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Should Tom, Dick and Harry Pull Your Credit?

May 20th, 2008 8:35 AM

The fact of the matter is that today when you are investigating home financing, the big question on everyone’s lips is, “What’s your credit score?” Many people are clueless as to what their credit score is. Pricing and product availability are hugely driven by credit scores in the mortgage industry. The difference between a 620 credit score and a 720 score means a world of difference to your wallet. However, when it comes to lending money for a home loan, there is a point when a lender must make a credit inquiry.

What is a credit inquiry? It’s when a lender or another entity you are asking to extend you credit requests a tri-merge credit reporting agency to assess and report your credit scores. At the back of the report, there is a list of what organizations you have given permission (or not) to pull your credit recently. And, too many credit inquiries can affect your credit score negatively. However, not all inquiries will do so, just ones that are a result of you applying for new credit. For example, if you apply for a mortgage, car loan or credit card, these are the types of inquiries, when you agree to them, which can affect your FICO credit score. The term FICO stands for Fair Isaac & Co. Credit, the entity that developed this scoring method for determining if you’ll actually repay your debt. However, some inquiries don’t affect your FICO credit score, like a future employer doing a background check on your credit.

So, if you want to apply for a mortgage, and compare different lenders, are you asking for trouble by allowing every Tom, Dick and Harry to pull your credit (or Tammy, Diane and Helen for that matter)? Well, yes and no. It depends. The scoring engine will typically ignore all mortgage or auto inquiries made in the 30 days prior to your most recent scoring. So, you need to make a decision within 30 days if you plan to do major rate shopping. And if the scoring engine finds mortgage or auto inquiries older than 30 days, it groups those inquiries into a typical shopping period as well. So, yes you can shop, just do so wisely.

I advise you to let one lender pull your credit; they can tell you what your score is, and then you can inform other lenders what your score is for the purpose of comparing loans. You can also ask what your debt to income ratio is. With that information, a lender should be able to give you a Good Faith Estimate and Truth in Lending that’s pretty spot on. If they say they can’t do so without pulling a credit report, then move on. A lender should be able to give you an estimate if you know the answers to the right questions. And since it’s an estimate, if you give the wrong information, be aware that all bets are off. As long as you are aware that what you are quoted is based on the information you’ve given(as yet unverified), the lender should be able to give you information that allows you to choose them from other considerations. When you’ve made the final choice, the lender will then have to pull your credit to move forward if they have not done so already.

So, be a smart shopper. But don’t be careless with your information. It could hurt you if you don’t share it wisely.

Posted by Admin . on May 20th, 2008 8:35 AMPost a Comment (0)

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Putting the Brakes on Retirement Budget Crunch: The Reverse Mortgage

May 8th, 2008 11:08 AM

Sometimes the Golden Years aren’t as bright as you had hoped. It should be a time for you to spend time with family, do the things you never had time to do and always wanted to, and enjoy life in general. But many people face financial challenges at this point in their lives. Perhaps your retirement plan didn’t pan out (any Enron victims out there?). Or, maybe the recent cost of living increases weren’t originally in your budget plan. If this scenario sounds familiar, than a reverse mortgage maybe an option to consider.

What is a reverse mortgage? It’s a Home Equity Conversion Mortgage, also known as a HECM (pronounced “heck-um” by all us mortgage people). It is a government insured program that allows a person of age 62 years or older access to monthly cash by tapping into the existing equity in their home.

There are different HECM products out there, but there are some features and safeguards you should seek if you are considering this move. Make sure that the program you are considering allows you to retain title to your home. Also, the loan should be non-recourse, or in other words, you should never owe more than your house is worth. The loan should not have to be repaid until you permanently leave or sell the home. And also, you should be asked to take a counseling class (conducted by someone other than a HECM lender) to ensure you understand the terms of the mortgage. And before you make that final decision, talk to your kids, your attorney or someone who cares about you and whom you trust. Don’t take the plunge until you’re certain this plan will work to your advantage.

A HECM is designed to deliver increased tax-free monthly income to most people (double check this point with your financial counselor) and eliminate monthly mortgage payments. So, it’s different from just your basic home equity line of credit. There is also no income limitation to fret about. The amount of money you can receive depends on things such as your age, how much your home is worth, the current market rates and which HECM product you pick. In general, the older you are and the more your home is worth, the more money could be available to you. Most HECM’s have costs similar to a regular mortgage, but make sure you do your homework. You can get a conventional or an FHA HECM. Your mortgage counselor will help you figure out which best fits your needs.

For many people, a reverse mortgage makes a lot of sense. It can allow you to live in your current home more comfortably, and still do those things you’ve always wanted to do. So, maybe taking the grandkids to Disney isn’t out of reach. Or skydiving lessons can still be a consideration. Or maybe you just need a new roof on the house. If you aren’t living the life you deserve or expected, you owe it to yourself to see if this option works for you. Talk to your kids, advisors or friends and see what they think. And if the stars align, maybe you should reverse the direction of your retirement budget.

Posted by Admin . on May 8th, 2008 11:08 AMPost a Comment (0)

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Mortgage Amortization...Avoid Paying the Piper Too Much

April 12th, 2008 10:47 AM

When obtaining a home mortgage, understanding what amortization is and how it can affect your pocketbook is an important concept to understand……

Amortization. Big word. And an important word in the loan world. It doesn’t matter whether you’re getting a loan for a boat, car or home - it’s an important concept to grasp. Of course, I’m going to focus on how understanding your loan amortization is important when considering home loan financing. It can mean a big difference in the amount of cash you shell out toward your home mortgage over time.

Amortization is the repayment, systematically, of calculated principal and interest to a lender over a designated period of time. Calculating an amortization schedule is a not an easy task. Thankfully, some really smart mathematical whizzes came up with tools that do it for us automatically. You can just punch in the numbers and print out a schedule. You can find online tools to assist you if you’re sitting at home and curious to see your current schedule. Or dig through your folder of loan closing documents. You should be able to dredge up a copy. And if you’re considering a home loan, your lender should be able to provide you with amortization schedules for different financing scenarios.

What does an amortization schedule look like? Pages and pages of numbers that finally end up reflecting your loan balance paid off. It points out to you, payment by payment, exactly how much of your monthly loan payment is directed toward principal reduction, lender collected interested, and escrow payments (if you have your lender pay your taxes and insurance for you). Also, you can see on the Truth In Lending statement just exactly how much money you’ll be paying out of pocket over the full amortization period if you only make your minimum monthly payments. It’s enlightening. Or some say, nauseating. The fact of the matter is that 85% (or more) of your house payment on the first pages of the amortization schedule go mainly toward interest fees. It’s not till the back few pages that your payment really starts chipping away at principal.

So how can you avoid paying so much more money back to a lender than you’re actually borrowing? By making extra principal payments monthly. You may be surprised to know that by paying additional money towards principal monthly, (make sure to write a separate check and mark it “principal payment”), you can chip off years of your loan repayment schedule and keep money in your pocket. For instance, if you have a 30 year fixed mortgage for $150,000 at 6%, paying an extra $50 per month will save you $26,673 in interest and pay off your loan approximately 4 years early. You can also achieve similar results by making a lump sum principal payment a year (maybe budget part of a yearly bonus toward this goal). Why this scenario works is that by reducing the principal more quickly over time, there’s less of a lump sum debt to calculate interest against. Make sense?

So stay in once a month, skip that new pair of shoes or Wii game. Put the money toward your principal. Or when pre-qualifying for a home, include an extra principal payment in your budget. Lower your “payment comfort level” a tad to allow for an extra monthly principal payment you intend to make. You’ll really see the benefit of doing so in the long run!

Posted by Admin . on April 12th, 2008 10:47 AMPost a Comment (0)

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Dazed and Confused: What Kind of Private Mortgage Insurance (PMI) Should You Choose?

April 8th, 2008 9:10 PM

Private Mortgage Insurance, Lender Paid Mortgage Insurance...it's all very confusing. By learning the terminology, its meaning and then asking the right questions, you can determine what makes the most financial sense for you.

So, you’re putting less than a 20% down payment on the house you are buying and you are getting a conventional loan. Your lender has given you the option of paying a monthly private mortgage insurance (PMI) premium or offering you a higher rate where the lender pays it, known as lender paid mortgage insurance (LPMI). Which scenario is better for you? You’re confused and don’t really understand it all; you’d prefer to just have the decision made for you rather than weigh the options yourself. However, if you don’t consider all the options, you could be making a financial mistake.

PMI protects the lender against default and is required on loans that are deemed higher risk If you are investing less than 20% of your own money into a home, a lender considers it easier for you to walk away from your debt obligation if you find yourself in a pickle and can’t pay your mortgage. Your lender can buy/pay your mortgage insurance for you, but to do so, they charge you a higher rate plus a profit margin. To make a decision as to which route to take, you need to weigh the pros and cons.

You have more interest to deduct on your taxes because of your higher rate when you have LPMI. But if you and your spouse make $100,000 annually or less, or individually you make $50,000 annually, your monthly mortgage insurance is deductible. Depending on your tax bracket, the higher interest rate may or may not benefit you. You should crunch the numbers or ask your accountant’s advice.

PMI automatically terminates when your loan to value (of the original property value) reaches 78%, and but you can request it terminated when it reaches 80%. Some lenders will allow you to terminate the insurance when the appreciated loan to value reaches 80%. So, how long are you keeping this loan? Will you be paying down the principal balance rapidly? Is this your forever home and your forever mortgage rate? Then perhaps LPMI isn’t such a hot option. You can review an amortization schedule when making this decision to figure out just what payment will get you to that target loan to value (LTV). If you know that you will be making extra principal payments regularly, your lender should be able to help you analyze that scenario as well. However, if you’re going to be in the house a short time, than LPMI might just be the way to go.

Finally, just look at your basic payment both ways. Which way is more affordable for your current needs? The pricing on these products fluctuates. One product may be cheaper than another based on loan amount, term, down payment and other factors. You may also qualify for a second mortgage to make up the remaining 20% down payment and avoid private mortgage insurance altogether. What works best for your needs?
When considering your options, discuss your plans with your lender. Consider the above points and discuss them with her/him. By doing so, you should be able to clear the fog and make an educated decision

Posted by Admin . on April 8th, 2008 9:10 PMPost a Comment (0)

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What is Private Mortgage Insurance (PMI)

April 7th, 2008 9:47 PM

vate Mortgage Insurance (also referred to as mortgage protection insurance on the West Coast) is a costly insurance premium that the borrower pays to protect the lender in case he defaults on the loan. As part of the loan qualifications set out by Fannie Mae and most secondary market investors, a borrower is required to pay private mortgage insurance (PMI) when they don't put down at least 20 percent of the home's purchase price as a down payment. But with the right loan, it doesn't have to be an obstacle. In fact, you could avoid it entirely.

Just How Costly Is Private Mortgage Insurance?

Mortgage protection insurance increases your monthly payment and may be tax-deductible (please check with your tax advisor). The cost of private mortgage insurance varies, but generally it calculates to about one-half percent of the total loan amount. Let's say you buy a home for $200,000 and put five percent down or $10,000. The annual cost of PMI on your $190,000 mortgage might run $950 a year, adding an extra $80 to your mortgage payment each month. However, this doesn't necessarily mean your payment will be $80 cheaper if you can avoid PMI.

Posted by Admin . on April 7th, 2008 9:47 PMPost a Comment (0)

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