s a major reason it’s important: not all mortgages are created equal. Depending on your situation, how much you want to have as a down payment, how long you plan to stay in the house, and other determining factors, one mortgage type could be better than another.

Fixed Rate Mortgage

Fixed rate mortgages are the most traditional home loan type. The term ‘fixed rate’ refers to the interest rate on the mortgage being just that, fixed. No matter if it’s a 30,20,15 or 10 year loan, the monthly payment for both the interest and the principle never changes. For a fixed rate mortgage, the down payment may be as low as 5%. The guarantee of predictable payments may cost a bit more in the beginning, but it might be worth it to you. (Side note: Although interest and principle payments are always the same, escrow expenses like property taxes and insurance could change from year to year.)

Adjustable Rate Mortgage

An adjustable rate mortgage (commonly referred to as an ARM) ordinarily begins at a lower interest rate (and as a result, lower monthly payments) than a fixed rate mortgage. The rate however fluctuates dependant on market interest rates. Generally an ARM is adjusted annually, but some are modified more frequently. Increases are usually capped for any given year and for the life of the loan.

For example, an adjustable rate mortgage could include an annual cap of 2% points and a cap over the life of the loan of 6% points.

Adjustable rate mortgages are advantageous for those who expect their income to increase in years following the first year of the loan. With an ARM, more house can be purchased in the beginning on a lower current income.

Balloon Mortgage

Balloon mortgages work for those who are planning on being in their home for a limited amount of time. This type of mortgage is popular with buyers in more temporary situations who want a lower interest rate but aren’t comfortable with adjustable rate mortgages. Often balloon mortgages have lower interest rates than fixed rate loans, but the full balance of the loan is due in five to seven years. In a case where a buyer with a balloon mortgage is still in the home at the end of the loan term, another mortgage must be found to pay off the first.

Jumbo Loan

A jumbo loan is like biggie sizing with a FDA approved loan. Most lenders follow the Fannie Mae or Freddie Mac guidelines to limit borrowing amounts to $252,700. Those looking to borrow more need a jumbo loan.

Buying a house is likely going to be the biggest financial decision of your life. Shop wisely is an understatement.

Refinancing

Posted by CC on December 19th, 2005

Several years ago, my mother refinanced her home. When she told me about it I was young, newly married and living in a basement apartment, and totally naive about what refinancing meant. I heard that she reduced the amount of years left to pay on her mortgage and thought, “Nifty! She’ll be payment free!”

Not that my mom felt the need to go into great detail when it came to the time and money that can be involved in refinancing. She didn’t. But if you are thinking about going the refinancing route–for whatever reason, someone should.

Most people that are in the market to refinance are doing it for one of four reasons:

1. To reduce their monthly payments
2. To consolidate outstanding debt
3. To take advantage of the existing equity in the home
or
4. To get out of a mortgage situation that they don’t particularly like.

If you are thinking about refinance, your first and possibly most important step is determining if it really is something you should do. When I was listening to my mom’s story about knocking ten years off her mortgage, I’m sure I wondered why everyone shouldn’t do the same thing. It’s not that simple.

The only way that you can responsibly make a determination about whether or not to take the refinance plunge is to weigh the time and cost factors.

Here are a few things that you should be aware of before you decide to refinance:

1. You may be charged a penalty for paying off your original loan early. Sounds odd, I know, but it’s possible, and you need to look into it.

2. The expense of a refinance depends on settlement costs, interest rates, points and other costs involved in getting a new loan. You should talk to a few lenders prior to making a final refinance decision about current (and available to you) rates and costs that will be associated. At that point you can determine the bottom line–which is your monthly or overall savings.

3. Evalute how long it will take to get back the costs of refinance by dividing the closing and other costs by the difference between your new and old payments (your savings each month). It’s important that you are aware of the time factor in deciding if refinance is for you.

4. Shopping for points is going to save you money. Like interest rates, you need to be aware that points will help reduce your overall expense. As a rule, each point adds about one-eighth to one-quarter of one percent to the interest rate the lender is offering. Those small percentages can add up and make a difference.

5. Realize that with a lower interest rate, there will be less to deduct on your income tax return. You need to determine whether or not an increase in your tax payments (and in turn a decrease the total savings) is worth taking.

6. Thinking about refinancing isn’t always about reducing your monthly payments. Like my example with my mom, taking a 15 year mortgage and having the same or even a bit higher monthly payments will considerably decrease the interest you pay over the years, and build your home equity faster.

7. Know that you don’t have to use the same lender for your refinance as your original home loan, but as long as you are considering it, find out if your current lender is willing to offer incentives to keep your business. No matter who you choose to borrow with, a lender, according to the Truth In Lending Act, must give you a written statement of the expenses and terms of your refinance before you are bound legally to the loan. Don’t discount the importance of a complete understanding of what you are getting into.

Realize that the eventual amount you could save is dependent on several considerations, which include, but may not be limited to; your total refinancing costs, the effects on your tax deductions, and how long you keep the house you are refinancing.

Talk to your lender. Talk to other lenders. Be certain that refinancing is truly worth all the time and effort that must go into it. Bottom line, “Nifty! Payment free!” doesn’t come cheap.

Six Foot Ceilings and Fixer Upper Homes

Posted by CC on December 12th, 2005

When my husband and I were first married, we were looking at apartments that were closer to the college campus where we were attending school. We looked at several before we came to a basement apartment right across the street from the University. I instantly fell in love with the place. It had new carpet, a diswasher, and the cutest little wallpaper border all around the kitchen.

We left with me nearly in tears. In spite of the fact that I lobbied (rather selfishly) to take the apartment, we didn’t move in. You see, my husband is 6′2″, and the ceilings in the place were only 6 feet. It was so cute, that I was willing to compromise my husband’s back health to live there (notice that I say I was willing, but I am only 5′4″).

What does this have to do with home mortgages and loans? There is a lesson to be learned here. When I walked into that apartment, I got starry eyed and didn’t see the whole picture. Jon would have been miserable there because he could never (not even in the shower) stand up straight. Think about that in terms of house hunting.

We were just looking to rent, but what if, in looking to buy, the perfect cottage style house in the country overrides the fact that there are so many repairs to be made that it’s going to cost a small fortune? What if, despite the idea that it’s just what you’ve always wanted, it’s so far away from work that you’re never home?

In short, don’t let your emotions take over when you are looking for your white picket fence dream. On the flip side, no house is perfect, especially older ones. It’s common for new owners to assume some of the repair responsibilities, and you shouldn’t let that nix a deal on a house that you and your family would love.

Improving Your Credit and Payment History

Posted by CC on December 7th, 2005

There are obviously several things to talk about when it comes to improving your credit. I decided (for several reasons, not the least of which is that I needed a refresher) to do some research and found mountains of information on the subject?especially when it comes to mortgages and credit scores. Because of the stacks of data from various sources, no matter how hard I try I can?t condense it into a decent blog entry, so this will probably be the first of a series on the topic.

No matter where I looked, or what I read, the first item on everyone?s list is to pay your bills on time. Seems like a no-brainer, but it?s probably the first and most important place that most lenders or brokers investigate. Although a few 30 day late payments aren?t going to cause too much damage to your credit, the same amount of 60 days or any public judgements, and your score could drop significantly. Your payment history is particularly important near or around the time you are planning to apply for your loan.

FICO scores are determined largely by five categories, and Payment History accounts for 35% of your score. I checked it out, and FICO (roughly anyway) determines Payment History to encompass the following:

  • Payment information on specific types of credit, which include credit cards, retail accounts, installment loans (like car payments for instance), finance company payments, and mortgages.
  • The presence of negative public records (like bankruptcy, lawsuits, liens, wage attachments, and collections).
  • Severity of past due payments (how long the payments were past due)
  • The amounts of past due payments on accounts or collection items.
  • How recent the past due payments or public judgements were.
  • Number of past due items are on your record
  • Number of accounts that have been paid as agreed.

If you have missed payments, the best things to do is get current and stay that way. Again, seems like a no-brainer, but it holds enough weight that it needs to be mentioned here. The longer your bills are consistently paid on time, the better your credit and score will become.

Obviously getting up to date is important, and it?s equally important (at least I think it is) to realize that paying off collections won?t remove them immediately from your credit report. Most public judgements or liens will stay on your credit for seven years, and bankruptcy may follow you for up to ten. Don?t let that be too discouraging though. Although taking control of your debt won?t improve things right away, it can and will get better.

Credit Card Statement Wallpaper

Posted by CC on November 21st, 2005

My friend Nicole* has stacks of credit cards. She can’t even fit them all in the cute wallet (with matching purse) that she bought with one of those cards. The mall loves girls like Nicole. She looks great in anything she tries on, and buys a great deal of it on store credit cards.

The amazing thing is that despite the fact that she could wallpaper her house in credit card statements she is phenomenal at managing her credit. Generally speaking, she keeps her balances at zero, or well below her limits.

More often than not, having credit cards and installment loans and making payments on time will raise your credit score. Someone with no credit cards at all has the potential to look like more of a risk to a broker or lender than someone like Nicole who handles their credit well.

Maintaining low balances on credit cards and revolving credit is an important factor in getting and keeping a good credit score. High outstanding debt can affect your score even if you’ve made timely payments. If you’ve used a large portion of your revolving credit lines it can indicate to a lender that you’ve over extended yourself and may be a risk.

Be very aware of your non-mortgage debt payments versus your total income, especially around the time you plan to apply for a mortgage loan. Many experts suggest that debt payments shouldn’t exceed 15% of your income, and that credit card balances should be kept at or below 25% of the limits.

Don’t be tempted to simply move your debt around rather than paying it off. Owing the same amount but with fewer accounts (and higher balances)can actually negatively affect your score. You should also take care to apply for new accounts only when you need them. Opening credit card accounts just to have a better credit mix can backfire.

Nicole is a great example of both what to do and what not to do when it comes to the “Amounts Owed” category (which holds 30% weight) for FICO scores. If it were solely based on timely payments and balance maintenance, her score would be in the bag (or shopping bag as the case may be). The fact that she has so many cards could adversely affect her score, and her chance for a mortgage loan.

Bottom line, most of us can’t be perfect in every factor involved in credit scores, and a lot of us have room for improvement. For people like Nicole though, I guess it’s nice to know that there are at least some redeeming credit qualities to her shopping habits.

Late Night TV and FICO Scores

Posted by CC on November 11th, 2005

I’ve been thinking a lot about credit lately. Partly it’s because of my sister buying a house and discussing those things with me, but it’s also because there seems to be a rash of commercials about credit scores and mortgage rates lately on late night TV (and unfortunately, I watch a lot of that since my daughter refuses to sleep normal three year old hours…whatever those are).

On one such late night, that commercial with the guy talking about his credit rating being in the 700s came on, and it occurred to me that the number (even though by his tone most anyone can assume he’s fairly proud of it) could mean very little to some people. The fact that his credit score is in the 700s means nothing if you don’t know what it is or what it’s used for. This may be extremely elementary, but I thought we could all stand for a little review. If anything, the research I did was a good refresher for me.

The rating is called a FICO score, and most lenders use it in some form on which they base their approvals. A FICO score is a three digit number usually ranging from 300 to 850. You will have three FICO scores, one for each credit bureau (Equifax, Experian, and Trans Union). A FICO score will be used under several circumstances which, as most assume, includes applying for loans (like your auto loan, a mortgage or a home equity loan). Your FICO scores can also be used in applying for credit cards, renting an apartment or beginning cell phone services.

Credit scores are calculated from a lot of data, but for the most part that information can be grouped into 5 categories. According to myfico.com, the percentages reflect how important each of the five categories are in determining your score.

Payment History 35%
Amounts Owed 30%
Length of Credit History 15%
New Credit 10%
Types of Credit Used 10%

There are some things that are not in your FICO or credit score, although your lender or broker may still take some of these things into account when determining whether or not your loan will go through. Again, according to myfico.com, the following is not in your score:

–Race, religion, national origin, sex and marital status
–Salary, occupation, title, employer, date employed or employment history.
–Where you currently live
–Any interest rate you are currently being charged on a credit card or any other account.
–Any items reported as child or family support obligations or rental agreements
–Consumer requests for your credit report

In the next few posts, there should be more detailed information here about each of the five categories FICO uses. I know it’s not as entertaining as picking out drapes and deciding on microfiber versus leather for the family room furniture, but credit is an important step to getting to the fun stuff.

My Sister and Mortgage Rates

Posted by CC on November 9th, 2005

My baby sister closed on her house this week. Since she and I are close, she has called me with various updates on the process in the past month or so. Along with area schools, decorating ideas and bedroom sizes, we have also discussed interest rates, monthly payments and FHA loans (she and her husband are first time home buyers).

Despite the fact that rates seem to be going up every time the Federal Reserve meets (they have raised rates 11 times since June of 2004 and have indicated that it’s going to happen again by the end of the year), it’s still a great time (historically speaking, anyway) to be taking the mortgage plunge.

Right now, the average rate for a 30 year fixed mortgage is just over 6%. The Mortgage Bankers Association’s recent long term forecast predicted that it’s going to go from it’s current 6.10% to 6.65% in the fourth quarter of 2006 and up to 6.75% the fourth quarter of 2007. Sounds ominous, right?

Look at the last few decades though. According to an October 2005 article in CNN/Money, the average rate in the 90s was 8.12%, and in the 1980s, it was 12.70%. In October of 1981, interest rates for the average homeowner were a whopping 18.45%! That’s worse than the interest rate on my first department store credit card!

I’m not saying that it’s a great thing that interest rates seem to be swelling every time the Fed meets, I’m only pointing out that it could be (and fairly recently has been) worse.