Your credit score is like a report card on how you manage your finances, and just as it is important to have A’s and B’s on your report card, it’s important to have a good credit score. Not only can your score play a role in whether you can get a loan, it also may affect what you pay for insurance and the amount of deposit you have to put down on an apartment. If your credit score is lower than it should be, you can follow these tips to give it a boost.
Bring past-due accounts current
One of the best and easiest ways to boost your credit score is to get current on any past-due accounts. If you are applying for a mortgage to check with the mortgage company first before paying any collections or charge offs. These accounts may not need to be paid before the loan is done and paying off old collections or charge offs will bring your scores down temporarily, or until they show some history of being paid and could cause a problem with getting the loan.
Accounts that haven’t been paid on time can greatly reduce your credit score, because your payment history accounts for more than one-third of your total score. If you have any accounts that are in collections, pay those off first and make sure the collections agency notifies that credit bureaus that you are now current. Then concentrate on bringing other accounts up to current status. One key thing to focus on, however, is that you want to make sure you don’t let any new accounts become past due while you are catching up on accounts that are already behind.
Pay down debt
Once you have worked to get all your credit accounts current, your next focus should be on paying down debt. The amount you owe makes up 30 percent of your credit score, and if you owe a lot relative to how much credit you have available, then it will affect your score. A general rule of thumb is your debt should be less than 30 percent of the amount of credit you have available. So if you have $10,000 worth of available credit, you should owe less than $3,000. This rule applies only to revolving credit accounts like credit cards, not to installment loans such as a car loan.
Don’t close accounts
If you pay off an account, you may be tempted to close it, but that can hurt your score, especially if the account has been open for a long time. The length of your credit history accounts for 15 percent of your credit score, so if you cancel accounts you have had for a long time, it can shorten your history and hurt your score. Keeping accounts open, even after they are paid off, will help boost your score.
Don’t open new accounts
The more credit cards you have, the more it can lower your score, especially if you have opened a lot of accounts recently. Opening a lot of accounts in a short time looks risky to lenders and can hurt your score. Doing so also can shorten your credit history, which can reduce your score as well.
In my last blog post we started discussing the various reasons that a homeowner would look into refinancing a mortgage. We touched on the conversions between adjustable rate and fixed rate mortgages, and the shortening of the mortgage’s term. In this post, we’ll touch on the remaining (common) reasons for refinancing.
Getting A Lower Interest Rate
As with the switch between adjustable rate and fixed rate mortgages, the goal is to save money via interest rates on the loan. When seeking a lower interest rate, it’s always necessary to switch between rate-types. In an environment where interest rates are low, mortgage holders (with fixed rates) may seek out refinancing to obtain another, fixed-rate mortgage with a lower rate. The general rule is to only seek out refinancing if there is an opportunity to reduce the interest rate by 1-2%, anything less will not be worth the upfront costs of the refinance.
Debt Consolidation or Accessing Equity
These are some of the most common reasons that mortgage holders will consider refinancing, but they are also the reasons that carry the most risk, from a personal finance perspective.
Some mortgage holders will look to refinancing in order to access their home equity. The justifications for this move will vary. Some will use the equity to pay off remodeling, which can increase the value of the house, or to purchase more property, which can be a great investment. Others will use the equity to to cover large personal expenses, or pay off other debts.
Other mortgage holders will refinance to try to consolidate their debts; the idea of reducing high interest debt with lower interest debt makes sense on paper. However, many people who are refinancing for this purpose alone will not necessarily be saved from their high-interest (ie: credit card) debt forever. It’s likely that they will accrue more high interest debt with the available credit the refinancing has allowed them.
For a great breakdown of how mortgage rates are quoted, view this video by Khan Academy:
In the housing market, it’s common to hear the term “refinancing” come up amongst homeowners. In short, refinancing is the act of paying off an existing mortgage loan and getting a new one to replace it. As with any major financial decision, there are upsides and downsides to refinancing a mortgage, and mortgage holders will look into refinancing for a number of different reasons. The end goal however is always the same: to save some money on some aspect of the loan.
Here are a few of the most common reasons for refinancing:
Switching Between Fixed and Adjustable Rates
There are benefits to starting out with fixed rate mortgages and adjustable mortgages, when first taking out a mortgage loan. But those benefits may erode over time, depending on the state of the market.
If the mortgage holder started out with a fixed rate mortgage loan, it may make sense to start looking into refinancing if the interest rates in the market begin to fall. If it looks as though market interest rates will continue to fall over an extended period of time, switching to an adjustable rate mortgage (ARM) would make sense. With an adjustable rate mortgage, there are periodic rate adjustments (that can adjust up or down). The falling rates in the market would result in both a lower interest rate and a smaller monthly payment for holders of an adjustable rate mortgage.
Important Note: Refinancing to an adjustable rate mortgage needs to be heavily considered by the mortgage holder. If they are only considering staying in the home for a few years, then switching to an ARM in a falling interest market makes sense. But, it’s possible for the rates to increase again over time, so that must be taken into consideration.
Conversely, if the mortgage holder started out with an adjustable rate mortgage, it’s possible for the market to enter a state of steadily climbing interest rates. In this situation, periodic adjustments to the mortgage will result in increased interest rates over time. It would make sense for the ARM to be refinanced to a lower, fixed rate mortgage to avoid continued hikes in the interest rate.
Reducing The Term of the Mortgage
Depending on the state of the market, refinancing to shorten the length of the mortgage is also an option. When there are “record low” interest rates, the loan holders may be presented with the opportunity to get out of a 25-30 year fixed rate mortgage. Refinancing to a lower interest rate can result in a shorter overall term, with a monthly payment that’s around the same as what was already being paid.
Check back soon for more information on mortgage refinacing!
A quick glance at any search results regarding millennials and their home-buying decisions will undoubtedly show a hodge podge of articles with conflicting points of view. So the question remains, are millennials buying or not? Surprisingly, the answer is: yes. But they’re buying differently than the generations before them.
As the millennial generation begins to come of age, it is becomingly increasingly obvious that they are approaching property ownership differently. This is understandable as the recession of 2008 left many under employed, and the subprime mortgage crisis had dire consequences on the market as a whole. Millennials are entering the real estate much more slowly than generations before them, for both economic and social reasons. From an economic standpoint, they are carrying far more student loan debt than ever before. About 71% of bachelor’s degree recipients graduate with loans today, which is up from 64% just 10 years ago. Additionally, the millennial generation has been heavily focused on moving into urban areas (where, from their financial standpoint, homeownership is virtually impossible).
But, the oldest members of the generation are turning 30 now, and the housing market is simultaneously beginning to find health. This means that millennials are actually looking to purchase homes.
Studies show that 35% of home buyers in 2015 were millennials, which was up 3% from 2014. These buyers had a median age of 30 years old, and were purchasing primarily single family homes within suburban areas. Based on the millennial exodus to urban centers (where they were primarily renting space in apartments), it’s very likely that millennials would like purchase homes in those urban spaces if the economy allowed for it. According Lawrence Yun, a NAR Chief Economist,
“The need for more space at an affordable price is for the most part pushing their search further out.”
According to Fortune Magazine, a survey was done to determine where millennials (ages 20-30) were looking to purchase homes. It was found that individuals were actively seeking out places where average wages and home prices worked hand in hand to make for a healthy living situation. Not surprisingly, the areas where millennials were purchasing homes were far away from the coasts, where housing cost are steadily increasing.
Currently, the most popular place amongst millennials looking to purchase homes is Utah. Not only does Utah tout some of the most affordable home prices, Utah County also has the fastest employment growth of the 342 largest counties in the United States.
National Mortgage News has pegged the following cities as the top 10 cities where millennials are buying homes:
- Ogden, Utah
- Minneapolis, Minnesota
- Raleigh, North Carolina
- Salt Lake City, Utah
- Charleston, South Carolina
- Denver, Colorado
- Washington, D.C.
- Seattle, Washington
- Austin, Texas
- Portland, Oregon
As, the millennial generation continues to age, it will be interesting to see how their buying habits develop over time.
According to the Mortgage Bankers Association’s National Delinquency Survey, foreclosure starts have decreased across the board, in the first quarter of 2016.
The Mortgage Bankers Association (MBA) is one of the most reputable and highly recognized sources for data on the residential delinquency and foreclosure rates. For their National Delinquency Survey, 120 mortgage lenders are observed. They sample 41.6 million mortgage loans that are given out by institutions such as banks, credit unions, and mortgage companies. The MBA then proceeds to review and report on both the delinquency rates and foreclosure rates that they observe throughout the sampling.
One of the most significant rates to decrease was the percentage of loans where the action to foreclose was started. In the first quarter of 2016, the rate is 35%, which is down 10 points from 2015 and is the lowest level since the second quarter of 2000. (source)
This downturn in foreclosure can be attributed to two major shifts. One, the qualifications and guidelines for getting a mortgage loan have become much more stringent since the recession of 2008. The Dodd-Frank Wall Street Reform and Consumer Protection Act was put into place under Obama’s presidency; it was a huge reform that was designed to temper and prevent risky business practices by a variety of financial institutions. Under the Dodd-Frank Act, The Consumer Financial Protection Bureau was established to provide regulation over mortgage lenders and brokers. One of the major side effects of that act was the implementation of protections of families from exploitive measures by lenders and mortgage companies.
The second shift took place on the consumer end. After feeling the effects of recession, consumers looking to buy a home have begun to seek education on the real estate market, before reaching out to apply for the loan. More resources have become available on predatory lending, and consumers are now willing and able to arm themselves with that knowledge before moving forward.
As the decrease in foreclosure starts continues, the whole lending market will begin to shift focus. The focus for the past few years has perpetually been stuck on reducing risk. But with the reduction of foreclosures now being evident, lenders will be able to start focusing on expanding access to credit. Their goal can now be on continuing this positive momentum, and creating traction for a new housing boom.
In any industry where financial transactions take place, there is a chance that a consumer will want to dispute a charge. When dealing with financial institutions (lenders), there are specific protocols that need to be followed and compliance deliverables that need to be met. The type of follow up that is required will depend on the type of financial dispute that is taking place. If there is a dispute in the realm of open-end credit accounts, it will fall under Regulation Z (which has its own required steps for resolution). Other disputes are handled a bit differently.
With any dispute there are few universal steps that financial institutions have to take to remain compliant.
- The nature of the dispute needs to be assessed
- Once the nature of the dispute is assessed, the financial institution must decide whether investigation is required (if it falls under Regulation Z, an investigation is mandatory)
- If it is determined that an investigation is required, then the institution must then make sure that all procedures are followed (timing, notices, etc.)
When a dispute DOES fall under Regulation Z…
Transactions (and subsequently their related disputes) that revolve around home equity lines of credit, overdrafts related to credit, credit cards, and other transactions of that nature carry specific rules about their investigations and resolutions.
According to Regulation Z, a billing error is,
“a reflection on or with a periodic statement for an extension of credit that exhibits some type of error, ”
which can come in many forms. An error can be anything from an unauthorized transaction to an improperly credited payment. If a consumer files a complaint about an error within the allotted 60 day time frame, there are three steps that will take places.
- Written acknowledgement of the receipt of the billing error dispute must be sent back the consumer within 30 days. The creditor must then follow all Regulation Z procedures.
- The consumer is not required to pay the disputed amount while the investigation takes place. The creditor is not allowed to make any negative actions against the consumer, and no delinquency is allowed to be reported.
- At the conclusion of the investigation, if there was no billing error, then the creditor must inform the consumer, in writing, that the disputed issue was in fact compliant. If it is determined that an error did occur, then the creditor in question must correct the error and send written notice of the correction to the consumer.
If the dispute DOES NOT fall under Regulation Z…
There are several potential billing disputes that do not involve open-credit accounts. In those situations, the creditor/lender is still responsible to carry out the “consumer complaint process” as part of the Compliance Management System.
All complaints must be documented, investigated, and resolved in accordance to the Compliance Management System (CMS).
In my last post, I started a list of things that you should absolutely consider before purchasing your first home. Buying a home is a major live achievement, and you’ll want to make sure that everything goes as smoothly as possible, so your achievement doesn’t turn into a source of deep personal and financial strife.
Let’s delve a little further into some other important things to think about before you sign on the dotted line.
Don’t Buy A Home for the View
If you’re looking at a home, and the selling point is the view, you must remind yourself that that view may not be there forever. Markets shift, renovations happen, and new properties are built all of the time; those can easily obstruct or destroy the view that you loved so much.
Protip: If you really love the view, and you have the means…..try and buy the property that makes it up. This is really only applicable in rural, undeveloped areas, but it may be possible to purchase a small plot of the land that makes up the view that you love.
What Is The Long Term Plan?
There are a few things to consider when you’re thinking long term.
- The most obvious question is whether or not you are planning to grow your family. How many kids are you planning for? Will there be enough space? Is the layout of the house kid-friendly/safe?
- If this is just a “starter” house, and you’re planning to move and rent out this house: Make sure renting is allowed. There are some homeowner associations that contractually prohibit renting, so be aware of that before you buy.
- If this is just a “starter” house, and you’re planning on selling, determine who the house will appeal to when you’re trying to sell. Is this home going to appeal only to first time buyers or will families consider it too?
You’ll want to try to invest in a home that appeals to a broad market. So, consider things like school districts, proximity to amenities, & family-friendliness when purchasing because you don’t want to end up with a house that you can’t sell or lose money on because your potential buyer-pool is limited.
Coming to a position in life when you feel ready to purchase your first home is very exciting. Of course there will be a lot of planning and budgeting before any concrete decisions are made. But, there are certain things that many first-time buyers forget to even think about when planning out their big buy.
Use this as a checklist of things you should take into consideration when thinking about investing in a home.
Look Into Funding & Grants
You’d be surprised by the assistance available for potential buyers if you do the proper research. Many people are quick to assume they wouldn’t qualify for grants because of income limits, but that’s not always the case. There are a lot of associations that provide grants and assistance based on profession, so check for those first. Then, look into grants available specifically for the area/type of area that you are looking to live in.
Can You Handle a Financial Emergency?
I mentioned emergency funds in a past blog post in the context of bankruptcy prevention, but it absolutely bears repeating. If you are going to invest in a home, you must have a significant savings. If you lose your job, or there is a medical emergency, do you have enough saved to cover expenses and your mortgage for a few months?
First-time buyers who are transitioning from renting also often forget that all maintenance will now come out of pocket. Many homeowner insurances will have deductibles that you must hit before they pay for damages, so remember that there can be a lot of unplanned out-of-pocket expenses that come with owning a home.
Think About What Kind of Neighborhood You Want to Live in
It’s easy to be swept up into the whirlwind of house showings and open houses, and the last thing you want to do is fall in love with a house in an area that doesn’t align with your needs. One of the most important things to determine is whether or not the area is primarily renters or buyers. The high turnover of residents in rental properties means that the vibe of the neighborhood can shift very easily.
If you’re planning to have a family, there are also a few things to think about. What are the schools like? Are there a lot of other families in the area, or is it primarily single residents? Will there be resources for your children?