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Monthly Archives: September 2012

How to improve your credit score: Simple payment trick


According to Experian, one of the three credit reporting agencies, “your utilization rate is the second most important factor in credit scores.” Most people do not realize this, as it is often not discussed or explained. Putting this in simple terms, the utilization rate is the amount of credit used (current charges & previous balance) divided by the credit limit. If you payoff as much of the balance as possible before the credit card statement closing date, a lower balance is reported to the credit agencies (Experian, Transunion and Equifax) and the utilization rate is lower. Please note, the closing date is different from the payment due date and can typically be found on the first page of the monthly statement or within the online statement. In general, if your monthly balance is 30% of the limit or less, it looks better to the credit agencies and will thereby increase your credit score over time. To send the payment earlier may be difficult at first, as requires good cash management and takes a little more time to review and send the payment, but when it becomes a habit the rewards are great. Other benefits:

  • It may allow you to qualify for a higher home loan payment because your debt-to-income (DTI) ratio is lower.
  • If you raise your credit score by 20-40 points, it may mean $1,000’s in savings on your next home, car, boat or RV loan.
  • It may be the difference of being approved or denied on your next loan. In today’s lending environment, the average minimum credit score required to become approved is higher than it has ever been.

For example, on one of my credit cards I purchased $924 worth of clothes and food from 9/1/12 to 9/25/12. My credit limit is $1,500 and closing date is the 2nd of every month. On 9/27, five days before the credit cards closing date, I accessed my account online and electronically paid $700, which is to be received and applied by the credit card company closing date of 10/2. So, my balance was $224 and utilization rate 224/1500 = 14.9% when it was reported to the three credit agencies and much lower than what I actually charged for the month.

If you take control of the factors that impact your credit score, you will better control your score and the fees that lenders can charge.

Industry quotes. According to:

Transunion: “Outstanding debt: High balances in relation to your credit limits can lower your credit score. Aim for balances under 35%.”

Experian: “Your utilization rate is the second most important factor in credit scores. Also called your balance-to-limit ratio, your utilization rate is the ratio of your total balances compared to your total credit limits.” “Work on reducing your debt so that you’re utilization rate is under 30% on all your revolving credit accounts.”

Equifax: “The amount you owe accounts for 30 percent of your score, and so you want more available credit than debt.”

Per Bankrate.com, “scores of 620 or lower usually place a borrower in the “subprime” category, and they can expect to be quoted significantly higher interest rates and may be offered fewer varieties of loans.”

Per the LATimes article, “How about the profiles of people who applied for conventional loans to buy a house but were rejected or didn’t get to closing? By historical standards, they were a fairly impressive group on average as well, with 732 FICO scores, 19% down payments and debt-to-income ratios of 24% (housing costs) and 41% (total debt). ”

http://articles.latimes.com/2012/apr/15/business/la-fi-harney-20120415

 
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Posted by on September 26, 2012 in mortgage, mortgage refinance, refinance

 

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Why refi from 30 year fixed to 15 year fixed?


Mortgage advertising is everywhere these days. Sometimes a 15 year mortgages is mentioned instead of the traditional 30 year mortgage.  Before I give you reasons why it will save you money, let’s first discuss your overall financial plan. Do you have credit card balances, paying finance charges of 10.99% or more? Do you have 6 months cash reserves for living expenses? Have you started saving for your kids college expenses? Do you have large car loans? Do you owe anyone money? If you answered yes to any of these questions, refinancing from a 30 to a 15 year fixed may not be in the best decision. Interest rates are at historical lows, so borrowing money is cheap right now. To view the current average U.S. 30 year mortgage rate, look at http://www.bloomberg.com/markets/rates-bonds/key-rates/ Even though you would save money on interest paid and pay the loan off sooner, it is more important to save money for children(s) college, saving 6 months cash reserves, or paying off expensive credit cards and car loans is a much better use of funds. Ask a certified financial planner to determine the right answer for you.

Reasons why it will save you money:

  1. The mortgage loan will be paid off 15 years faster.
  2. In the 15 year loan payment, more money goes toward the principal portion of the loan sooner. As a result, equity is built-up more quickly.
  3. Making higher payments during a shorter timeframe will save tens, even hundreds of thousands of dollars in interest.
  4. A shorter term can also provide a tax break. The New York Times recently noted, by restarting the mortgage you’ll pay more in interest in the loan’s early years, which will increase the mortgage-interest deduction as compared to the waning years of a 30-year loan.
  5. Rates on 15 year fixed are currently lower than 30 year by approximately .50% – .625% or more, which will save money.
  6. At times, investments are losing money. By paying more on the mortgage loan, you may be earning a higher return.

Reasons to refi from 30 year to 15 year fixed:

  1. Pay-off your mortgage before retirement.
  2. Build equity in your home twice as fast compared to refinancing back into a 30 year mortgage.
  3. Save more than 1/2 the interest paid. Per Bankrate.com, on a $100,000 loan, 30 year fixed at 6% versus 15 year at 5.75%, the savings is $66,364. http://www.bankrate.com/calculators/mortgages/15-year-30-year-mortgage-calculator.aspx
  4. Lock in a 15 year mortgage rate at historical lows, as borrowing money is cheap currently.
  5. Financial and payment stability, knowing the mortgage payment will not change for 15 years.
  6. Often, when borrowers choose the 15 year term, they usually have a better understanding of their finances, better budgeting and more organized cash management to afford the higher payment. Described in another way, they are spending less on frivolous things.
  7. If the 15 year fixed rate is lower than your current 30 year rate by .75% or more, it may be more cost effective to refinance. See my earlier post about when you should refinance and the breakeven analysis, found at: Bankrate.com mortgage calculator

Reasons NOT to refi from 30 year to 15 year fixed:

  1. The 15 year payment is higher by more than 35%, which may be difficult to manage.
  2. If you have a prepayment penalty on your current loan which is excessive and increases the cost of refinance this could make it difficult to recoup the cost by the time you plan to sell the home.
  3. If you do not have a steady job and income, than committing to a higher payment may be too risky. It would be better to commit to a 30 year loan, then if possible, pay the higher 15 year amortized payment as much as possible, thereby reducing the term and interest payments.
  4. If you are trying to qualify for a streamline refinance, which is less loan information and documentation, it is not possible when changing from a 30 to a 15 year fixed rate.
  5. If you know you are moving in a few years, it does not make sense to refi to a shorter term.
  6. If you are a first-time home buyer, you may not fully understand the costs involved in home maintenance and taxes. So, committing to a higher 15 year payment may limit other spending on your home.
  7. The expense to refinance versus simply paying the 15 year payment instead of the 30 year payment.

Interesting fact:

Per Freddie Mac, the Government Sponsored Entity(GSE), “Of borrowers who refinanced during the second quarter, 30 percent reduced their loan term, while 67 percent of borrowers kept the same term as the loan they had paid off. So, almost 1/3 of the borrowers thought it was a good idea, based on their situation.

http://freddiemac.mediaroom.com/index.php?s=12329&item=131537

 
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Posted by on September 19, 2012 in mortgage, mortgage refinance, refinance

 

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