Why Is My Credit Bad
January 24, 2010 by · 1 Comment
When you begin the process of securing a home loan, often you will compare mortgage rates first. It is soon after many find that their credit history is nto as good as they thought. Your credit maybe considered bad and causing a low score for a number of reasons. While there are numerous reasons for bad credit some of the more common ones are as follows. You have numerous credit cards that are maxed out or close to the credit limit, you have unpaid judgments or collection accounts, you have 30 day late payments showing on your payment history. All of these examples can cause severe drops in your credit score.
One area people overlook that can negatively impact their credit report is failing to honor mobile phone contracts. Cell phone companies give away free phones to customers who sign on with their services for a specified period of time, usually one to two years. Terminating subscription to the phone service before the expiration and failing to reimburse the phone carrier for the cost of the free phone is considered breaking the contract. Cell phone companies would then report to the credit bureaus and cause a blemish on the credit history. Such blemishes are not serious, but they nonetheless lower credit scores.
Credit scores generally range from about 350 to 850.
* 800+ = great credit
* 700-799 = good credit
* 600-699 = average credit
* 500-599 = bad credit
* under 500 = hard to get a loan at all
Your credit can be bad for a variety of reasons:
Late payments
High Account Balances
Bankruptcy
Collections
Chargeoffs
To minimize negative on your factors you will need to pay down balances, make payments on time, dispute incorrect information, and let the passing of time lessen the impact of past bad credit.
Too many inquires at one time can affect your credit score.
If your credit score is low because of a high balance on a credit card, transfer some of the balance to another card. Try not to open a new card because to do this can also reduce your score.
One reason why your credit may be bad is because of erroneous information reported on your credit report. This can happen to anyone and is actually quite common. This is one reason why you need to check your credit report out at least once per every 12 months. By checking you credit report for free you can keep an eye on your credit and make sure that you take care of any erroneous information when it happens, not when you are trying to apply for a loan and it comes as a surprise to everyone. Utilize your one free annual credit report each year to take a look over your credit to make sure everything looks well. There are many reasons as to why credit report errors can happen so make sure that if errors do happen to you that you rectify the situation immediately.
Maintaining high balances on your credit cards and other revolving debt negatively impacts your credit score. Paying down credit cards balances below the 70%, 50%, and 30% thresholds is a quick way to boost your credit score.
Paying down your credit card balances to around 30% will help your score. If you can, try to keep the balance at that level at all times. If you need to raise your score quickly, and don’t have the money to pay down your balances, you may request that your creditors increase your credit limit. This will in turn lower your balance in comparison to the limit.
Only use this technique if you are responsible with your credit. Once your limit is increased, it may be tempting to go on a shopping spree. Know that if you do this, you will be in a much worse situation than when you started. Not only will you have more debt, but you will increase your ratio of balance to limit.
You should frequently check your credit report at least twice a year to know what your credit profile looks like. Sometimes erroneous items appear on credit that you may not know about and when it comes time to utilize your credit it can affect the rate you will get. Depending on the state you live in, you are allowed at least one free credit report per year from each of the three major credit bureaus; Experian, Equifax and Transunion.
Watch on your credit report for companies that are illegally renewing the chargeoff date every month in order for the account to never gain history. These companies you should call and address this immediately.
Here is a general guidline which outlines the five major types of information used to calculate a FICO score. Each type of information counts as a percentage of a total FICO score:
- 35% Payment History
- 30% Amounts Owed
- 15% Length of Credit History
- 10% New Credit
- 10% Types of credit
There are several ways to increase your credit. However the fundamental principle is the bills must be paid on time. This doesn’t mean by the due date. For the sake of your credit a payment must NEVER be more then 30 days late. If you are acquiring 30 day lates on your credit then your credit standing will deteriorate quickly. Judgments also hurt your credit even if you pay them.
It is also important to note that a credit score is a snapshot. Although it shows your payment history, length of credit, etc., having inaccurate (negative) information removed from your credit bureau report will immediately reflect an increase in your score.
If you do decide to pay off some of your credit cards, be sure to leave the cards open. The credit bureaus look favorably upon accounts that have been open for a substantial period of time, especially if they are showing a zero balance.
Remember that a credit score amounts to a prediction of how likely it will be that you go 60 days late or more on your mortgage in the next two years. One thing that will really lower this score is if you carry high balances on revolving debt and then start making a few of the payments late. This is the pattern of a consumer who is close to getting in trouble with debt.
Things that may go into a collection or judgment that will hurt you credit include unpaid medical payments, unpaid utility payments, and unpaid cell phones or cable payments.
If you have old collections on your credit report, paying them off now can actually hurt your credit. Credit Agencies look at the age of a delinquent item: if you pay it off the “date of last activity” becomes recent instead of old. There are many reputable credit repair agencies or credit counselors that can help guide you in restoring your credit.
Should You Pay PMI or the Higher Interest Rate
January 24, 2010 by · Leave a Comment
You Compare mortgage rates but,should I pay PMI or go with the loan with a higher interest rate but no PMI? This is a choice many borrowers face when deciding on a loan. There are many pros and cons for each choice. Borrowers should talk to an experienced Mortgage Consultant or Financial Consultant to help with their decision.
Some lenders pay the mortgage insurance on loans over 80% by raising the rate by a small fraction. This allows the borrower to get one loan and not having an additional expense which is not deductible on one’s taxes.
There are loans out there where PMI is not required and your interest rate will not be effected as well. For example, keeping your LTV (loan to value) below 80% will allow you to not pay PMI with any loan, where it may just be a lender that does not require it.
Why do lenders charge PMI if your loan is above 80% LTV? Studies have shown that most foreclosures happen before the borrower has 20% of the mortgage’s principal paid off. So, loans with an LTV of 80% or higher pose a greater risk to the lender.
You may also choose to do a combo mortgage like an 80/20 to avoid PMI. A combo mortgage carries with it a higher rate
on the second mortgage. Even with a higher rate second the borrower often comes out ahead when compared to a traditional loan with PMI.
Some savvy buyers will negotiate for the seller to pay the PMI as a one time up front charge. Be sure to ask your Loan Officer and Realtor if seller paid PMI is an option for you.
PMI is not tax deductible, but mortgage interest is. You will want to take that factor into consideration when making your choice.
There are also some lenders that offer a lender paid MI program. On pay option loans they will usually increase the start rate of the loan.
There are also some loan programs now available that do one loan up to 100% with no PMI, ask your Loan Officer for more details.
Private Mortgage Insurance (PMI) must be maintain until the loan balance falls below 78% loan-to-value (LTV) ratio. The decision on getting a loan with a higher interest rate or one with PMI depends partly on how long for the loan to reach 78%. Also, home owners tend to opt for mortgages with PMI if they intend to refinance in the near future.
How Market Conditions Affect Interest Rates
January 24, 2010 by · Leave a Comment
The Federal Reserve recently lowered interest rates to an all time low. The rate is now close to zero , but how does that affect home mortgage rates? Market conditions are a primary factor in determining mortgage interest rates. Rates fluctuate day to day. Take the time to compare rate quotes
When the Chairman of the Federal Reserve lowers “rates,” he lowers the “Federal Funds” rate. Its the interest rate at which large banks lend funds to one another and is a “short-term” rate. Mortgage interest rates are long-term, up to 30 years. Longer-term interest rates are sensitive to expectations about inflation. When short-term rates fall, like the ones the Federal Reserve controls, borrowing and spending usually increase, which can actually cause inflation. Longer-term rates, like mortgage interest rates, can rise when concerns about inflation increase.
Bond prices and bond yields have a direct effect on long term interest rates. Bond prices and bond yields always move in opposite directions (if one pays more for a bond, the yield decrease, and vise versa). Bond prices, hence their yields, are affected by many economic indicators. Some of the monthly economic indicators the bond market pays close attention to are Non-Farm Payrolls, Unemployment Rate, and Gross Domestic Products, Consumer Price Index, Producer Price Index, and Retail Sales. As a rule of thumb, when these economic indicators forcast a strong or inflationary economy, bond prices fall and bond yields increases, interest rate will go up. If a weak economy or low inflation is expected, bond prices rise, bond yields falls and rate will fall.
When the Stock Market is in a Bull trend (Up Trend) it is indicative of monies flowing into the market. Historically, The stronger the up trend in stocks, the weaker the real estate market will be durring the same period. Weak realestate markets (lack of demand) will result in declining prices in home values, which usually correlate to a rise in mortgage interest rates.
One aspect of the economy that can cause interest rates to rise is inflation. One of the reasons interest rates were so high back in the 1980’s was that the market felt that inflation was out of control. Investors demand high rates of return when there is inflation because they are investing or loaning with today’s dollars and being repaid with tomorrow’s money. If the market senses inflationary trends, interest rates will usually rise.
Many domestic and international investors, particularly those investing in the country’s stock and currency markets, will respond to a hike in interest rates by moving money out of the country. This is due to a belief that the increased cost of borrowing will weaken balance sheets and devalue equities, thereby creating a ripple effect which weaken’s the country’s currency.
Because Adjustable Rate Mortgages and Fixed Rate Mortgages are affected differently it is very important to find a mortgage professional who understands the market conditions and the relation between the bond markets and interest rates. Your mortgage broker can help you make the decision on when to lock a rate which can save you thousands of dollars over the life time of your loan. He can also help you choose the right program!
It is important to note that Adjustable Rate Mortgages (ARMs) and Fixed Rate Mortgages are affected differently by an increase made by the FED or Federal Reserve. The FED makes adjustments to the short term rates which in turn affects things like the bond market, a key determining factor in the 30 year fixed rate. The 30 year rates work in the opposite direction to the 10 year note. If the price of the 10-yr note falls, the rates rise.
Adjustable rates are comprised of two things an Index, and a Margin. The margin is set by the banks so when the FED adjusts the rates, banks in turn make adjustments. The Index is a regularly published rate that is independent of the lender and generally used as a market indicator. Examples of and Index would be: PRIME, LOBOR, MTA, COSI, etc.
Markets are often ahead of the Federal Reserve. Mortgage interest rates are determined every day in active public markets. If those markets believe the economy is slowing, interest rates may fall as markets anticipate that the Federal Reserve might lower short-term rates. This happened in the last half of 2000 when mortgage rates began steadily dropping, even though the Federal Reserve left their short-term rates unchanged. The opposite can happen as well. Mortgage rates can rise well ahead of the Federal Reserve increasing short-term interest rates.
It’s almost impossible to accurately predict the future of something as complex as the U.S. economy. However, it is important that we, as mortgage consumers, understand some of these market dynamics. Sometimes, a lack of understanding can cost us a lot of money.
This is why it is important to “shop” for your mortgage with lenders on the very same day. Key factors can see mortgage rates changed several times in a given week, sometimes in the same day. The lender that you get a rate from on Monday may not be able to give you the same rate on Wednesday.
Choosing The Best Mortgage For You
January 23, 2010 by · Leave a Comment
When searching for a mortgage or trying to compare rate quotes you will find that every lender you speak with has the best mortgage program for you. They have to say that. It is a sales tool. Much the same way car dealer promote their vehicles as the best vehicle money can buy and always at the lowest prices. Again, sales pitches filled with illusion.
The best mortgage program for you depends on your personal situation. Your decision depends on your individual needs and various factors.
Factors that will determine your best mortgage program are
1. credit score, income, asset, and job status
2. your monthly budget
3. how long you plan to reside at the property
Depending on your credit score, income, and other factors you may only qualify for certain mortgage programs. If this is the case, you are better off taking one that you know you can qualify for, and then refinancing out of it when your situation has improved.
When deciding the answer to this question its best to let your mortgage professional know everything your looking to accomplish. At that point they can begin to tailor a loan that will fit your needs. If your needs change you need to let the mortgage professional know so he/she doesn’t waste your time.
This is one of the many tasks your professional and trusted mortgage advisor will provide for you, figuring out which programs you qualify for and which ones will be best for your unique individual situations. There are many, many home loan and mortgage programs out there for you to choose from. Everything from interest only loans, Pay Option ARM loans, fixed rate loan, balloon mortgages, and much more. Your current situation however is really going to provide the basis for which program is right for you. If you only plan on living in a home for 3-5 years then an ARM may be best for you. If you are a self-employed person and your income is very unstable and interest only or Pay Option ARM loan may be right for you. Take some time to explain your situation to your mortgage broker and provide him as much information as possible so that you can be fitted with the best program for yourself and your family.
Selecting the best loan program will depend greatly on what your short and long term goals are. Discussing what your financial and housing goals are with your mortgage professional will make the decision process that much easier. Your mortgage professional can analyze your situation, make suggestions, and explain the pros and cons to each program offered.
If your credit scores are low you should consider an adjustable rate mortgage. Between the time of your first payment and the adjustment date you should concentrate on improving your credit scores in order to qualify for a lower, fixed rate mortgage. Ask your preferred mortgage professional for a credit repair guide.
Bi-Weekly Mortgage Programs
January 23, 2010 by · Leave a Comment
Imagine paying your mortgage once every two weeks to pay it down quicker. Better yet, imagine a more desirable scenario- your mortgage is being paid bi-weekly by a company that has advertised a special service for mortgage reduction or a savings program.
Is there such a thing as a company that will pay your home loan bi-weekly in a manner that will help you and give you a more advantageous financial picture?
The straight up answer to this is no. There is no fairy godmother to wave her magic wand, nor is there a magic potion. If you are paying a mortgage then you have to pay it. It is as simple as that. There are no exceptions. If a company professes to be willing to make bi-weekly payments on your home loan for you they are not telling you the whole truth.
Let us take a closer look at what these companies are actually doing instead. The company will deduct money from your bank account on a bi-weekly basis. They will then take this money and put it into an account that is the one from which your mortgage payments come from. Your mortgage payments will then be withdrawn by your financial institution once a month. Instead of the standard 24 deductions in a calendar year, the so-called “mortgage reduction service” will deduct the money 26 times.
What happens with the money that is deducted two more times a year? The company then takes that money and makes another mortgage payment. To put it another way, as a homeowner you then will made 13 payments on your home annually instead of 12.
The worst part about these services is that while they claim to save you money, they are charging you exorbitant fees for the supposed help they are providing to you. Their claim that they will save you money in the long term and that you will pay your mortgage off faster is supposed to make you forget that in the short term you are paying out plenty of your hard earned money to them. In truth they are not helping you at all.
These services try to tell consumers that the only way to make an extra home loan payment in the course of a year is to go through them. This is completely false. If you wish to do this you can make appropriate arrangements with your financial institution. One method of doing this is as follows- Set up automatic withdrawals for your mortgage payments on a monthly basis and ask that an extra 1/12 payment be added to the principal of the loan monthly. By the time a year has passed you will see that you have made the extra payment without the need to look to any type of reduction service or program.
There are other ways that you can make an extra mortgage payment. For example if you have a sizable tax return on its way to you then use this money to lower the principal of your mortgage. This can make a great deal of difference in how long it will take you to pay off your mortgage.
Even if your tax return funds are only enough to make one extra payment annually, if you do this year after year you can knock a 30 year mortgage down to approximately 23 years! This can also save you a lot of money in interest charges.
When you see ads proclaiming to help you reduce your mortgage because of a special service or program, run the other way! Look to more responsible and cost saving ways of bringing down the amount you are paying on your mortgage. Do not let yourself be fooled! Be smart and wise about your money. Learn how you can save money on your home mortgage without costing you money.
