Getting the Best Interest Rate on Your Home Loan?A Qualified Mortgage Advisor Can Help Boost Credit Scores
Consumers interested in purchasing or refinancing a home will pay an interest rate based on current market conditions and their ability to pay back the loan. The borrower’s income and debt ratios are taken into consideration by the lender, as well as the predictability factor provided by credit scoring. It’s important to have a mortgage professional in your corner that has a keen eye for solutions to improving credit scores in an effort to get the best interest rate possible.
Interest rates associated with various loan programs are broken down into schedules based on credit score ratings. While each lender has its own guidelines, it’s safe to assume that as the consumer’s credit score goes down, interest rates will go up.
A borrower with an outstanding credit rating will get what is called an A-paper loan. This type of borrower is rewarded with a lower interest rate because they have a proven track record of using credit sensibly and paying their bills on time.
Loans designed for consumers with less-than-perfect credit – sometimes referred to as “sub-prime” – can range anywhere from A-minus, B-paper, C-paper or D-paper loans.
If you have already taken out a mortgage loan with a higher interest rate because your credit score was a little under par, you will really appreciate the value in doing a little work to improve your credit score. Refinancing from a D-paper loan to a B-paper classification can save literally thousands of dollars in financing fees over time, even though the B-paper loan is still considered sub-prime.
A qualified mortgage advisor will guide you through the nuances of the process of improving your credit score to refinance and save money. First and foremost, he or she will want to review the terms of the existing mortgage loan to determine if you have a pre-payment penalty clause written into your contract. In general terms, that means that if you sell the home or try to refinance before the pre-payment penalty expires and you have not already paid off 20 percent of the original loan amount, you will most likely have to pay a 3 percent fee back to the lender to compensate for the high risk and high costs incurred to provide that financing.
Next, you should obtain copies of your credit reports and start working on improving your credit score six months prior to the expiration date on your existing pre-payment penalty. You can secure free copies of your credit report from my website at www.ChristinaDunham.ProvidesCreditReport.com
There are five factors that make up the credit score and your mortgage advisor can coach you through some basic strategies to improve your credit score. This means very conservative use of credit cards, paying off debt as much as possible and not applying for additional credit cards unless you will benefit from such action. You will want to verify that negative items you have paid off are being removed from your credit report, and that good credit history is being reported to all three bureaus. You’ll also want to dispute any errors that appear on your credit reports and seek to have those removed entirely.
Once your credit score improves, it’s time to refinance at a better interest rate. Your mortgage professional should look for a program that carries no more than a two-year prepayment penalty so you can continue to refinance as your credit score increases. You can repeat this process until you reach A-paper status and secure the best interest rate available.
This is a strategy that also works well for first time home buyers who do not have enough credit history under their belt to get an A-paper loan at the time of purchase. The important thing is to work with a mortgage advisor who can give you a roadmap to follow and a strategy for success in building personal wealth.
Until next week, happy home loan shopping!
Christina Dunham is a Mortgage Advisor with the Dunham Group at Sierra Pacific Mortgage, a nationwide mortgage banker funding $9 billion in loans in 2006. For a free credit consultation, contact her at contact@christinadunham.com.
Protecting Your Credit During Divorce
When a marriage ends in divorce, the lives of those involved are changed forever. During this time of upheaval, one thing that shouldn’t have to change is the credit status you’ve worked so hard to achieve.
Unfortunately, for many, the experience is the exact opposite. Unfulfilled promises to pay bills, the maxing out of credit cards, and a total breakdown in communication frequently lead to the annihilation of at least one spouse’s credit. Depending upon how finances are structured, it can sometimes have a negative impact on both parties.
The good news is it doesn’t have to be this way. By taking a proactive approach and creating a specific plan to maintain one’s credit status, anyone can ensure that “starting over” doesn’t have to mean rebuilding credit.
The first step for anyone going through a divorce is to obtain copies of your credit report from the 3 major agencies: Equifax, Experian®, and TransUnion®. It’s impossible to formulate a plan without having a complete understanding of the situation. You may obtain a copy of your report from my website at www.christinadunham.providescreditreport.com.
Once you’ve gathered the facts, you can begin to address what’s most important. Create a spreadsheet, and list all of the accounts that are currently open. For each entry, fill in columns with the following information: creditor name, contact number, the account number, type of account (e.g. credit card, car loan, etc.), account status (e.g. current, past due), account balance, minimum monthly payment amount, and who is vested in the account (joint/individual/authorized signer).
Now that you have this information at your fingertips, it’s time to make a plan.
There are two types of credit accounts, and each is handled differently during a divorce. The first type is a secured account, meaning it’s attached to an asset. The most common securedaccounts are car loans and home mortgages. The second type is an unsecured account. These accounts are typically credit cards and charge cards, and they have no assets attached.
When it comes to a secured account, your best option is to sell the asset. This way the loan is paid off and your name is no longer attached. The next best option is to refinance the loan. In other words, one spouse buys out the other. This only works, however, if the purchasing spouse can qualify for a loan by themselves and can assume payments on their own. Your last option is to keep your name on the loan. This is the most risky option because if you’re not the one making the payment, your credit is truly vulnerable. If you decide to keep your name on the loan, make sure your name is also kept on the title. The worst case scenario is being stuck paying for something that you do not legally own.
In the case of a mortgage, enlisting the aid of a qualified mortgage professional is extremely important. This individual will review your existing home loan along with the equity you’ve built up and help you to determine the best course of action.
When it comes to unsecured accounts, you will need to act quickly. It’s important to know which spouse (if not both) is vested. If you are merely a signer on the account, have your name removed immediately. If you are the vested party and your spouse is a signer, have their name removed. Any joint accounts (both parties vested) that do not carry a balance should be closed immediately.
If there are jointly vested accounts which carry a balance, your best option is to have them frozen. This will ensure that no future charges can be made to the accounts. When an account is frozen, however, it is frozen for both parties. If you do not have any credit cards in your name, it is recommended you obtain one before freezing all of your jointly vested accounts. By having a card in your own name, you now have the option of transferring any joint balances into your account, guaranteeing they’ll get paid.
Ensuring payment on a debt which carries your name is paramount when it comes to preserving credit. Keep in mind that one 30-day late payment can drop your credit score as much as 75 points. It is also important to know that a divorce decree does not override any agreement you have with a creditor. So, regardless of which spouse is ordered to pay by the judge, not doing so will affect the credit score of both parties. The message here is to not only eliminate all joint accounts, but to do it quickly.
Divorce is difficult for everyone involved. By taking these steps, you can ensure that your credit remains intact.
Christina Dunham is a Mortgage Advisor with the Dunham Group at Sierra Pacific Mortgage, a nationwide mortgage banker funding $9 billion in loans in 2006. She may be reached at contact@christinadunham.com.
Short-Term Rates Getting a Shot in the ARM
When the Fed Funds Rate goes down, other short-term rates typically follow. This spells relief for borrowers with Adjustable Rate Mortgages (ARMs) and Home Equity Lines of Credit.
A 10-year comparison chart of the LIBOR, Monthly Treasury Average (MTA) and the Prime Rate, which is typically pegged at 3 percent above the Fed Funds Rate, shows how each index has performed since 1998 against the 30-Year Fixed mortgage.
Specifically, the 1-Year LIBOR, which was at 4.458% just last month, is now at 3.083%. This means that if you have a mortgage loan with an interest rate tied to the LIBOR, your rate has just gone down by 1.375%. On a $300,000 interest-only mortgage, this translates to a drop of $343 a month on your mortgage payment.
If you currently have an ARM that is set to adjust in the next few months, now is the perfect time to refinance into a longer-term fixed-rate mortgage. Rates are the lowest they have been since the summer of 2005.
Call us today at 866.7.DUNHAM (866.738.6426) or drop us an email for a complimentary, no pressure, loan consultation.
Fed Funds Rate Down to 3.5%
In a surprise move on Tuesday, January 22nd, the Fed cut the Fed Funds Rate by 0.75%, lowering it to 3.50% and bringing it down to September 2005 levels. This is the deepest one day Fed cut since 1984, and comes in the wake of a special meeting held Monday night after stock markets tumbled from Hong Kong to London.
The Fed Funds Rate is the rate that banks pay to borrow from each other to fulfill reserve requirements. A decrease in the Fed Funds Rate makes borrowing cheaper, stimulating business activity and economic growth.
The vote to cut wasn’t unanimous. St. Louis Fed President Poole dissented against the cut and preferred to wait until at the normal scheduled meeting at the end of the month.
Here’s the brief statement the Fed delivered this morning with the cut:
The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3 ½ percent. The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets. The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully. Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.
In addition to cutting the Fed Funds Rate, the Fed also cut the Discount Rate, the rate commercial banks and other depository institutions can borrow directly from the Fed itself, to 4.0%. This move should provide further stimulus to the credit markets.
Analysts predict that the Fed will lower the Fed Funds Rate another 50 basis points at next week’s meeting, bringing it down to 3.0%.
This spells relief for consumers who hold adjustable home equity lines of credit (HELOCs) based on the Prime Rate, a rate pegged at 3% above the Federal Funds Rate. The Prime Rate is expected to go down to 6.50% in the coming weeks.
Between January 3, 2001 to June 25, 2003, the Fed cut the Fed Funds Rate 13 times, and it hit a 45 year low of 1% between June 2003 to June 2004. From June 2004 and onward, it increased the federal funds rate 17 times in a row a quarter point at a time. After holding steady for several months, the Fed has slashed the federal funds rate four times in the last four months.
LIQUIDITY CRISIS STILL LINGERING
Anyone watching or reading the financial news over the last few weeks has seen a lot of angst and consternation over the state of the mortgage industry. In fact, a few large lenders in the US such as First Magnus have been forced to shut down operations recently. But why? What does all this mean to you and most importantly... what should you be doing do right now to make sure you are protected?
The major damage is probably already done, and the present situation will likely settle out over the coming year. Lenders will stop pulling products off the shelf, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize.
But here are a few important things YOU should do right now:
ONE: Even if you are not presently in the market for a home loan of any type, make sure that your credit standing is as solid as possible. Many people in the market for a home loan didn't expect they would have a need, and didn't plan in advance to ensure their credit would qualify them for the best possible financing. With no immediate need for a home loan, time is on your side... why not take a few minutes and just make sure you are prepared, should a need arise down the road?
TWO: If you are in the market for a home loan, or know someone who is - understand that now is the time to be working with a real qualified professional who can keep you informed of changes in the market and get your loan funded quickly. Now is NOT the time to be playing the risky game of trying to scour the entire nation to find someone who promises to save you a paltry amount on costs, or deliver a rate that seems too good to be true.
Your home and your financing are just too important, and times have changed. Staying informed of all the changes in the mortgage market place and working with trusted professionals is more critical than ever.
CONFUSED ABOUT THE CREDIT CRISIS?
Worried about where you stand? Here are some things to keep in mind:
? Lenders will always send out a letter to borrowers 3 to 6 months before their rate is about to adjust. The letter will state what your new monthly payment may be. If you feel that you will have difficulty making payments at the higher rate, contact the lender ASAP.
? As long as you are making on-time payments to the lender, you are not in danger of foreclosure. Lenders will start calling you once you are 10-16 days late on your mortgage. You can qualify for many of the bailout programs up to the point where you are 60 days (2 months) late on your mortgage.
? Before you are 60 days late on your mortgage, you can:
? The moment you hit 90 days (3 months), your options will become more limited. At this point, the lender will file a “Notice of Default” with the county and you are now in pre-foreclosure. In CA, there are currently 106,297 homes in Pre-foreclosures and 33,355 in Foreclosures.
? Some homeowners simply turn over their deed to the lender (referred to as “Deed-in-Lieu of Foreclosure”) instead of fighting the foreclosure process. A knowledgeable attorney can help determine whether there are some legal defenses to your foreclosure.
? Foreclosures are expensive for lenders, costing them up to $50k in some cases. They are not in the business of selling real estate. They would prefer a win-win solution if you are willing to work with them.
? There is life after foreclosure. Typically, if you are able to maintain at least 4 years of on-time payments for all your other credit accounts, you can qualify for a good loan program and purchase another home.
Your Mortgage Advisor should be providing you assistance throughout the life of your home loan, with interest-rate reset or prepay expiration reminders, quarterly credit reviews, as well as annual mortgage loan and home equity reviews.
If they are not involved in actively managing your mortgage debt and home equity, give us a call at 866.7.DUNHAM or email contact@dunhamgroupmortgage.com for assistance. We can help you manage your mortgage, regardless of who your current lender is.
BIG BROTHER STEPS IN TO HELP
The last part of 2007 was a busy year for legislators stepping in to manage the mortgage crisis and credit crunch. Following is a brief summary of what happened just in December.
12/13/07 - Senator Christopher Dodd introduced The Homeownership Preservation and Protection Act of 2007, the Senate’s “tougher” version of H.R. 3915. According to the National Community Reinvestment Coalition, the strong anti-predatory lending bill, among other provisions, will seek to:
12/17/07 – Senate passes first major FHA Reform Bill. If enacted, the FHA “modernization” legislation would increase loan amounts FHA could insure, cut in half down payments for borrowers getting an FHA loan, and provide more counseling to homeowners. The Senate must now forward the bill for final approval (or veto) to the President, who has expressed support for significant FHA enhancements.
FHA also launched a refinance program called FHASecure to help homeowners avoid foreclosure. To qualify, homeowners must meet the following criteria:
12/18/07 – The Federal Reserve Board, under the authority of the Truth in Lending Act, unanimously voted to propose important changes that would affect subprime loans or those loans the Fed defines as "higher-priced mortgage loans" (loans with rates at least 3 percentage points above a comparable Treasury security for first mortgages and 5 percentage points for second loans, or home-equity loans). Creditors would be:
The Fed also proposed another set of rules for all mortgages, including what the Los Angeles Times called "stricter disclosures on 'yield spread premiums.'" These rules include:
12/20/07 - President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, which will help Americans avoid foreclosure by protecting families from higher taxes when they refinance their home mortgages. This Act will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive.
Under current law, if the value of your house declines, and your bank or lender forgives a portion of your mortgage, the lender will issue you a year-end statement (called a 1099-C) which states the amount of debt forgiven. This amount is treated as taxable income. This happens in both short-sale and foreclosure situations.
One thing to note: if you have lived at least 2 out of the last 5 years in your home, you may exclude up to a $250k gain (or $500k for married couples) from income. This means that the Mortgage Tax Relief only affects you if you have lived in the home for less than 2 years or if your lender is forgiving more than $250k in mortgage debt.
CHRISTINA DUNHAM | MORTGAGE ADVISOR | BAY EQUITY Purchase | Refinance | FHA LoansPh 650-756-7100 | Toll Free 866-7-DUNHAM | Fax 650.227.2334E-mail: contact@christinadunham.com
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