Bill McCord's Blog

TURNING 26 YEARS INTO 30 YEARS.

It’s not always a good idea to refinance a mortgage simply to lower the Monthly Payment.

Before you refinance a 30 year mortgage which has 26 years to go, and take a new 30 year loan, you must compare the total amount which will be paid over the life of each loan before deciding whether it makes economic sense.

The smartest way to take advantage of lower interest rates would be to calculate the amount you would have to pay each month in order to have the new loan paid off in 26 years, and then make an extra payment each month to achieve that highly desirable result.

If the new lower payment plus the extra to make it a 26 year loan is less than the amount you are currently paying then go for it. If not then you should reconsider other options before proceeding.

I cannot go into details regarding other options within a simple post such as this, but I can assure you they do exist. However the regular Loan Officer is not going to bring them to your attention. 

A recent nationwide survey asked a wide age range of Homeowners the following question:

“When is it smart to pay points to get your mortgage”?

Amazingly 83% of the respondents answered NEVER. This displays either an astounding ignorance of basic economics, or a desire to help Banks get richer.

The CORRECT ANSWER should be “When it saves me money with no extra risk“.

Put simply you pay points to get a lower Interest Rate. If you keep the loan for at least 5 years you will be showing a Profit. Every year from then on you add to that profit.

BUY IN HASTE, REPENT AT LEISURE.

John and Dave are as close to identical as is possible without actually being twins.

They both work at the same company, make the same money, had saved up the same 20% down payment for  a nice 2bed 2 bath condo in the same favourite complex for up to $250,000.

Problem was that only one unit was for sale back in April. Being good friends they agreed to spin a coin to see who got to buy 1st. John won and bought that one, and Dave waited for the next listing to come up.

That duly came up in late May and Daves offer of the same amount that John had paid was accepted.

They both got their 30 year mortgage for the same amount from the same Broker 6 weeks apart.

What’s interesting here is that for the next 30 years John will pay approximately $75/month more than Dave. This is due entirely to the drop in interst rates during the time between the 2 purchases.

Obviously John will hope to refinance to a lower rate as soon as possible but there is no guarantee that will be possible.

The most interesting part of this story is that due to the continued econonmic chaos it world wide Bond Markets mortgage interest rates are now even lower that Dave got, and are now at 40 year lows.

My message here is to pay more attention to how mortgages really work , and consider whether the 30 year fixed really is the best for you. For 90% of all buyers it is not.

If anyone would like to know how to make this decision just send me an e-mail and I’ll be happy to explain.

Not just a Mortgage Issue

 Most people know that your Credit Score (FICO) has a significant effect on whether you can get a Mortgage.

What is not generally known is that FICO is increasingly being used by Employers, Insurance Companies,

Utility Companies, Apartment Complexes and a growing list of other organization which provide services for regular payments.

These and many other groups consider it a good indicator of general reliability and whether bills will be paid on time.

Are you a potential 1st time buyer living in Californias Silicon Valley, and expect to live in your new home for at least 5 years/? YES YES YES.

0. Prices in our Valley have pretty much stabilized.

0 Interest rates are at all time lows.

0 There are multiple 1st Time Buyer programs from Cities, Countys, State, and Federal Governments. These can provide down payment assistance, and significantly reduce the cost of owning.

If your answer to my 1st question is negative then the answer is probably NO NO NO.

If you believe that prices are going to drop further and you plan to wait and buy at the bottom, please let me know how you will be able spot that bottom before it has already happened.

What’s the purpose of Credit Scores (FICO)?

To provide a Lender with an independent opinion on the probability that a possible Borrower will pay a Loan as agreed.

How is the score determined?

By looking at the history of payments on previous debts and developing a numerical SCORE which reflects that history. For example:

A score of 800 or more is EXCELLENT. Lenders compete for your business.

A score between 700 and 799 is GOOD. No major problem getting a Loan.

A score between 640 and 699 is POOR. Will pay higher interest rate for a loan.

A score below 640 is BAD. Very difficult to get a Mortgage at an acceptable rate.

NOTE. These examples relate to Mortgages. Other types of Lenders will have different score standards

What exactly is FICO?

The Credit scoring system developed by the Fair Isaac Co and used by the 3 major Credit Bureaus, EXPERIAN, EQUIFAX, and TRANS UNION. Each of these interprets the data slightly differently so produces a slightly different score.

What is MOST important in producing the score?

35% is Payment History. (Do you pay on-time, any Bankruptcies, foreclosures, debt Judgments etc?)

30% is Amount Owed. (Total amount owed as a percentage of credit available.)

15% is Length of Credit History. (Old debts are better than new debts.)

10% is New Credit. (Too much is a Negative.)

10% is Type of Credit. (Credit Cards, Store Cards, Mortgages etc.)

Where can I learn more?

www.MyFico.com is the Public information site for the Fair Isaac Company.

BEWARE of Credit Repair/fixing SCAMS. Anyone who wants money up front should is probably a SCAM.

Potential home buyers, or anyone thinking of refinancing are finding that their credit scores are vastly more important now than in the boom years. However, they seldom know the effect of even one “minor”  bad credit event.

For example:

Tom has a barely o.k. 68O FICO score but makes a 30 day late mortgage payment. It will take 9 months for his score to get back to that level assuming no more late payments.

Dick has an good 720 Fico and makes a 30 day late payment. It will take 2 ½ years to get back.

Harry has a very good 780 FICO but after a 30 day late pay it will take 3 years for him to get back to that level.

The financial costs of  lower credit range from being unable to get any loan, to paying a higher interest rate and higher fees for anything below 720, finding it virtually impossible to get any loan below 640.

The moral is of course to pay your bills on time at all times.

NOTE: Getting and maintaining good credit is a greatly misunderstood process with mountains of free but inaccurate advice. I can strongly recommend Ken Strey kstrey@creditlinei2.org for pretty much anything related to your credit.

If you truly want to understand how our economy got into it’s current mess, who’s responsible, and where they are now this is a must movie.

It does a great job of pulling together the threads and showing the whole cloth.

Low Credit Scores accounted for one third of all of mortgage loan applications made across the country during September being turned down.

Borrowers with credit scores under 620 were refused even when they had down payments up to 25%. According to myFICO.com this minimum requirement eliminates 29.3% of the population who might wish to get a mortgage.

Note: While FHA will insure loans to otherwise well qualified borrowers with lower scores, the Banks will not make such loans.

Meanwhile, the lowest interest rates went to mortgage borrowers who were among the 47 percent of Americans with excellent credit scores of 720 or above.

In the first half of September, borrowers with credit scores of 720 or above got an average low annual percentage rate (APR) of 4.3 percent for conventional 30-year fixed mortgages. Borrowers with mid-range credit scores between 620 and 719 received APRs between 4.44 and 4.73 percent, with the APR rising as credit score drops. Those with credit scores below 620 received too few loan quotes to calculate average low APR.

The message is very clear. A poor credit score is expensive even if you can get a Mortgage.