Refinance

Your credit history is the MOST important thing you need to be aware of and should always consider when making financial decisions. Your score is a snapshot of your historic and current ability to repay debt. Believe it or not, having debt can actually be a good thing as it pertains to generating credit scores. While there are several other factors, your credit history is the number one factor influencing your ability to borrow money. So why do your scores change so often? Why is your score lower today than when you received your free online report yesterday?

There are three credit bureaus that lenders pull information from; Trans Union, Equifax and Experian. They each generate a score, and we the lender use the median score as your qualifying score. If you are buying a home with a spouse, partner or co-borrower, we look at both median scores and then take the lower of the two for qualifying. People are often surprised that their score is lower than they expected. Often times people will tell me that they got a free report online and their score was much higher. Why is this? Each of the three credit bureaus use multiple scoring models and algorithms to determine your score. You may hear a credit score often referred to as a FICO score. This is the overlying scoring system. Fair Isaac Corporation (FICO) has multiple models that are updated and released from year to year. For example, Classic 04 and Beacon 5.0 are often used in the mortgage industry but can have a much more conservative scoring process than the models used when purchasing a car, or getting a free consumer report. So no, we cannot use your online credit report. We must pull our own report. And yes, it’s very important to have your lender pull your credit early in the pre-approval process to manage your expectations and help identify any potential issues or discrepancies you may be able to correct.

While the scoring algorithms aren’t public, we know what impacts your scores the most. And no, having your score pulled by multiple mortgage companies will NOT affect your score. I’ll dive into that later.

Pay your bills on time.
Your credit card won’t report you late until it’s 30 days past due, but get in the habit of paying early. I’ve seen a single 30 day late payment drop scores more than 50 points. If you continue to fall behind, multiple 60 and 90 day late payments will destroy your scores.

Revolving debt vs. Car Loans, Student Loans & Mortgages
Having good credit comes from a history of repayment. Car loans, student loans and mortgages can help develop a long term history of good credit standing. As long as these are paid on time, these are good items to have on your credit report. Revolving debt, i.e. credit cards, need to be tamed. Again, it’s okay to have credit card debt but read ahead on how to handle this debt.

Keep your credit card balances “low”
It’s perfectly fine to have credit cards. In fact, showing your ability to pay these cards on time is what generates a healthy credit record. The key however, is keeping your debt utilization low. What does that mean? Try to keep your credit card balances below 40% of the limit. Percentages are key! If you have a card with a $15,000 limit, then keep that balance below 40% or $6,000. Better yet pay that card off so your utilization is 0%. Somebody with a $25,000 credit limit with an $8,500 balance will likely have better credit scores than somebody with a $2,000 balance on a $4,000 card. Sure the debt is higher but the person with the higher credit limit has a lower utilization percentage. Be careful when opening cards to buy products. They often set the credit card limit to the cost of the product. I’ve seen this with somebody who bought a $2,000 television on a Best Buy card. Sure, it was no payment and no interest for 12 months. Great, right? Not for this person. The card limit was set to $2,000, so he was actually maxed out, 100% utilization, for several months.

Don’t close out old cards
As I mentioned, your credit history is important. When you close out a card, eventually that history attached to that account will go away. More importantly, your overall utilization percentage goes up. For example, if you have two credit cards with a $10,000 credit limit and the balance of one is $0 and the other is $4,000, your combined utilization is 20%. If you close out the zero balance card, your total utilization just went to 40%. Don’t trust yourself with that second card? Cut it up. Shred it. You don’t have to use it. I just don’t recommend you close it out.

Pay off collections
Sometimes the oldest collection can come back to haunt you. When you have a bad debt that the credit card company couldn’t collect on, they will sell that debt to a collection agency for cents on the dollar. The collection company will try to recoup dollar-for-dollar to be profitable, but often they’ll negotiate with you since they bought the debt for less than what you owe. If you don’t pay it, the debt could get sold to another collection agency years later. This could bring it back to life on your credit report where you’ll once again get “dinged” with late payments.

Write letters
If you find something erroneous on your credit report, contact the creditor and get documentation agreeing it was an error. Send that information to the three credit bureaus so they can correct the errors.

Credit Inquiries
Yes. Too many credit inquiries can affect your score. Just one credit check can have a negative but small impact, but just like your car, you need a checkup. Have it pulled annually to make sure nothing populates out of the ordinary. Think of it as a score card. You should visually see your credit history and see if there are ways to improve your scores. If you are having it pulled several times by several credit card companies, this for sure can impact your scores. The bureaus know that you’re attempting to acquire more revolving debt. They’ll penalize you for multiple attempts. A common misconception is that multiple pulls by a mortgage company will hurt your credit. As a consumer shopping lenders for your home mortgage, rest assured that multiple inquiries from multiple lenders will not affect your due diligence. The Consumer Finance Protection Bureau regulates this and states that multiple inquiries in a 45 day window will only register as 1 inquiry. Read More From The CFPB Here

There are many other factors that can affect your scores, but if you can pay your bills on time and keep your credit card balances low, you will find yourself on the path to 800. If you are in the early stages of purchasing a home or even just entertaining the idea, please give me a call so we can make sure you’re on the right path!

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

When it comes to buying a home or refinancing your existing mortgage, there are many loan options and many factors that help determine what’s right for you. Not only should you consider goals as a home owner today, but also look to the future. Where do you see yourself in the next five, ten and fifteen years? How about your job? Are you in a salary position or on a commission structure? Do you have children? Do you see your family growing in the short and long term? Have you started saving for your children’s college education? These are just a few things to consider and talk to your mortgage consultant about.

The most typical loan product is the 30 Year Fixed mortgage. With this product your interest rate is fixed for the full 360 month term. While your mortgage payment doesn’t change, the amount of interest and principal does each month. Since you only pay interest on the loan balance, the interest portion of your payment goes down and the portion of your mortgage payment allocated towards principal goes up. This is called amortization; the cost of the loan spread over the loan term. Since the 30 Year Fixed allows you to repay the loan over 30 years, it will have a lower monthly payment than say a 15 or 20 Year Fixed. This keeps your payment down in comparison, but you will be paying much more interest over the life of loan compared to a shorter term mortgage. Even if you can afford a 15 Year Fixed payment, you need to ask yourself what’s more important, expedite paying down your mortgage while building equity or a higher cash flow with the lower mortgage payment.

Let’s look at the 15 Year Fixed compared to a 30 Year Fixed. Using a $300,000 loan amount and a 4.000% interest rate on a 30 Year Fixed mortgage, the principal and interest payment is $1,432 per month. A 15 Year Fixed rate of 3.5000% – Yes, rates are typically lower on the shorter term product – with the same loan amount of $300,000 equates to principal and interest payment of $2,144 per month. That’s a $712 swing in monthly payment. While that sounds like a substantial difference in payment, the interest paid over the life of the 30 Year Fixed is $215,607 and just $80,036 on the 15 Year Fixed. That is savings of more than $135,000. However, not everyone can afford the 15 Year Fixed, especially when you add in your property taxes and homeowners insurance premium. Even if you can afford it, you may have certain expenses coming up that need to be considered. Do you anticipate a new car payment, a job change, or are of your children going to have a school expense? Maybe you simply want the peace of mind that if something unexpected comes up, you’ll have a more comfortable mortgage payment. Whatever your reasons are, everybody’s life situation is different.

What about the Adjustable Rate Mortgages (ARMs) that received a lot of bad press in recent years? How does it work and is it a risky product? Typically an ARM product has a fixed term and then can adjust at a future date. For example, a 5 Year ARM is fixed for 5 Years and then can adjust at the start of year 6. Just like the 30 Year Fixed, it is amortized over 360 months but the interest rates are usually lower than the 30 Year Fixed. Therefore you pay less interest and have a long term loan to provide an overall lower monthly payment. The interest rate can adjust to a margin plus an index and has a cap of how much it can adjust annually and over the life of the loan. Typical ARM products are 5, 7 and 10 Year ARMs. This is where you ask yourself where you see yourself living in the next 5, 7 or 10 years. Hypothetically, let’s say you and your partner are buying condo in the city and plan to start a family in the next 5 years. You’ve discussed your life goals and decide that you want to save up for long term home in the suburbs. The 7 Year Arm might be a great option for you. Your rate will not adjust over the time frame you own and live in the condo, minimizing your risk of a rate adjustment, and with a lower interest rate than that of a 30 Year Fixed, you will maximize your savings. The ARM products received a bad reputation years ago as many loans began to adjust upward with the “collapse” of the housing market. Due to the deteriorating market, people didn’t have the equity in their homes to refinance out of their ARM. Layered with unconventional, subprime and low documentation loans, many people struggled making their mortgage payments. However, as the housing market continues to normalize, added regulation and a more conservative approach to qualifying individuals, this is still an attractive program for qualified home buyers.

Finally, let’s look at Federal Housing Administration (FHA) and Veteran Affairs (VA) loans. Both are government sponsored and have their quirks. FHA allows for a 3.5% down payment, lower than most conventional 5% down products. They are more forgiving as it pertains to credit scores, debt-to-income ratios and interested party contributions, i.e. seller credits. Many have referred to this as a first time homebuyer program, but because of its leniency on credit scores and debt ratios, it may be the right choice for any homebuyer. The interest rates are also typically lower than that of a conventional loan. The downside is that Private Mortgage Insurance (PMI) is required to be paid for a minimum 11 years for those putting 10% or more down payment and for the life of the loan for those putting less money down. FHA also collects a mortgage insurance premium up-front when acquiring the loan. VA helps current military service members, Veterans, and eligible surviving spouses become homeowners. Since VA guarantees a portion of the loan, it enables the lender to provide favorable terms. Depending on county loan limits, most VA loans will not require a down payment. For example, in Cook County, Illinois, you can purchase a home for $424,100 and finance the entire amount. There is no PMI and the interest rate is typically lower than that of a conventional loan. The only down side of a VA loan is that you may be required to pay a funding fee at closing. This fee is rolled into your loan balance and the amount of the fee is dependent upon your down payment and the number of times you’ve received VA financing.

There are an abundance of loan programs and several ways to structure your mortgage. Since everyone’s credit score, income, down payment and debt-to-income are different, it’s important to speak to a seasoned mortgage professional that will not only walk you through your options but help guide you to what best fits you based on your current and future life goals.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

So you’re wondering “when should I refinance?” You hear that your coworker got a great interest rate. You don’t follow the mortgage bond market but occasionally hear those “too good to be true” ads on the radio or television to get a historic low rate with no closing costs. So when does it REALLY make sense to refinance, and how is it possible to do it for no cost? What’s the catch? Whether or not it makes sense to refinance is quite different for each individual’s current loan structure, life plans and financial goals.

The first thing you need to ask yourself is why do you want to refinance or what are some reasons to refinance your mortgage? Here are a few:

• You want to lower your interest rate.
• You want to lower your payment.
• You want to shorten your loan term.
• You want to drop or reduce your monthly PMI payment.
• You want to cash out some equity.

You want to lower your interest rate

If you simply want to lower your rate (the interest portion of each month’s payment), then you need to look at two things; your monthly interest savings by refinancing and the cost to refinance. Once you know this, you need to make a determination if you’re going to keep the new loan long enough to break even to make up your costs. For example, if you are saving $50 per month in interest and the cost is $1,800, it will take you 36 months (3 years of mortgage payments) to break even on your investment. If you know you’re going to keep this loan for more than 3 years. Then YES, it makes sense to refinance because you’ll reach and exceed your breakeven point.

You want to lower your monthly payment

Lowering your rate isn’t the only way to lower your monthly payment. If you want to lower your mortgage payment because of a life situation, it’s not necessarily wrong to refinance to a longer term, even if the interest rate is higher. For example, the principal and interest payment on a 15 Year Fixed $300,000 loan amount at 3.000% is $2,071. However, the payment on a 30 Year Fixed for the same loan amount at 4.000% is $1,432. Let’s face it, sometimes life throws you curveballs and just need to free up some monthly cash, so while paying higher interest isn’t typically viewed as a smart decision, sometimes you need the cash flow.

You want to shorten your loan term

Shortening the term of your mortgage is the fastest way to build equity and a great option for those who can both afford and are comfortable with a higher mortgage payment. Loans that are shorter in term typically have lower interest rates as well. In the example above, a $300,000 loan the payment is $639 higher for a 15 Year Fixed than the 30 Year Fixed. The $2,071 monthly payment doesn’t include your homeowners insurance of property taxes either. So the payment can be quite high relative to that of a loan with a term twice as long.

But how do the life savings compare? The finance charge is the interest/cost over the life of the loan. If you can afford that 15 Year Fixed payment, your finance charges for the loan term is roughly $73,000. The finance charge on the 30 Year Fixed is roughly $215,600. So the savings for the 15 Year Fixed is over $142,000! Makes you consider that higher monthly payment, doesn’t it?

You want to drop or reduce your monthly PMI payment

Another reason people refinance is to drop their monthly Private Mortgage Insurance (PMI) payment. PMI is essentially an insurance premium that you pay, providing some coverage to the banks in case you default on your loan. The cost of your PMI is determined by many risk factors. The PMI factor is higher for somebody at a 95% loan-to-value (LTV) versus a 90% LTV. The factor is reduced even further if you an 85% and then you are eligible to drop your PMI at an 80% LTV.

Keep in mind that the banks will not automatically drop your PMI until you are at 78%, so once you hit 80%, you’ll want to call the loan servicer to see if they’ll remove your PMI. United Home Loans even offers Lender Paid Mortgage Insurance (LPMI). So even if you don’t have 20% equity in your home, you may qualify for loan without monthly PMI. LPMI typically requires you to pay a higher interest rate, but your effective rate could be lower.

For example, if your interest rate is 4.000% and your PMI factor is 0.80%, then your effective rate is actually 4.800%. If you can get an LPMI loan at 4.500%, then your rate is lower than the effective rate of 4.800% when paying monthly PMI. Credit scores and loan term can impact the monthly and LPMI factor and as well.

That being said, if you feel the value of your home has improved enough to lower or eliminate your PMI, your credit scores have improved enough to lower the PMI factor, or you want to explore LPMI, you’ll want to consult with your lender about potentially restructuring your loan.

You want to cash out some equity

I often get calls about cashing out some equity. Whether you need cash for home improvements, your child’s college education or other investment opportunities, cashing out equity from your home may be a good option for you. There are lending guidelines in place that max your cash out on a conventional loan to 80% of the home value and 85% for FHA loans, so typically only people who have a significant amount of equity in their homes are candidates for a cash-out refinance. You can research websites like Zillow to see what homes in your area are selling for. At the end of the day, your home is only valued at what other similar homes to yours are selling for in a couple block radius.

The right time to refinance is really up to you.

I’ve had somebody say “it only makes to refinance if you’re saving a half percent in interest.” I responded with “what if I can drop your interest rate just an eighth of a percent (0.125%) at no cost? Why wouldn’t you?” That person had a very confused look on their face. It’s true. There actually are no cost refinance options.

Without going into how mortgage bonds are traded on Wall Street and how the coupon pricing affects yield spread premiums that translate to discount points and rebates, I’ll keep it simple. Mortgage companies get paid by delivering good loan to the lender that services the loan. They pay companies like us a specific premium for a loan at current market rates. They’ll pay us less money for delivering a loan with a below market rate – That’s typically when you get charged a point, or they’ll pay us more money for a loan delivered at a higher than market rate – That’s when we can provide a rebate to you. Depending on how high the rate is or how large your loan size is (since the premiums we receive are a factor of the loan amount), we may be able to cover a portion of, if not all costs.

Why would you want to take a higher than market rate? Well let’s say you hypothetically have a rate of 4.750%. Market rates are 4.000% with costs of $2,300 or 4.250% with a $2,300 rebate to cover your costs. If you don’t have extra cash available to pay the costs, or you don’t feel you hit your “break even” as discussed above, than 4.250% is great option. It’s truly a no cost loan and saving you half percent in interest. It may not be the lowest rate available, but this makes sense for your financial situation and life plans.

I’m here to provide options

In a market that is always changing, it’s my job to provide options that make sense to YOU. Through knowledge and expertise, I will provide a personalized experience that involves discussing your current financial situation and your various life plans that can affect one of your life’s largest investments – your home. Call me to discuss your current loan structure. If it’s already caters to you perfectly, I’ll tell you that. If there’s something better waiting for you, I’ll provide options.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735