Have you ever wondered what kind of impact a foreclosure, short sale, or bankruptcy would have on your credit score? Well, wonder no more…

According to a recent report from VantageScore Solutions, which is a credit scoring company created by the “big three” (Equifax, Experian, and TransUnion), here’s what you can expect:

• Short sale = 120-130 points
• Foreclosure = 140-150 points
• Bankruptcy = 355-365 points

Apparently loan modifications, where late payments and penalties are rolled into the mortgage balance, can actually have a small beneficial impact on your credit score.

Note that your VantageScore isn’t the same as your FICO credit score. VantageScores range from 501 (subprime) to 950 (superprime), whereas FICO scores range from 300-850.

Despite these differences, the numbers above can give you an idea of the relative impact of the different scenarios. Moreover, your VantageScore is being used by an increased number of lenders, particularly large mortgage lenders.

If you’re curious about your “real” FICO credit score, you can take a free peek at it by signing up for a free trial with MyFICO.

Source: Baltimore Sun via Clark Howard

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Big news this week… We went ahead and locked in our mortgage interest rate. My husband called the lender on Wednesday, and we’ve since faxed back the agreement. We’re locking in our 30 year fixed rate mortgage at a 5% interest rate with a 1.017% origination fee.

To be honest, I’ve been anxiously watching our lender’s site and counting the days until our closing date. I was worried that mortgage rates would go up before we locked. Fortunately they didn’t, so we have one less thing to stress over about.

What is an interest rate lock?

A rate lock is an agreement with your lender to fix your interest for a limited time period. Locking in your rate keeps the terms of your agreement consistent prior to close. Your lender won’t increase your interest rate for a limited period of time, though they also won’t decrease it if rates fall.

While I’ve read that some lenders charge a fee locking your rate, we found that pretty much everyone offered to lock our rate for free. If your lender tries to charge a fee, ask if they’ll waive it. And, as always, the terms of your should get the terms of your agreement in writing.

Why lock your interest rate?

Interest rates change constantly, so it’s possible that the rate you were first quoted will rise (or fall) between prior to closing. If rates increase and you haven’t locked, you’re mortgage payment will increase — perhaps to the point where you can no longer afford the payments.

On the flip side, you may have to settle for the locked rate even if the interest rates go down. Be aware, though, that some lenders offer the option to “float down” your rate if it drops significantly. In our case, our lender will split the difference if the interest rate drops to 4.5% or lower prior to closing.

When should you lock your interest rate?

There’s no concrete answer to this question. If you think that interest rates will rise in the near future, you should lock your rate. In our case, the interest rate was 5.25% when we first applied for our mortgage. It then went up a bit in the summer, but it’s now down to 5% for our FHA loan.

In 2008, the average rate was 6.1% for a 30-year fixed rate mortgage. Since no one can predict the future, you’ll have to weigh your options carefully before you decide. You can compare current mortgage rates here.

In case you’re curious about mortgage rate trends, ShopRate has a widget that track weekly average mortgages rates. You can also check prevailing mortgage rates at Money Rates. Since rates are pretty low right now, we went ahead and locked.

Closing thoughts

Personally, I can’t wait for this whole process to be over. I’ve never read so many forms and studied so many educational guides before. Did you feel like this as you were going through the home buying process? Do you have a rate-locking stories to share?

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Some good news has come up in the last couple of weeks, as I’ve happened upon a temporary job for the next couple of months. Since we’re buying a house, we looked at what we can do with the extra income.

For background, we’re getting a 30-year fixed rate FHA mortgage for our town house. This means that our interest rate will remain the same through over the life of the mortgage. Since it’s an FHA loan, however, there are some differences vs. conventional loans.

FHA loans and the Mortgage Insurance Premium

With a conventional loan, if you make a downpayment of less than 20% of the purchase price, you either have to pay for Private Mortgage Insurance (PMI), or take out a piggyback loan to make up the difference. With an FHA loan, if your downpayment is less than 20%, you have to pay a Mortgage Insurance Premium (MIP).

For loans with terms longer than 15 years, the law currently requires your MIP to remain in place for at least 5 years, whether or not your loan-to-value (LTV) ratio drops below 78%. With a conventional loan, most lenders will allow you to drop your PMI, though you might have to make a special request.

Keeping that MIP in place — at a cost of roughly $50/month for 5 years — will take up money that we could use for other things. We had hoped to use my extra earnings to pay for it in advance and keep it from getting rolled into the mortgage, but…

I called the Housing and Urban Development (HUD) hotline for the FHA’s resource center (1-800-CALL-FHA) to asked about doing this and was told that we can’t. While that was a bit disappointing, we’ve decided to change our game plan a bit.

Our new plan for my windfall income

We’ve always been careful to avoid putting ourselves in a financially vulnerable position, so we’ve decided to continue down that road by putting using my extra income to increase our emergency fund.

We’re also going to put some toward a refrigerator for the townhouse (which doesn’t come with one). We were going to buy a friend’s fridge which still was under warranty, but it was too big to fit. So now we’re in the market for a new one. If you have any suggestions, they’d be greatly appreciated. Hopefully, this new appliance rebate program can work out for us.

Closing thoughts

The home-buying process has been very crazy so far. Hopefully, it’ll turn out alright when all is said and done. Have you ever had an FHA loan? If so, how was your experience? And do you have any tips to share?

Note: The good news is that MIP payments are, in many cases, partially refundable. If you have an FHA loan and are wondering if you’re due a refund, go to the HUD refund site and enter your loan details.

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With the $8,000 first-time homeowner’s tax credit deadline approaching, many people are still trying to get in on the deal. If you’re in this boat, don’t assume that just having a down payment is enough (even though it’s a big help).

Applying for a mortgage involves a thorough check into your finances to see if you really qualify for a mortgage loan. This process takes time, and waiting to the last minute could cost you the tax credit.

Before you apply for a loan, you should be familiar with some numbers that the lender will be examining closely. The better you look to them, the better your chances of getting a solid deal on your mortgage.

Credit score

One of the first things that a lender will look at is your credit score. Not only does your credit score influence whether or not you’ll get approved, but it can also influence your mortgage rate. Be sure to check your credit report well in advance of any loan application, and fix any errors that you see.

Buyer’s income

Lender have to verify your income, so be prepared to provide W-2s, pay stubs, tax returns, and bank statements. If you’ve recently landed a new job, you might also be asked for a letter from your employer verifying your new salary. In our case, we were asked for two years of tax returns and recent financial statements.

Lenders are also looking to see if the savings you have is a gift or if you have saved up for it. Receiving a gift from a relative isn’t necessarily a bad thing, but you’ll need a mortgage gift letter to prove that it’s not a loan that has to be repaid. Prospective lenders just want to know the full extent of your obligations.

Debt-to-income ratio

Your debt-to-income ratio is a number that lenders use to evaluate the amount of debt that you’re carrying. It’s calculated by taking your debt monthly debt obligations and dividing that total by your monthly income.

Lenders are looking for lower numbers, as you’ll be more likely to be in a position to pay your mortgage. Lenders used to want your total debt obligation (including your housing expenses) to be no more than 28% of your income, though this number drifted up as high as 36% or even 40% during the housing boom.

Improving your debt-to-income ratio

There are two basic ways to improve your debt-to-income ratio:

Decrease your debt: Before you apply for a mortgage, reduce your long-term debt such as your car loan or student loan debts. You should also pay down your credit cards and negotiate lower interest rates, starting with any that are behind. If you are having a hard time now with debt, adding a mortgage will be a disaster. Reduce your monthly expenses and put that money towards reducing your debt.

Increase your income: Building additional income streams can help you immensely in the long run, and not just with getting a mortgage. If you have a review coming up at work, prepare diligently, and include concrete examples of your worth to the company. If they don’t want to give you a raise per se, see if you can negotiate a bonus if you reach a performance goal.

Loan-to-value ratio

This is another number for lenders to asses the risk of loaning you the mortgage loan. The loan-to-value (LTV) ratio is the mortgage loan amount divided by the appraised value of the property (expressed as a percentage). An independent appraiser usually determines the property’s value. If the buyer has a high loan to value ratio, they can expect to pay private mortgage insurance.

Private mortgage insurance (PMI) can add to your monthly payments so having a larger down payment or piggybacking your mortgage loan can lower your payments.

Cash Reserves

I read about this one in a few books covering mortgages, but I personally haven’t noticed this from our lender. Some lenders examine how much cash you have on hand to see if you’ll be able to weather any emergencies that arise. The cash reserves that we have are for the down payment as well as some for our emergency fund.

Closing thoughts

While it’s gotten harder to get a mortgage over the past year or so, that’s a good thing. It means that lenders are checking to make sure that borrowers can handle their mortgages. As much as I hate paperwork and filling out form after form (after form!), I also understand what’s at stake, and why the bank is being careful.

Have you noticed a change in mortgage standards?

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A reader that I’ll call Mary recently wrote in with the following question about dealing with a collection agency:

We were in a horrible car accident last year and our car insurance just now paid the car towing company. This company turned our bill over to collection agency which listed this on our credit report. Now… Who does what? The towing company tells collection agency to delete record on our credit report? Or do we need to do something?

We actually experienced something similar when a local medical clinic sent to collections a bill that we had already paid. Based on our experience, I would suggest starting by reading up on the Fair Debt Collection Practices Act (FDCPA).

Once you’ve done that, I would then request validation of the debt from the collection agency. A quick Google search turns up numerous sample letters that you can adapt for you own purposes. As part of your request, it wouldn’t hurt to note that you have proof of payment.

Be sure to send this letter via certified mail within 30 days of the collection agency’s initial contact. The collection agency will then have 30 days to respond. If they can’t validate the debt, they’re not allowed to:

(1) attempt to collect it,
(2) contact you about it, or
(3) report it to the credit bureaus

If they don’t respond, send a followup noting (politely!) their failure to comply with the FDCPA. Further state that they will be in violation of the act if they attempt to collect and/or report you to the credit bureaus (or fail to remove the listing if they’ve already reported you).

In our case, this is as far as it went. We sent the request for validation and didn’t hear anything. I then sent a followup noting their failure to validate the debt, and further stating that we consider the matter to be resolved. We haven’t heard anything since.

In Mary’s case, it would also be worth following up with both the insurance company and the towing company and asking for their help. It’s important to be polite but firm, and to not give up until you get a resolution. Take good notes of every conversation, and provide documentation wherever possible/necessary.

What did I miss?

Have any of you successfully navigated this sort of situation, or otherwise dealt with a collection agency? If so, do you have anything to add?

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This is a guest post from Kevin Mercadante of Out of Your Rut. Kevin is a former loan underwriter, and also author of Lighten Your Load, an e-book focused on reducing living expenses while still maintaining a comfortable lifestyle.

The housing market has been down for two years or more in much of the country, but many home buyers are continuing with the practice of buying a new home before selling the old one. While this was a common practice a few years ago in a stronger market, it makes little sense now.

Selling a house in this market is substantially more difficult than buying a new one.

If you insist on delaying the sale of your current home until you put a contract on a new one, then you’ll face the very real possibility of carrying house payments on two mortgaged properties at the same time. This is a situation that should be avoided at all costs in this market.

The downside of the real estate double deal

Below are some common entanglements you might face by not selling your house before buying a new one.

Qualifying for a new mortgage. A mortgage approval is much harder to obtain when the potential exists for carrying mortgages on two houses. Your lender will be aware of the situation, and may be less flexible in your terms. Either that, or they might not approve your loan at all. Since most buyers purchase at the upper range of affordability, the possibility of carrying two properties may be viewed as an unacceptable risk.

Sale of prior residence clause. If the lender wants you to sell your current home before closing on the new one, they will add this condition to your approval. Real estate agents don’t like it, and sellers like it even less. It makes the closing on your new home contingent on the sale of your old one —- a deal dependent on another deal. If your lender requires the sale of your current home, your offer on a new home may not be accepted.

The Simultaneous Close. This is typically the most desired outcome. You close on the old and new homes on the same day. This is the perfect world outcome, but much more difficult to pull off than most people think. It’s very stressful on all parties, and can be sabotaged by a laundry list of potential issues with EITHER transaction. This is the classic, “it ain’t over until it’s over” trap, that may cause sleepless nights and significant delays in closing.

Wiping out your liquid assets. There are numerous expenses that accompany the purchase of a new home that don’t show up on a closing statement. Costs of the move, new furniture, minor repairs to the new home and the “whoops, we didn’t know we would need to buy (or fix) that!” Now add an extra monthly mortgage payment to the mix, and how long do you think your liquid assets will hold out?

A forced rental situation. Renting out your old house to cancel the payment on it might make sense short term, but having tenants will make it much harder to eventually sell your house. Your tenant might not be open to real estate agents showing the house, and also might not keep it in salable condition.

Foreclosure. Carrying two mortgaged properties simultaneously is a major cause of foreclosure. Even if nothing goes wrong, the double payments might prove to be too much for you to handle.

Common reasons for not selling first

Over my many years in the mortgage industry, I’ve heard the following offered as reasons for buying the new house before selling the old one.

“My house is in (pick one) top condition/a top neighborhood/a top school district, so it’ll sell fast.” Most home sellers aren’t objective when assessing the salability of their homes, and tend to be overly optimistic. Note: seller optimism is not a factor in the marketability of your house.

“I don’t want to make a double move.” A double move is a temporary problem, and one you have some control over. It’s not uncommon to go a year or more carrying two house payments! That’s serious money.

“We might not be able to find another house quickly if we sell ours first.” For all the same reasons it’s difficult to sell a house in today’s market, it’s much easier to buy one.

“What if we sell our house, then can’t get a mortgage for one that we want to buy?’ You can and should obtain a mortgage pre-approval before entering into any home buying situation, so the risk here is remote at best.

The unspoken fear of being homeless. Okay, I’ve never actually heard this one, but I suspect that (perhaps in the dark of the night) people might have a pang of fear that selling their house before buying a new one could leave them out on the street. Given that you’ll have a loan pre-approval before doing anything anyway, this isn’t something to be feared — especially not in this market!

The alternatives

Simply getting a contract offer on your house isn’t always sufficient. Contracts can fall through for more reasons than you can imagine, as can the buyer’s mortgage approval. The cleanest way to enter the purchase of a new home is to fully dispose of the old one first. Below are some suggestions on how to accomplish this.

Before using any of these suggestions, it is strongly recommended that you first consult a qualified real estate attorney in your area as laws and practices vary by jurisdiction.

Sell your house with a delayed closing date. You can accept a contract on your current home and set the closing date 30, 45 or 60 days from receipt of a contingency-free mortgage approval from your buyer. At that point, you’ll have a solid buyer as well as time to find your new home, and you may be able to pull off the coveted simultaneous close.

Add a short-term rental provision to the contract on your current home. Add a clause to the sale of your old home that permits you to stay in the house as a rent-paying tenant for 30-60 days following the close. Use this time to secure your next home. You’ll avoid a double move, have the cash from closing in hand, and can make a clean offer on a new property.

Move into an extended stay hotel and put your furniture in storage. This requires a double move, but also eliminates the uncertainty pf being able to sell the old home. It also makes your a more attractive buyer. Yes, it will cost more, but it’s a solid defensive strategy that guarantees you won’t be stuck with two mortgages.

Sell your house, and take a lease purchase on a new home. This strategy also enables you to sell your old home and enter the market as an unencumbered buyer. You get a chance to “test drive” the new house and neighborhood, and you avoid the double move. There are now more lease purchases available than there have been in recent memory, and one might imagine that any property that’s been listed for sale for more than a few months might be a candidate for such an offer even if it’s not being presented as such by the sellers.

No doubt any of the above will create some problems, but you’ll be accepting smaller, short-term problems rather than risking larger, more costly problems later.

Do you know of anyone who’s been trapped with two homes for more than a couple of months? Are you in this position now?

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As many of you know, we’re in the process of buying a townhouse. We recently received the paperwork from our lender, including our truth in lending disclosure, a disclosure book, and our good faith estimate. The Real Estate Settlement Procedures Act (RESPA) requires that we receive these things within 3 business days of submitting our loan application.

As we get closer to closing, we’ll also receive a HUD-1 Settlement Statement, which is a form used in the United States for disclosure of fees that the lender or broker is charging. The purpose of the HUD-1 statement is to help borrowers understand the total costs of buying their home. These documents are a great resource to give you an idea of upcoming expenses and costs.

Always ask questions

I’ve heard from my friends and read from others that they wished they ad asked more questions when buying their home. Unfortunately, they usually come to this realization after they realize that they could’ve gotten a better loan. Instead of relying on what a lender tells you, check out these resources:

• HUD’s Site on Buying a Home and Closing Costs
• Consumer’s Guide to Mortgage Lock-Ins
• Consumer’s Guide to Mortgage Settlement Costs
• Five Tips for Shopping for a Mortgage
• Looking for the Best Mortgage: Shop, Compare, Negotiate

Remember, no broker or lender has to give you the best deal. They are trying to make a profit, and that might involve higher rates and/or fees than you would otherwise have to pay. Be sure to ask questions, and don’t be afraid to comparison shop. It’s your name on that loan, and you’ll be the one responsible for it.

Is your interest rate adjustable or fixed?

It’s in your best interest to understand the term of your loan, your interest rate, whether it is fixed or adjustable, and whether or not you will have any balloon payments in your future — you should generally avoid loans that require balloon payments.

Fixed-rate loans generally have repayment terms of 15, 20, or 30 years.

Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates.

Source: Federal Reserve

Run all your numbers before agreeing settling on a lender and loan. Ask them to walk you through and show you how much your monthly payments could be a year from now, five years from now, and so forth. In the case of a fixed-rate loan, the principal and interest payments won’t change over the life of the loan.

How much are your settlement costs?

Besides your down payment, there are a number of costs associated with closing on your new house. Becoming familiar with the typical costs and fees will put you in a better position.

Loan origination fees: Borrowers might be asked to pay this fee in return for the brokers/lenders handling your loan. It typically ranges from 1- 1.5% of the house’s cost, though some lenders offer lower flat rates.

Hazard/homeowners insurance premiums: Lenders expect you to pay your first year’s premiums in advance. Going forward, they will also (most likely) collect a portion of your annual premium along with your monthly mortgage payment and place it in your escrow account.

Title insurance: The title insurance come into play if there’s ever a dispute of who really owns the property. While you have to find a company that meets your lender’s requirements, you can search to find a good deal on your title insurance premiums.

Just make sure the coverage you get is adequate. Some cheaper policies may have exclusions that can hurt you — e.g., they might only protect the lender’s interests.

Pest inspection: Depending on where you live, your new home might need to be inspected prior to closing for termites and other pests that might damage your house.

Credit report: Lenders will pull your credit report to make sure you’re a financially worthy candidate. The cost for doing this is typically passed on to the borrower.

Other settlement costs: You also have to consider processing fee, underwriting fee, document review (I’m not kidding!), tax service fee, commitment fee, wire transfer fees, overnight shipping fees, and a few more. There are a lot of fees involved, so review your Good Faith Estimate carefully to see what you should expect.

Closing thoughts

If you’re thinking of purchasing a new home, keep the settlement costs in mind when formulating an offer. Remember, you’ll have to bring enough cash to the closing table for both your down payment and your settlement costs.

Your settlement statement will also give you a pretty good idea of your complete cost of home ownership. Of course, this doesn’t include incidentals like new furniture and your monthly utility bills, but it gives you a pretty good baseline.

And remember… If you have any questions about fees, ask before you sign anything. Don’t be afraid to negotiate a better deal — if something doesn’t make sense to you, try to get it reduced or removed. Being an informed buyer is the best course of action.

If you’ve bought a home, what surprised you about the settlement costs and/or the closing process? Do you have any tips or tricks? Anything that we should be sure to do/avoid? Please share your thoughts in the comments.

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I recently received an e-mail from a reader who is interested in paying off her mortgage early. In it, she asked the following:

Is it better to pay money monthly that is applied to your escrow or your principal? I would like to pay the equivalent of one extra mortgage payment a year, but I’m not sure where to apply it.

The short answer is that you want the extra payments to apply to your mortgage principal — that’s the amount that you still owe the lender. In most cases, your lender will automatically apply any overage to your mortgage principal. That’s not always the case, however, so it’s best to check with them to be sure.

The longer answer is that your monthly mortgage payment likely consists of four parts: principal, interest, taxes, and insurance. This is where the acronym PITI comes from. The reason that your lender collects taxes and insurance is that they want to protect their investment (your home) from both disaster and tax complications by making 100% sure that both bills get paid.

What the heck is escrow?

So where does escrow come in? Well… The term escrow refers to a legal arrangement in which a third-party takes possession of money or property until certain obligations have been met. In the real estate world, the “extra” funds that your lender collects are placed in an escrow account until your tax and/or insurance bills come due. At that point, the funds are disbursed to cover your obligations.

More generally, escrow services are often used to reduce risk in business deals when the two parties don’t fully trust each other. For example, if a particularly valuable asset is being sold, the buyer will often transfer their money to an escrow agent instead of paying the seller directly. The escrow agent will then hold the funds until the asset has been transferred, at which point the seller will get paid.

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A reader named Mary recently wrote in to ask about my thoughts on getting a mortgage from ING Direct. She’s heard that they have competitive rates and low fees, and is seriously thinking about refinancing her mortgage with them.

I don’t have any firsthand knowledge of ING Direct mortgages, but I was curious enough to go take a look. For starters, it doesn’t look like ING Direct offers traditional, fixed-rate mortgages. Instead, they offer a so-called “Easy Orange” mortgage as well as standard 5/1 and 7/1 adjustable rate mortgages (ARMs).

Inside the “Easy Orange” mortgage

The “Easy Orange” mortgage is a five year, fixed rate loan with monthly payments based on a 30 year payback period. Instead of making monthly payments, however, you make biweekly payments corresponding to half the monthly amount. This accelerates the repayment schedule, and helps you pay off your mortgage early.

At the end of five years, you can re-lock at the then-current rate for another five years. The downside here is that re-locking appears to cost the equivalent of two biweekly payments. The upfront lender costs are all wrapped up into $395 processing fee when you sign your original loan documents.

Inside the “Orange Mortgage”

The “Orange Mortgage” is an ARM that comes in two flavors — 5/1 or 7/1. In other words, the rates are initially fixed for five or seven years, after which time they adjust annually. As above, these loans are amortized over 30 years, and the total lender costs are wrapped up into a $395 processing fee.

Thoughts on ING Direct mortgages

Personally, I’m not crazy about ARMs. Instead, we’ve always used 15 or 30 year fixed-rate mortgages. While I’m aware of the arguments in favor of ARMs, I don’t like the uncertainty associated with them. This is especially true when rates are as low as they have been in recent years.

Speaking of rates, the Easy Orange loan had a 4.25% rate and the 5/1 and 7/1 ARMs were at 4.5% and 4.75%, respectively*. I just checked around, and these rates appear to be fairly competitive. Note, however, that these rates require a 75% loan-to-value (LTV) ratio or less. Thus, you’ll need to come up with a 25% down payment (or have at least 25% equity in the case of a refinance).

As I said above, I don’t have any firsthand experience with mortgages from ING Direct. This is where you come in… If you’ve ever borrowed from ING Direct, please weigh in. Likewise, if you’ve considered using them in the past, but decided against it, I’d like to hear why.

*Note: Rates as of 8/10/09.

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This is a guest post from Jim Wang of Bargaineering. If you like what you see here, please consider subscribing to his RSS feed.

Credit scores are becoming increasingly important each and every day. While some people check them compulsively, almost as frequently as they check their investment portfolio, others check them infrequently, like the oil in their car. Regardless of where you stand, that three digit credit score plays a big role in your life, so it’s important to make sure that you have a good one.

So what’s a good credit score?

Good is relative. If you’re not planning on getting a loan, you probably shouldn’t be too worried about your score. As long as you have an average credit score or above, you’re in good shape. In such cases, good enough is good enough.

But let’s say that you want to buy a house, and you’re looking for a 30 year, fixed rate mortgage. What do the rates look like relative to credit scores?

Here’s what MyFICO says:

 
In that case, anything above 760 is “good,” though anything about 700 r†ange are pretty darn good. The point that I’m trying to make is that the definition of good depends on your needs. If you don’t need to borrow, then a 620 is as good as a 850. After all, you can’t walk into the grocery store with your 850 and expect to get anything with that alone, right?

So, the next time you’re fretting about how good your score is, think about what you’re trying to achieve first. Once you have context, it’s worth spending time finding out if your score is good, or at least good enough.

There are several ways you can see your FICO credit score for free, but all of them require that you sign up for a trial membership for some sort of paid service (e.g., FreeCreditReport.com requires a seven day free trial of their credit monitoring service). If you don’t want the hassle, you can always try a site like Credit Karma.

Credit Karma is absolutely free, but it’s not a true FICO score. Rather, it’s an approximation based on your TransUnion credit report. If you’re planning on getting a loan, you’ll want your real FICO score. If you’re just curious or want to see how it changes, the TransUnion-based score is good enough.

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Related Articles at fivecentnickel.com:

» Yet Another Reason to Value Your Credit Score
» Do You Care About Your Credit Score?
» Another Reason to Value Your Credit Score
» Delinquency Rates and FICO Scores
» Effect of Foreclosure, Short Sale, and Bankruptcy on Your Credit Score
» Five Ways to Hurt Your Credit Score
» How is Your FICO Credit Score Determined?
» Five Reasons you Should Care About your Credit (FICO) Score

About a month ago, we had a pretty lively discussion about whether or not you should pay off your mortgage early. A number of readers made great points on both sides of the debate. Since that time, I put together some thoughts on how to pay off your mortgage early for those that are interested in doing so. Today, I wanted to share some thoughts additional thoughts on the topic.

The source for these thoughts is a recent book called “The Frugal Millionaires,” which profiles 70 anonymous millionaires and their thoughts about money. Interestingly, just like with our prior discussion here on FCN, there are ‘frugal millionaires’ on both sides of the fence. Here’s a taste of what they had to say…

Thoughts in favor of keeping your mortgage…

“When it comes to residences, mortgages can be a way for someone to save cash for investing and therefore possibly allow them to earn a higher rate of investment return than one is paying in mortgage interest.”

“If you can have money at a cheap rate then a mortgage is a great decision…”

“If the money is cheap, it can be smart to arbitrage the cost of the mortgage vs. the benefits of a tax deduction and market gains…”

“The US government tax system is set up to reward those who have mortgages…”

“If the government is going to pay you to own a home, why turn them down…”

Thoughts in favor of paying off your mortgage…

“If you want absolute peace of mind, don’t have any debt…”

“For many people the advantage of the ‘interest deduction’ is a myth perpetuated by by real estate agents, mortgage brokers, and even your friends…”

“Mortgages lose their interest rate deduction efficiency as they get older. This [is because] you are paying more principal towards the end of the loan…”

“Take opportunities to pay off a little of the capital on your mortgage whenever you can — even if it seems like an insignificant amount.”

“I prefer not to have one and say get rid of them as fast as you can. Debt will kill you.”

“There’s a great feeling in living in a home you own outright.”

What say you?

While I know that I number of you have weighed in on this already, I still thought it would be worth asking… As I’ve noted previously, we’re doing a bit of both. We’re paying down our mortgage ahead of schedule, but we’re not committing every last penny to the effort. Instead, we’re directing a sizable chunk of our ‘discretionary’ funds to our investment portfolio.

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Related Articles at fivecentnickel.com:

» Pay Off Mortgage Early? Or Invest?
» What is a Mortgage Escrow Account?
» Help a Reader: Mortgages from ING Direct
» How to Pay Off Your Mortgage Early
» Debt Reduction vs. Retirement Savings
» How to Decide When to Refinance Your Mortgage
» Reaching the Mortgage Crossover Point
» More Thoughts About Refinancing Our Mortgage

Should you payoff your mortgage early? I asked that question a couple of weeks ago, and the majority of respondents said “yes.” With that in mind, I thought I’d put together a list of strategies for doing just that…

Refinance your mortgage to a shorter term

If you refinance your mortgage to a shorter term, say from thirty to fifteen years, you can dramatically reduce the time required to payoff your mortgage. As an added bonus, rates are typically lower on shorter term mortgages.

The downside here is that you will have to pay closing costs, etc. (unless you opt for a “no-cost” refinance). Your mortgage payment will also increase, but what did you expect? You’ll be paying off your mortgage significantly faster, so it only makes sense that you’ll pay more per month.

Biweekly mortgage payment plans

I’ve written about biweekly mortgage payment plans in the past. The trick here is that, by sending in half of your monthly mortgage payment every two weeks, you end up making the equivalent of an extra payment every year.

Don’t believe me? Do the math. Instead of making 12 monthly payments, you’ll make 52/2 = 26 biweekly payments — the equivalent of 13 monthly payments. This will shave years off your mortgage. Moreover, if you’re paid on a biweekly basis, this approach might match your budgeting process better than monthly payments.

The downside to biweekly payment programs is that, while many lenders offer these sorts of programs, most of them charge a fee for the privilege. While it might seem easy to justify such fees based on your long-term savings, there’s a better option…

Overpay a fixed amount every month

When we bought our first house, I started sending in an extra 10% of our total payment as an additional principal payment. Ultimately, this works out to the equivalent of 1.2 extra mortgage payments each year — on par with the biweekly plan, but without the extra fees. Since you’re sending a fixed amount everything month, this is also very easy to automate.

Pay next month’s principal this month

This is an idea that I first read about in “Wealth Without Risk.” It goes like this… When you sit down to make your mortgage payment, send an additional payment equal to next month’s principal.

If you’re not sure what next month’s principal payment will be, just double the amount from this month — that’s close enough. In case you weren’t aware, your mortgage statement should break this down for you, listing the amounts going to principal, interest, and taxes/insurance.

The primary advantage with this approach is that it really puts your mortgage payments into hyperdrive. Over time, the amount you are paying toward principal will increase, meaning that you’ll pay down your mortgage faster and faster as the months go by.

There are two primary disadvantages to this approach. The first is that the amount of your overpayment is variable (increasing each month) such that it can be hard to automate your payments. The second is that it becomes increasingly difficult to keep up with the payments since the overpayment continually accelerates as the interest portion of your payment dwindles.

The haphazard approach

If all else fails, I recommend that you at least take what I’ve termed here the haphazard approach. Whenever you run across a small windfall, simply forward it to your mortgage company as an extra principal payment. Get a check from your reward credit card? Send it in. Get a tax refund? Send it in. Find ten bucks in the gutter? You know the drill… Send it in.

Aside from the fact that this approach doesn’t put any additional strain on your budget, paying down your mortgage with found money can be kind of fun. The downside is that this approach is generally less effective than the alternatives. After all, your additional payments will typically be smaller, and will come at somewhat random intervals.

Closing thoughts

The above list is by no means exhaustive, but it’s a great starting point. If you have any other suggestions, please share them in the comments. If you’d rather invest than prepay your mortgage, that’s fine. In fact, some of the above strategies can be applied to juicing up your investments. For example, make that extra “principal” payment into a brokerage account.

The important thing is to do something.

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Related Articles at fivecentnickel.com:

» More Thoughts on Paying Off Your Mortgage Early
» Pay Off Mortgage Early? Or Invest?
» Are Biweekly Mortgage Payment Plans Worthwhile?
» Debt Reduction: Share Your Story
» What is a Mortgage Escrow Account?
» Reaching the Mortgage Crossover Point
» Help a Reader: Mortgages from ING Direct
» How to Decide When to Refinance Your Mortgage

As a followup to last week’s post about finding the best mortgage rates, I just wanted to remind you that there is no such thing as a free lunch. I mention this because those of you that are in the market for a new mortgage are likely to be confronted by offers for a “no-cost” refinance. While this isn’t necessarily a bad thing, it’s important to know what you’re getting into.

What’s a “no-cost” mortgage refinance?

A “no-cost” refinance is one in which the lender or broker covers the closing costs on your new mortgage. Depending on where you live, you can expect to pay 2-3% of the loan amount when closing a typical mortgage, so this is a great deal. Right? Well…

The reason I keep putting the term “no-cost” in quotes is because there actually is a cost — you just don’t typically see it. In other words, the lender doesn’t eliminate the costs, they simply convert them into another form. In most cases, this means that you’ll wind up paying a higher interest rate.

It works like this… Just as you can buy points to reduce your mortgage rate, you can increase your mortgage rate in return for negative points. Each point is equal to 1% of the loan amount. By accepting a higher than market rate on your loan, you can generate cash back that lender can use to cover the closing costs.

Clearly, this approach is most beneficial to those with a short time horizon, as they’ll enjoy the upfront cost savings without having to live with that higher rate for very long. If you decide that the “no-cost” option is best for you, be sure to get a full rundown of the costs that are covered so you can make a meaningful comparison across lenders — not everyone covers all the same things.

“No-cash” is not the same as “no-cost”

Perhaps the biggest mistake that you can make when shopping for a “no-cost” refinance is to wind up with a “no-cash” deal instead. While the names sound very similar, these are very, very different products. With a “no-cash” refinance, the closing costs are rolled into the balance of the new loan.

Because there aren’t any negative points involved with a “no-cash” refinance, the rate will likely appear more competitive on a “no-cost” refinance. Unfortunately, you’ll wind up paying the fees yourself over time plus interest.

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Related Articles at fivecentnickel.com:

» How to Decide When to Refinance Your Mortgage
» Calculating Your Mortgage Refinance Payback Period
» More Thoughts About Refinancing Our Mortgage
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» Deciding When to Refinance Your Mortgage
» How to Pay Off Your Mortgage Early
» Reaching the Mortgage Crossover Point

As a followup to last week’s article on whether or not you should pay off your mortgage early, I thought I’d talk a bit about how to find the best mortgage rates. To date, we’ve bought two houses, sold one, and refinanced three times. Thus, we have a good bit of personal experience when it comes to finding a mortgage. What follows are some tips that we’ve picked up along the way.

Check your credit

Given all that’s transpired over the past year or so, it should come as no surprise that your credit score is more important than ever when it comes to getting a great deal on a mortgage. As such, your first step should be to check your credit report and fix any errors that you find. Just be sure to give yourself enough lead time to get things sorted out. Here’s why…

I recently ran across a panicked letter that I faxed to Chase back in 2001. As it turns out, I checked our credit report before applying for our first mortgage and discovered a delinquency that had never happened. When I contested this with the credit bureau, Chase came back claiming that the information was accurate. Thus, the black mark stayed on our record.

Because I didn’t discover this problem until the last minute, time was running short, and I had to quickly resolve the problem directly with Chase. I ended up faxing them a letter the day before we applied for our mortgage explaining the situation and essentially begging them to help us out. In the end, we got the problem taken care of, but we could’ve avoided a lot of stress by simply starting sooner.

Beyond making sure your credit report is accurate, you might also want to check out your credit score itself. Unfortunately, while you’re legally entitled to free access to your credit report, the same is not true of your credit score. The good news is that you can get a free peek at your credit score if you’re willing to jump through some hoops… Simply sign up for a free trial at FreeCreditReport.com or MyFICO. Just be sure to cancel before you get charged.

Get the lay of the land

If you haven’t already decided what sort of mortgage you’re looking for, online mortgage marketplaces are a great way to get a feel for the prevailing rates on different types of mortgage. Alternatively, you can check current mortgage rates on a site like ShopRate. In either case, you can quickly compare rates on fixed vs. adjustable rate mortgages, 15 vs. 30 year terms, etc. With that info in hand, it’s much easier to identify the best option for your situation.

Find the best mortgage rate

Once you know what you’re looking for, check the mortgage rates offered by your local bank or credit union. Their rates may or may not be competitive, but you’ll never know if you don’t ask. Beyond that, you should consider asking friends or family if they can recommend a reputable mortgage broker.

While a mortgage broker isn’t absolutely necessary, working with one can make finding the best mortgage deal much easier. Ideally, you should contact more than one broker and see what they can offer you. Just be sure to ask for a “good-faith estimate” from each so you can make an informed comparison based on the full rundown of rates, fees, etc.

Once you’ve found what appears to be the best deal, start shopping it around. Go back to your bank, any other brokers that you’ve had contact with, etc. and see if they can beat it. Even if they can’t beat the rate, they might be able to sweeten the deal by knocking some money off your closing costs, etc. Remember, you’re looking for the best overall deal, not just the lowest rate. A bit of extra work here can pay huge dividends.

Of course, you should also be comparing these offers back to the rates that you found online. Just be careful… I’ve found that some lenders are less than honorable when it comes to making good on the rock bottom rates that they advertise online.

Some words of warning

If you’re buying new construction, you might feel some pressure to use the builder’s “preferred” lender. While they’ll likely offer to throw in some freebies if you use their guy, you probably won’t get the best overall deal if you simply say “yes.” Instead, negotiate with them on this point.

When we bought our first house, we agreed to use the builder’s lender, but only if they matched the best deal we could find. We also negotiated to get the freebies even if their mortgage guy couldn’t match our best deal. This put a lot of pressure on them to deliver, and they ultimately came through.

Finally, when it comes time to close, be sure to read everything they put in front of you. You might feel like uncomfortable making the closing attorney sit there while you read through all the paperwork, but that’s their job. If you simply can’t stomach doing this, you at least need to go over your HUD-1 settlement statement (which lists all the details of your deal) with a fine-toothed comb.

When we bought our first house, we had an 80/10/10 “piggyback” mortgage. While everything was fine with our first mortgage, the settlement statement listed the wrong (higher) rate for our second mortgage. Obviously, this could’ve caused a lot of trouble if we hadn’t been paying attention.

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Related Articles at fivecentnickel.com:

» Mortgage Refinance Complete
» Deciding When to Refinance Your Mortgage
» An End to Rising Rates?
» Mortgage Refinance Rates Continue to Fall
» More Thoughts About Refinancing Our Mortgage
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» Locking in Our Interest Rate
» Beware the “No-Cost” Mortgage Refinance

Should you pay off your mortgage early? Or should you focus on investing with your spare cash? This is one of the most hotly debated topics in personal finance, with vocal proponents on both sides. Today, I thought I’d take a look at this issue from both angles and then share our approach with you.

Why you should pay off your mortgage early

One of the biggest advantages of paying off your mortgage early is peace of mind. Once you’ve paid it off, you’ll wake up every morning and fall asleep every night knowing that the roof over your head is 100% yours. For many people, you can’t put a price on that sort of security.

Beyond the comfort/security aspect, paying off your mortgage early is a bit like locking in a guaranteed investment return. For every dollar that you pay early, you’re “earning” the interest that you would’ve otherwise paid on it over the balance of the loan period. This sounds great, right? Well…

The flip side of the “guaranteed investment return” argument is that mortgage interest rates are often quite low, and interest payments on a mortgage are also tax deductible (for those that itemize). These factors make early payments lose a bit of their luster.

Another advantage of paying off your mortgage early is that doing so protects you from yourself. While paying the minimum on your mortgage and investing the difference might sound like a great idea, there are no guarantees that you’ll actually follow through on the second part of the equation.

To see how long it might take you to payoff your mortgage, there’s a mortgage payoff calculator at this site for mortgage calculators

Why you shouldn’t pay off your mortgage early

The biggest downside to paying off your mortgage early is the (potentially large) opportunity cost that you’ll face. By this I mean that you’ll be giving up investment returns that might significantly outpace your mortgage interest rate.

In other words, why pay off a 5% mortgage when you could be earning 8-10% on that money? Of course, one only has to look at the past year to know the answer… Those sort of returns aren’t guaranteed, whereas the mortgage savings are.

Another important point to consider is the effect of inflation. Over time, inflation erodes the value of the dollar. This means that your future mortgage payments will effectively cost less than they do now, as the money you’ll be sending in won’t be worth as much in terms of “real” buying power.

What are we doing?

Instead of pretending to know what’s best in your situation, I though I’d tell you what we’re doing. We’ve actually gone back and forth on this issue, but ultimately decided to do a bit of both. And yes, I know that answer is a total cop-out, but it is what it is.

We are currently in the fortunate position of being able to max out our retirement accounts while having enough left over to put some extra cash toward our mortgage and to work on building up a non-retirement portfolio, so… That’s exactly what we’re doing. I view it as a bit of extra diversification.

A bit over a year ago, we refinanced from a 30 year fixed rate mortgage down to a 15 year fixed rate mortgage. In doing so, we cut our time horizon in half. Beyond that, we’ve been sending in an extra principal payment every month, further reducing the time until we’re mortgage-free.

Admittedly, this hasn’t been an easy decision for us, and we’re still tempted to waver at times. After all, now is a great time to refinance, and I also suspect that there’s a good bit of inflation looming just around the corner.

Given the above, we’ve been tempted to refinance into a rock bottom 30 year fixed rate mortgage and pay it off as slowly as possible while we focus on building our investment portfolio. However, a wise man recently reminded me that “pigs get fat, but hogs get slaughtered.” In other words, it pays to be greedy, but not too greedy. In the end, we opted to stay the course.

What about you?

Where do you stand on the mortgage pre-payment issue? Are you looking to get out of debt come hell or high water? Or are you paying off your mortgage on schedule while focusing on your investments?

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Related Articles at fivecentnickel.com:

» More Thoughts on Paying Off Your Mortgage Early
» Debt Reduction: Share Your Story
» Are Biweekly Mortgage Payment Plans Worthwhile?
» How to Pay Off Your Mortgage Early
» Dave Ramsey’s Baby Steps
» What Would You Do With $1000?
» What is a Mortgage Escrow Account?
» Pay Off Debt or Invest?

As a followup to yesterday’s post about FreeCreditReport.com, I wanted to open up a discussion about whether or not you care about your credit score.

On the one hand, I’ve written extensively about why you should care about your credit score… Like it or not, your credit score does matter, even if you don’t intend to borrow money. In fact, insurance companies, utilities, apartment complexes, and even prospective employers regularly check credit scores when evaluating potential customers/employees.

On the other hand, debt reduction guru Dave Ramsey has disparaged credit scores as being nothing more than “debt scores,” and has gone on record encouraging his followers to “stop worshiping at the altar of the FICO score.” Dave’s point here is that you need to focus on getting rid of your debt rather than worrying about what effect doing so will have on your credit score. I agree, but…

I still care about my credit score. I’m a realist. Like it or not, credit scores play a central role in many aspects of our financial lives, and it doesn’t cost me anything to have a good one. I don’t lie awake at night worrying about it, and I most certainly don’t base major financial decisions on the impact it will have on my credit score, but I do care about it.

The simple truth here is that living a responsible financial life typically results in a high credit score. My wife and I use credit cards as a convenience, but we always pay our balance in full, and have never carried consumer debt. We save and invest aggressively, and we have a 15 year fixed rate mortgage that will be paid off well in advance of its due date. We also have credit scores just shy of 800.

My point here isn’t to brag, but rather to point out that you can have your cake and eat it, too. While it might feel good to thump your chest and claim that you’re looking forward to getting out of debt and having a credit score of zero, it’s not an either/or proposition. In fact, the two are intrinsically linked. As you work to get yourself out of debt, your credit score will likely rise — and that’s a good thing.

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Related Articles at fivecentnickel.com:

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“F-R-E-E that spells FREE, credit report dot com, bay-bee!”

Unless you’ve been living under a rock, you’ve probably heard that jingle a bazillion times. FreeCreditReport.com — sounds great, right? Just sign up and get a free credit report as well as a free credit score. But is it really free? Or is it some sort of scam? They’ve gotten some bad press in recent years, so I decided to investigate.

While I dig deeper below, here’s the executive summary:

In my humble opinion, FreeCreditReport.com isn’t a scam. They tell you up front exactly what you’re getting into, and they honor their end of the bargain. You’re signing up for a free trial of their credit monitoring service, which comes with free access to your Experian credit report and credit score. If you don’t cancel before the trial expires, they’ll charge you. But if you do call them and cancel, you won’t be charged anything.

What does FreeCreditReport.com provide?

One of the first things you’ll notice when you arrive at FreeCreditReport.com is the big, yellow button promising you free access to your credit report and your credit score (pictured below). As just about everyone knows, the free credit report itself isn’t that big of a deal. After all, you can get free access to all three of your credit reports by visiting annualcreditreport.com.

But what about your credit score? Free credit scores are a bit harder to come by, though there are a number of promos out there floating around — e.g., the FreeCreditReport.com offer talked about here, as well as the free trial of myFICO ScoreWatch that I wrote about awhile back.

FreeCreditReport.com — What’s the catch?

As always, it’s important to read the fine print. If you look over to the left side of the FreeCreditReport.com homepage, you’ll see a box labeled “Important Information.” Here’s the scoop:

“When you order your free report here, you will begin your free trial membership in Triple Advantage Credit Monitoring. If you don’t cancel your membership within the 7-day trial period**, you will be billed $14.95 for each month that you continue your membership.”

They go on to specify that they are not affiliated with the federally mandated free credit report program (linked above). The footnote indicates that you actually have nine days during which you can cancel your trial membership since it can take up to 48 hours for the credit monitoring to begin.

Signing up for the free trial

I’m as curious as the next guy when it comes to things like this, so I decided to sign up and give it a whirl. The signup process is actually very easy. Simply visit FreeCreditReport.com, click the yellow signup button, and go through their two step signup process.

Step 1 (below) just asks for your name and address.

Step 2 (below) asks you to create a username and password, provide your personally identifying information (social security number, date of birth, and credit card information. Your card is not charged unless you decide to keep the service beyond the trial period.

After that, they ask two quick security questions derived from information on my credit report, and then you’re in. While they offer to upsell you at various points along the way, you can simply click “No Thanks” and keep going.

Accessing your free credit report and credit score

Once you’ve gained access, you free to view your Experian credit report and credit score. You can either view your report online or download a printable version. They also provide a link to a “Credit Report Guide,” which explains the types of information contained in each section of your credit report, and they have a link for disputing errors from directly within the site.

So… What did I learn from all of this? Well, for starters, there aren’t really any errors on my credit report. Beyond that, I learned that I have a credit score of 796, which puts me in the 99.5th percentile.

They also give you a breakdown of factors that helped and hurt your credit score. Here’s what they had to say about me…

Factors that increased my credit score:

• You have paid your bills on time and currently do not have any overdue accounts or derogatory information, such as a collection, charge-off, or bankruptcy, on your report.
• You have a good cushion of available credit between your current balance and your credit limits on all open trades. This has a positive affect on your credit score. This cushion shows lenders that you are unlikely to overextend yourself financially.
• The total balance on all your credit cards is relatively low compared to your total available credit limit. This has a positive impact on your credit score.
• Your average credit limit for your major credit cards, such as Discover, American Express, VISA, or MasterCard, is high. This tells lenders that you have enough financial experience, and they will be more likely to see you as a good credit risk.

Factors that decreased my credit score:

• Credit scores are calculated based on various factors in your credit report. Currently, your credit report does not show any significant negative or derogatory information.

How to cancel FreeCreditReport.com

Straight from their FAQs, here’s how to cancel:

If for any reason you are not satisfied, you can cancel anytime to discontinue your membership to Triple Advantage Credit Monitoring and stop the monthly billing. However, you will not be eligible for a prorated refund of any portion of your current month’s paid membership fee. To cancel, please contact Customer Care at 1-888-829-6560.

When I was done poking around, I called them up to cancel. After a brief period on hold, the phone rep pulled up my account, verified my identity, and then tried to convince me to stay for the remainder of my trial period. I simply told him that I had signed up to get the free credit report and credit score, and that I hadn’t seen anything after logging in that convinced me to stick around. He then canceled my account. The entire process took less than three minutes (yes, I timed it).

Just to be on the safe side, I called back and asked to cancel my account. The rep that I got this time around pulled it up just as before, and then said that my account was already showing that it had been canceled a few minutes earlier.

Is FreeCreditReport.com a scam?

So… In answer to the original question… FreeCreditReport.com is not (in my opinion) a scam. Yes, some people may erroneously arrive there looking for the federally mandated free credit reports mentioned above, but they clearly state what they’re all about and they honor the terms of the free trial period.

Closing thoughts

When she heard that I scored a 796, my wife decided she had to check hers. We’ve always run neck-and-neck since our credit histories are so similar, though she has often had me by a couple of points in the past (primarily due to a slightly longer credit history, I think).

Well… When she checked, she found out that her score was also 796. Exactly the same as mine. Consider me disappointed… I had hoped I would finally pass her by. For the record, she also found that the cancellation process was a snap — just be firm and clear about your desire to cancel.

So what are you waiting for? Go check your score and let us know if you can beat us. Just don’t forget to cancel if you don’t want their recurring service.

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Related Articles at fivecentnickel.com:

» Scammed out of $15k
» Ten New Money Scams, Part 2
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» NCRC Sure Looks Like a Scam to Me

Remember when I talked about how the foreclosure crisis is much more localized than the mainstream media would have you believe? Well, check this out… According to a recent report in USA Today, 35 counties accounted for 50% of the foreclosures that occurred in 2008. Amazing how such a small cross-section of the county could drag us down, isn’t it?

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A reader named Brett recently wrote in to ask for advice on finding a good deal on a new home. He and his wife are in seemingly stable jobs, and they’re looking to buy their first home. In a nutshell, he was wondering how to: (1) tax advantage of the forthcoming homebuyer tax credit, (2) get a great rate on a mortgage, and (3) find a good property at a good price.

That’s a pretty tall order, but I’ll take a whack at it.

Taking the Tax Credit

Changes to the first-time homebuyer tax credit have been fast and furious over the past week or so and, frankly, I’m getting a bit worn out from talking about it. If you’re sick of hearing about it, feel free to skip down to the next section. But if not, please read on…

In the beginning, it was essentially a $7,500 interest free loan. Then the House of Representatives decided to remove the repayment requirement. The Senate then followed up by increasing it to a $15,000 tax credit with no repayment requirement and no first-time homebuyer limitation. But then… When the House and Senate got together to work through their differences, it got knocked back down to an $8,000 first-time homebuyer credit.

As of right now, the details surrounding this are still somewhat murky. It sounds like it will apply to homes purchases between January 1 and August 31 of this year, and that the income limits will be $75k for single filers and $150k for joint filers. My best advice here is to simply keep your ears open and listen for details as they come available. There should be more info soon.

Getting a Great Deal on a Mortgage

Unfortunately the 4% mortgages that were floated by the Senate never materialized. Nonetheless, there are still great deals to be had when it comes to finding a mortgage. Given that lenders have become increasingly risk averse, one major factor in landing a great mortgage rate will be having a high credit score. Unfortunately, while there are things you can do to improve your credit score, they all take time. Thus, if your score is currently in the crapper, finding a low rate might be tough.

The only other advice that I can offer here is to ask around and find a reputable mortgage broker. If you get multiple recommendations, all the better. Contact them all to establish a relationship and see what they have to offer. Then, when you get closer to actually buying a house, take the best offer that you can get and shop it around to the other brokers. See if they’ll beat it. Many brokers are hungry for business, and will do whatever they can to win you over. Beyond finding a low rate, you might be able to get some concessions on closing costs, etc.

Getting a Great Deal on a House

Real estate is so intensely local that it’s hard to give good advice from afar. On top of that, there’s a lot of disagreement about where we are with regard to finding the bottom of the market. That being said, I can offer one fairly generic tip, and that is to keep a close on how long various properties have been on the market. One trick that many realtors/sellers will use is to de-list and then re-list a property that has been on the market for awhile. With a fresh listing date, it won’t look like it’s been on the market as long, but that doesn’t make the sellers any less desperate to sell.

What About You?

Do you have any tips to add to what I’ve written above? If so, please don’t hesitate to share them in the comments.

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According to recent media reports, leading Senate Republicans are looking to spice up the economic stimulus plan by pushing 30 year mortgage rates down into the 4% range. Details of the plan aren’t yet available, but:

Presumably, borrowers would be required to meet stringent loan requirements of the kind the lending industry reinstated in the aftermath of the meltdown from subprime mortgages, which required little documentation of income or other evidence of ability to pay.

It’ll be interesting to see how this develops. While we currently have a 15 year mortgage that we’ve been paying down ahead of schedule, it would be awfully hard to turn down a 30 year fixed rate mortgage at 4%. Talk about an inflation hedge!

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In talking about refinancing, I recently mentioned the concept of the mortgage refinance “payback period,” which is the length of time that it will take to recoup the costs associated with refinancing. While there are a number of mortgage refinance calculators available online, I thought I’d give you a quick and dirty explanation of how to calculate your payback period.

Calculating your payback period

For starters, you’ll need to know how much it will cost you to refinance. You can get an idea of these costs by getting a good faith estimate from your prospective lender. Keep in mind that, for the purposes of this exercise, you should ignore escrow items such as taxes and insurance. The reason for this is that these amounts are essentially prepayments for items things that you will have to pay for whether or not you refinance. Moreover, you likely already have escrow funds encumbered with your current lender, and you will be receiving a refund following your refinance. As an aside, one way of reducing your closing costs is to request a reissue rate on your title insurance.

Once you know how much your refinance will cost you, you need to figure up your cost savings. To do this, compare your new monthly payment to your old monthly payment. To be sure that you’re comparing apples to apples, simply tabulate your principal, interest, and any applicable mortgage insurance under the two scenarios. Once again, you can safely ignore homeowner’s insurance and property taxes as you’ll have to pay those amounts under either scenario.

Once you have these numbers in hand, simply plug them into the following equation:

Payback Period (in months) = Closing Costs / Monthly Savings

As I’ve noted previously, the length of the payback period is an important factor in deciding whether or not to refinance your mortgage. If you can’t recover your closing costs in relatively short order, you might want to think twice about pulling the trigger. This is especially true if you’re not sure that you’ll be staying in your house for the long term.

Consider the total cost

Another wrinkle to consider is how much you’ve already paid on your current mortgage. If you’ve been in your home for awhile, then you’ve already sunk a good bit of money into original mortgage. In that case, you should also take a look at the total cost to own your home with and without the refinance. In other words, figure out how much you’d pay over the life of your original loan (without the refinance) and compare that amount to how much you would pay over the life of the new mortgage plus what you’ve already paid toward your original mortgage.

The bottom line here is that you need to be careful not to fall into the trap of lowering your monthly payment while increasing your total cost to own your home. I wrote a bit about this angle in an earlier article where we were considering whether or not to refinance our mortgage. In our case, we weren’t very far into our original mortgage, so it wasn’t a huge consideration. We ultimately pulled the trigger, though we also dropped from a 30-year to a 15-year term when we did it.

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The other day, I wrote about current mortgage refinance rates. Guess what? In the time since I wrote that articles, rates have continue to fall. In fact, Zillow showed average rates of as low as 4.71% for 30 year fixed rate mortgages as this morning (it’s frequently updated, so your results may vary), and Bankrate is reporting an overnight average of 5.08% for 30 year mortgages. Either way, it’s clear that mortgage rates are very, very low right now.

Of course, if you’re trying to decide when to refinance, then the key question is whether or not they’ll head even lower. Since I don’t have a crystal ball for this sort of thing, I have to rely on things like Bankrate’s Rate Trend Index, which currently states that “Rates are likely to head lower” over the next 30-45 days. Just keep in mind that the RTI is far from foolproof, as it’s simply a summary of the opinions of a panel of experts.

My advice is that, if you’re thinking about refinancing, get a ballpark estimate of how much it’ll cost you to do so. With that in hand, you can estimate your “Payback Period” (i.e., how long it will take to recoup your closing costs). If the payback period is too long (or if you don’t plan on staying in your house for very long), then it doesn’t make sense to refinance no matter how enticing the rates seem to be. But if the payback period makes sense, then go for it. Just try not to look back with regret if rates dip further after you pull the trigger.

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Inspired by Jim’s recent efforts to research a possible refinance, I decided to drop by LendingTree to see what they have to offer. For those that haven’t been following along, we refinanced into a 15-year fixed rate mortgage at 4.875% just under a year ago, so I’m not really expecting to find an offer that’s good enough to warrant refinancing. But that doesn’t stop me from wondering…

The LendingTree executive summary

To be perfectly honest, I was a bit disappointed with what LendingTree had to offer. While the site is very easy to use, the rates that I received weren’t all that great. I requested quotes for both 15- and 30-year fixed rate mortgages and, while the rates looked okay on the surface, they were all predicated on paying a full discount point. I’ve attached a screenshot of the results below (as of 12/22/08).

The best 15-year offer that we got was for 4.875%, whereas the best 30-year offer that we got (which came from the same lender) was for 5.125%. But again, these rates assume that you’re buying a full discount point, which is equal to 1% of the mortgage amount on top of the standard closing costs. By comparison, PenFed has similar rates with no discount points, and no lender-associated closing costs.

Anyway, LendingTree delivered the quotes that you see above in well under an hour, so they’re certainly efficient. Just don’t let the ease of the process lull you into accepting whatever they happen to bring to the table. While you might get a great deal, you might not, so it’s important to look around and consider your options.

Update: The day after applying, we got a call from a LendingTree rep. When I told him I was unimpressed by the rates, he said that those are fairly generic offers that don’t take into account your credit score, etc. He further stated that he could do much better, but when I told him that we were already at 4.875% he said he couldn’t go far enough below that to make it worth re-financing.

Finding the best mortgage rate

The bottom line here is that, if you’re trying to decide if now is a good time to refinance, it can’t hurt to give LendingTree a shot. The signup process isn’t overly invasive, and they respond fairly quickly. Just be forewarned that they’ll try to upsell you on a “free” credit report and credit score (it’s really a free trial) as well as better auto insurance rates.

In the end, I’m still a fan of working directly with a known quantity like a trustworthy mortgage broker (ask around for referrals), or perhaps a local banker. In our case, we’ve had the most success working through an independent mortgage broker that my brother turned us onto a few years back. In fact, we’ve used the same guy for three separate mortgages now (one purchase and two refinances). Even here, we’ve shopped around and used other offers to get him to improve his rates.

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For those of you that haven’t been paying attention, mortgage rates are once again in very attractive territory. On top of that, the Federal Reserve just cut rates, and the Treasury Department is talking about driving 30 year fixed rates down into the 4.5% range in an attempt to stimulate the real estate market. With that as a backdrop, here are some thoughts about mortgage rates and refinancing…

The Federal Reserve and mortgage rates

First, it’s a common misconception that Federal Reserve interest rate changes drive the mortgage market. In fact, these rate cuts apply to short-term interest rates, and they typically have little to no direct effect on fixed-rate mortgages. That being said, adjustable rate mortgages (ARMs) may be more sensitive to these sorts of rate changes. In fact, depending on the terms of your loan, those of you with ARMs might see lower rates when the next time your loan resets.

The Treasury’s plan to drive down mortgage rates

Second, while it’s true that the Treasury is interested in driving 30 year fixed rates down into the 4.5% range, rumor has it that such loans will only be available to purchases, and not for individuals interested in refinancing. Of course, if fixed rates for purchases do go that low, refi rates are likely to follow at least partway.

Deciding when to refinance your mortgage

Of course, there are other considerations that go into deciding when to refinance your mortgage. For example, if you’re currently upside down on your home (i.e., you owe more than it’s worth) then you’re likely out of luck regardless of where rates go from here. But assuming that you’re in a position to actually refinance, I suggest that you run the numbers for yourself and see what makes sense.

I’ve previously written about deciding when to refinance your mortgage, and that information is applicable now as it was then. Your first step should be to head over to figure out your breakeven point and your total savings from refinancing. The former will tell you how long it will take to recover your closing costs — the sooner the better. The latter tells you how much interest you’ll save if you pull the trigger and refinance. With this info in hand, you’ll be able to make an informed decision.

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As a followup to my previous article about what happens to your mortgage when you bank fails. I recently ran across an interesting article from last winter that talks about banks losing track of mortgage paperwork and being unable to foreclose on deadbeat homeowners.

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven’t been able to prove they own the mortgages… More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks… Those loans may be sold several times before they land in a security.

Whenever loans are sold, the sellers are required to sign over the mortgage note to the buyers, but in the recent mortgage boom, that step wasn’t always properly completed.

According to Alan White of the Valparaiso University School of Law:

“Loans were mass produced and short cuts were taken. A lot of the paperwork is done in the name of the original lender and a lot of the original lenders aren’t around anymore.”

In fact, more than 100 mortgage companies closed their doors during 2007, and I would imagine that the number has just kept climbing since then. Thus, in addition to all of the mortgages being sold through the normal course of business, the recent uptick in bank failures has created an even bigger mess. While mortgage banks can file a lost note affidavit fully document ownership of a particular loan, an increasing number of people are apparently challenging the ownership of their mortgage note.

Maybe it’s just me, but I’m surprised that people can get away with this. While the details vary from place to place, mortgages typically result in a lien on the property, and are filed with the county courthouse. This should establish that there is (or at least was) a mortgage on the property in question. If you combine that with evidence that the homeowner had been willingly paying the mortgage before going into default, the obvious conclusion should be that the mortgage is legit, resulting in what should be an open-and-shut case.

Of course, common sense and legalities don’t always intersect…

Source: Bloomberg.com

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Over the past several weeks, I’ve received a number of comments and e-mails from readers wondering what would happen to their mortgage if their banks fails. Is the loan terminated? Do they have to pay it back immediately? Or do they get to walk away free and clear? In short, the answer to all three questions is an emphatic “no.”

From the bank’s perspective, your mortgage is an income-producing asset, and it can be sold to another institution at any time. In fact, this is quite commonplace. For example, all of our mortgages (four total, including two related to refinancing) have been sold off by the originating institution within a few months. The good news is that the terms of the mortgage do not change when this happens.

Returning to the issue of bank failures, if the bank that holds your mortgage were to fail, the FDIC would step in and oversee the sale of their assets to another institution. Your mortgage would thus be transferred to a different lender, but the terms would remain the same. Shortly after the transfer, the new lender should contact with you instructions as to how and where to make your payments. Mortgage transfers are accompanied by a 60 day grace period during which you cannot be charged a late fee.

As an aside, the current financial turmoil seems like a great opportunity for scammers. Given all the news about banks on the edge of failure, I’m sure it wouldn’t take much to convince unsuspecting homeowners to send their mortgage payment elsewhere. So… If you receive a letter directing you to change where you’re sending your payments, be sure to double-check before acting on it.

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The big news today was that the White House is pushing for a so-called “Rescue Package” for the economy. While details are still being fleshed out, the Treasury Department will apparently seek authority to spend “hundreds of billions” of taxpayer dollars to purchase illiquid assets from U.S. financial institutions.

These buybacks will be managed by a new entity that will run “reverse auctions” in which the federal government will buy securities from those that offer them up at the lowest price. As costly as this sounds, Treasury Secretary Henry Paulson is convinced that:

“…this bold approach will cost American families far less than the alternative — a continuing series of financial-institution failures and frozen credit markets unable to fund economic expansion.”

It won’t be simple, though. The Wall Street Journal asks:

Does [the government] pay more than fair-market value for hard-to-assess distressed assets, putting taxpayers on the hook for any losses? Or does it drive a hard bargain, buying for pennies on the dollar? The latter approach would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets.

This line of thinking has led former Treasury official Douglas Elmendorf to argue that “This approach saddles taxpayers with significant downside risk but limited potential upside gain.”

In other news, the Treasury is temporarily insuring money market mutual funds to (hopefully) head off a stampede of withdrawals. Meanwhile, the SEC banned short-selling on 799 financial stocks for at least the next ten days. The Treasury, along with Fannie Mae and Freddie Mac, will apparently also step up efforts to buy mortgage-back securities to keep the housing market afloat.

Source: Wall Street Journal

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According to recent reports, mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) are on the cusp of failure, and may be taken over by the federal government as soon as this weekend. The two companies, which together account for nearly half of the nation’s $10+ trillion in mortgage debt, have piled up $14 billion in debt over the past year and are facing additional losses going forward.

The news of the looming takeover broke following a report by the Mortgage Bankers Association that more than 4 million American homeowners were either behind on their payments or in foreclosure at the end of June. That’s a record 9% of all mortgagees.

The takeover, which is expected to cost taxpayers in the neighborhood of $25 billion, was made possible in part by the so-called Housing Rescue Bill, which was signed into law in late July.

Since this news first broke (after the financial markets closed on Friday), shares of both companies have tumbled over 20% in after-hours trading. It’ll be interesting to see how the markets react when they re-open on Monday.

Source: Business Week

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A reader named Brian recently wrote in with the following quandary:

We own a condo in Las Vegas. It was purchased 5 years ago at a value of $200K. It currently is valued at $125K. The loan we have is for $163K and it is interest only with a 4 point margin on top of the current Fed* interest rate. We cannot re-finance because of this and feel handcuffed as a result. Can you offer any advice to me?

If you read through the comments, you’ll see that Brian and his wife are currently renting out the condo. Unfortunately, they’re paying substantially more on their mortgage than they can get in rent, and they have no prospect of moving into it to save money because they currently live in another state.

This is definitely a tough spot to be in, and I’m afraid that I don’t have any magical words of advice that would fix this situation. It’s a slow market and, even if they were able to sell for the current value of $125k, they’d have to come up with an $38k in cash to pay off the mortgage ($45.5k after factoring in a 6% realtor commission).

If they were living in the condo and hadn’t owned it for so long, I’d suggest they try getting into a more affordable FHA mortgage under the terms of the so-called Housing Rescue Bill. Unfortunately, Brian and his wife don’t qualify.

So, dear readers… Do you have any suggestions for Brian?

*It appears that the “Fed” rate in question is the prime rate (currently 5%).

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If you’re in the market for a home or looking to refinance, you might want to check into an FHA home loan. In fact, as I’ve noted, access to FHA loans is a cornerstone of the housing rescue bill that was recently signed into law. With that as a backdrop, I thought I’d take a closer look at this sort of mortgage.

What is an FHA home loan?

FHA loans are mortgages that are insured by the Federal Housing Administration. The FHA doesn’t actually make loans; rather, they insure loans issued by federally qualified lenders. These loans are only made to individuals and non-profit/government agencies that are approved to participate in U.S. Department of Housing and Urban Development (HUD) programs (more on qualifying, below).

Advantages of an FHA vs. conventional home loans

FHA home loans have a number of advantages over conventional home loans. These include a lower required downpayment, competitive interest rates, lower closing costs that can be included in the amount of the loan, the ability to include re-modeling/repair costs in the amount of the loan, no pre-payment penalty, and possible leniency during hard financial times, which may translate into a reduced risk of foreclosure.

You can also often qualify for an FHA loan even if you’ve had relatively recent financial problems. For example, you may be able to obtain an FHA loan within 2-3 years of bankruptcy or foreclosure as long of you’ve maintained good credit in the mean time. It’s also easier to use gifts to cover your downpayment and/or closing costs when using an FHA loan product.

Disadvantages of an FHA vs. conventional home loan

Despite the foregoing advantages of FHA loans, there are also some drawbacks of this type of mortgage. For example, an FHA loan might not be large enough to cover the cost of the home your are interested in buying. While the FHA periodically increases their limits, these sorts of limits are a big part of the reason that FHA loans lost favor starting in the 1990s – as home prices began shooting up, more and more properties were ineligible for an FHA loan. If you’re curious about FHA loan limits in your area, check out this calculator.

Another potential disadvantage of FHA home loans is that they don’t come in as many flavors as conventional loans. Rather, they’re designed specifically to serve the needs of long-term homeowners, and thus tend to have relatively conservative terms. In addition, while you might end up paying private mortgage insurance (PMI) on a standard home loan, the insurance premiums associated with an FHA home loan are built into the loan, such that you may end up paying more for your mortgage insurance over the life of the loan.

Qualifying for an FHA home loan

While anyone can apply for an FHA home loan, they are most frequently used by first-time homebuyers. To apply, you must have a valid social security number and be a legal U.S. resident. The FHA’s mortgage programs do not typically have income limits, though you must have sufficient income to qualify for the mortgage payment alongside any other debts that you might have. Likewise, the FHA doesn’t have minimum credit score requirements, though past credit performance will likely be used in determining eligibility.

For more information about FHA Loans check out the FHA experts blog at FHALoanPros.com

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In case you missed it, Congress has passed the so-called Housing Rescue bill, and President Bush is poised to sign it into law despite his opposition to certain components of the bill. So what’s the Housing Rescue bill all about?

What follows is a rundown of the benefits included in the bill…

Homeowner benefits

Up to 400,000 homeowners at risk of foreclosure will be allowed to refinance into lower-cost mortgages insured by the Federal Housing Administration. To qualify, borrowers must live in an owner-occupied home, have a relatively high level of debt to income, and agree to share the profits on an eventual resale with the government. Moreover, the lenders must agree to write down the loan principals, meaning that lenders could use this an opportunity to shed bad loans and hang onto better loans.

Homebuyer benefits

Once this bill becomes law, first-time homebuyers can qualify for a tax credit of 10% of their new home’s purchase price, up to $7,500. The income caps for the full benefit are an adjusted gross income (AGI) of $75,000 for single people and $150,000 for couples who file taxes jointly. The thinking here is that the tax credit will help to stimulate a sagging real estate market. The catch is that this “credit” is essentially an interest-free loan that has to be repaid over the following 15 years.

Community benefits

The Housing Rescue bill offers nearly $4 billion to communities to purchase and rehabilitate distressed homes. The homes will then be sold to low- or moderate-income individuals with the profits being use to fund neighborhood development. The thinking here is that foreclosures have downstream effects on neighboring property values. By attempting to stem the tide of foreclosures, the bill seeks to stabilize neighborhoods and reduce this negative impact.

Fannie Mae and Freddie Mac benefits

In hopes of stabilizing the financial markets, the bill also makes explicit the government’s backing of the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac). Fannie Mae and Freddie Mac own a combined total of $5 trillion in U.S. mortgages, nearly half the nation’s total.

The Treasury now has the power to rescue both companies through loans or cash infusions. The bill also makes permanent an increase in the ceiling of “conforming” loans to $625,500. This measure, which is intended to boost to the high end of the real estate market, was introduced in the original economic stimulus package.

Photo Credit: wonderal

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The latest issue of Money Magazine includes a “Real Estate Survival” guide with tips for selling your house in the current down market.

Rule 1: Get real about price. Interview multiple agents, and have them each come up with a price based on recent, comparable sales and current market conditions. Don’t obsess over what you could’ve gotten had you sold a few months ago. Also consider inventory in your price range. If there are a lot of properties like yours, you might want to undercut the competition.

Rule 2: Vet your agent — especially if it’s you. Selling amidst a major market slowdown is tough work. If you’re not prepared to market the heck out of your property, consider enlisting the help of a pro. If you go this route, make sure they have a track record. Ideally, you want someone who has weathered previous market downturns.

Rule 3: Pimp your house — hire a home stager. Staging a home is all the rage these days. If you don’t know how to properly stage your home, it might be worth bringing in a pro who will help rearrange furniture, move extraneous items to storage, etc. Also browse through my tips for preparing your home for sale. You want that curb appeal as high as possible.

Rule 4: Cash will make your home look even better. Instead of offering some sort of gimmick such as a car or cruise to the lucky buyer of your home, consider throwing in some cash. Offer to pay part of the buyer’s closing costs. You might also consider throwing in an additional bounty to the realtor that brings in the buyer. Either a higher commission and a flat amount of cash. You may even be able to carve this out of the commission to the seller’s agent, but be careful… You don’t want to decrease your agent’s incentive to sell your house.

Rule 5: Underwater? Learn to swim. If you bought recently, your mortgage may be larger than what you can get for your home. According to data from Zillow.com, about 1/3 of 2006 homebuyers currently have negative equity (ouch!). If you have no choice but to move (say for a new job) you still have some options. For one, you might be able to get your employer to cover the difference. Alternatively, if the rental market is holding up, you could rent out your house while you wait out the slump. Finally, you can always sell for as much as you can and then make up the difference out of your savings.

So there you have it. Five tips for selling when nobody is buying.

Any other suggestions?

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Related Articles at fivecentnickel.com:

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On the heels of our recent mortgage refinance, we’ve been inundated with mortgage-related junk mail. Among the most common pitches that we receive are offers for bi-weekly* mortgage payment programs.

Almost without fail, these missives are disguised as official-looking notices proclaiming things like “NOTICE OF INTEREST OVERPAYMENT.” They also list the lender’s name at the top, though they indicate in a footnote that it’s listed “for reference only,” and that they have no relationship with the lender. Rather, your loan information “was obtained through public record.” Clearly, these folks want to get your attention, and they don’t mind mis-leading you along the way.

What is a biweekly mortgage payment plan?

In short, biweekly payment plans are designed to help you pay off your mortgage as much as six to eight years early. That’s the good news. The bad news is that these plans come at a price. Enrollment fees are typically in the $300-$400 range, and some companies charge additional fees on each transaction.

How do biweekly mortgage payment plans work?

You normally make a monthly mortgage payment, resulting in a total 12 payments per year. But what if you were to make a half payment every two weeks instead of a full payment once per month? Given that there are 52 weeks in a year, this works out to 26 half payments, or 13 full payments.

So… This is essentially a fancy way of getting you to make one extra mortgage payment per year. By doing so, you’ll build equity faster, pay less in mortgage interest charges, and close out your loan well ahead of schedule.

Are biweekly payment plans really necessary?

The short answer is no, you can do this all on your own for free. While proponents might argue that these plans add discipline to your early payment plans, you can achieve much the same thing by automating your payments.

Some simple alternatives

(1) Call your lender and ask them if they can handle a half payment every two weeks. Some can, others will charge you for this service, and still others will flat out decline (or get confused). Assuming that they can handle it, you can (and should) automate the payments through your online billpay.

(2) Pay an extra 1/12th of your mortgage every month. With online billpay, you only have to set this up once. While it’s a good idea to designate that the overpayment should go toward principal, every lender that I’ve dealt with will handle such payments properly even without further instructions.

(3) Open a high-yield savings account and deposit half your mortgage payment into it every two weeks. Make your payments from this account and periodically apply the excess (plus interest) to your mortgage.

Of course, this all ignores the larger issue of whether or not you should pay off your mortgage early in the first place, but… That’s a topic for another day.

*Note: Biweekly can mean twice a week or every two weeks. Here, we’re talking about the latter.

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This is a guest post by Lynnae of Being Frugal. If you like what you see here, please consider subscribing to her RSS feed.

I was watching the show Property Virgins for the first time the other night, and I was shocked at what I heard on that show. Let me give you a rundown…

The buyer was a single woman who wanted the best quality in a house, but didn’t want to spend a lot of money. She knew exactly what she wanted and how much she wanted to pay, and she wasn’t willing to budge much on either issue.

The property expert seemed nice enough, and she was a saint for dealing with the opinionated buyer, but halfway through the show, she said something that stopped me cold. She had just shown the buyer a home that was brand new and had everything the buyer wanted. The problem? It was $40,000 more than the buyer wanted to pay.

The ensuing conversation went something like this. These aren’t exact quotes, but you’ll get the idea.

Expert: The price on this property is $240,000.

Buyer: What? I definitely can’t afford that!

Expert: That’s about $1700 a month, not including insurance and HOA fees.

Buyer: The insurance and HOA fees are extra? I really can’t afford that. This is what I want, but I’m not paying that price.

Expert: Well, there is another option. We can do a 35 year loan and bring your payments down to $1500 a month.

Buyer: That’s just so much money! I can’t take on that much debt! (I was cheering for her at this point).

Expert, talking privately to the camera: She’s only thinking about the big number here. She can easily afford the monthly payment. That’s what she should be looking at… Whether or not she can afford the monthly payment.

That’s the point at which my jaw dropped open. She shouldn’t consider the total cost? Are you kidding me? I’m no expert, and I don’t own a home yet, but there are a few rules I’m going to stick to when I do buy.

Know What You Can Afford

When I finally take the plunge to buy a house, I’m going to figure out how much I can easily afford per month. If the bank tells me I can afford to put 30% of my income toward my mortgage payment, but I know I can only fit a payment of 25% into my budget, I’m going to figure out my target price based on what I think. I’ll figure out the approximate amount of insurance, taxes, and any other fees, and work that into the number as well. I’ll also decide what mortgage terms I want. A fixed rate, 15 year mortgage would be ideal. From there, I’ll come up with a target house price. And I won’t look at anything more expensive.

Human emotions are powerful, and when we see something we really want, we can often talk ourselves into buying it, even if we can’t really afford it. The amount of credit card debt in this country is indicative of that. I’m not going to put myself into a situation where I might be enticed into making a stupid decision that will cost me for the next 30 years.

Never Look at a House Before You Know the Price

I couldn’t believe the buyer even walked into that house without knowing how much it cost! She set herself up for disaster. As predicted, she fell in love with the house, and deeply desired to buy it, even though she couldn’t afford it. That made her vulnerable to taking on a less than ideal mortgage. I imagine that’s how many people got caught up in the mortgage crisis we have today.

Be Willing to Do Some Work

After looking at house #2 (the dream house), the buyer was shown a third house. It was a modern house, like she wanted, but it needed a little work. It was bargain priced at $174,000 and, for an additional $30k, the buyer could do enough work to bring the house up to her standards. But our naive buyer balked at the thought of doing the work.

Take Time to Think If You’re Unsure

A tactic that the property expert used on the buyer was to tell her that the properties were flying off the market like hotcakes. She kept stressing that the buyer needed to make a decision quickly, or avoid losing the property. While that may be true, if you’re hesitating about signing on the dotted line for any reason, take time to think it over. It’s better to lose out on a property than to make a $200,000 mistake. There will always be other properties, but once you buy a house, it’s difficult to undo your mistake.

So what did the buyer end up doing?

Much to my chagrin, our buyer went with expensive house #2. She negotiated the price down to $233,000, and she went with a 35 year loan. If it were me, I would have taken house #3 and gotten the same quality of home for $33,000 less. It just makes better financial sense.

The bottom line is, if you’re a new buyer, do your research. Don’t blindly trust the “experts”. Their job is to sell you a house, so they can make a commission. Though I’m sure there are many honest and helpful realtors out there, they do have a financial interest in making a sale. It’s always wise to figure out what’s best for your financial situation on your own, rather than trust someone else to do it for you.

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As a followup to my earlier note about refinancing our mortgage, I wanted to point out an interesting way of looking at things…

In the comments to that post, Laura brought up the concept of the mortgage “crossover point,” which is the point at which you are paying more toward principal than toward mortgage interest.

In looking at the amortization table for our original and new mortgage, I realized that this is a very powerful concept. Here’s a breakdown:

Under the terms of our old mortgage, and assuming no pre-payments, it would’ve taken 231 months, or 19.25 years, to reach the mortgage crossover point. Given that we were 21 months into our mortgage, that means it would be another 17.5 years before getting there.

Of course, we were were overpaying our mortgage every month, so we would’ve reached the crossover point much sooner. Those payments notwithstanding, however, we were still looking at a relatively long time horizon before our money was working more for us than for the bank.

What about the new mortgage? As it turns out, it will take just over 10 months to reach the mortgage crossover point. So, ignoring the possibility of mortgage pre-payments, we’ll reach the crossover point in January of 2009. Not bad at all.

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This is just a quick note to say that we closed on our mortgage refinance yesterday, and are now the proud new owners of a 15 year, fixed-rate mortgage at 4.875%.

For the sake of comparison, we were 21 months into a 30 year fixed rate mortgage at 6.375%. The original balance on this loan was $175,000 and we had a total of roughly $370,000 in remaining payments (including interest, but ignoring pre-payments). In contrast, the new mortgage (we refinanced a total of $170,000) will cost us roughly $240,000 (including interest, but again ignoring pre-payments). The closing costs were minimal in that we had no lenders fees, just title-related costs.

The bad news (for you guys, not us) is that we came close to nailing the very bottom of the recent valley in mortgage interest rates. We could’ve eaked out another 0.125% or so by waiting a day, but rates spiked the day after that, and haven’t come back down since. As things currently stand, 15 year fixed-rate mortgages are in the neighborhood of 5.625% and 30 year rates are around 6.125%. Thus, you won’t be able to match the sort of deal that we got unless rates fall precipitously.

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Related Articles at fivecentnickel.com:

» Reaching the Mortgage Crossover Point
» Beware the “No-Cost” Mortgage Refinance
» Deciding When to Refinance Your Mortgage
» How to Decide When to Refinance Your Mortgage
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» Our Biggest Income Tax Deductions
» More Thoughts About Refinancing Our Mortgage

After nearly pulling the trigger and refinancing our home last spring, we finally decided to go ahead and pull the trigger on a refi yesterday. We’re currently about 1.5 years into a 30 year fixed mortgage at 6.375% (yes, rates bumped up right around the time we moved in 2006). Besides getting a lower rate, we’ve been thinking about moving to a shorter term (15 years instead of 30 years).

The search

After poking around at Bankrate.com and checking the rates at PenFed, I discovered that going rate for 30 year fixed rate mortgages (without paying any points) was around 5.875%, whereas the going rate for 15 year fixed rate mortgages was around 5.125%. On top of this, PenFed doesn’t charge any lender fees, and covers many third-party fees, as well.

Yesterday, I checked with PenFed again and was pleased to see that rates had dropped by 0.125%. Thus, I shot an e-mail to our mortgage broker to see what he could do. He responded with 15 years fixed @ 5.00% — same as PenFed. When I replied that we could get the same rate from PenFed, and that they’d cover many of the fees, he responded with an offer of 4.875% and the same fee structure. After getting a Good Faith Estimate, we decided to go ahead and lock in at that rate.

The resulting deal

So in the end, we’re getting a 4.875% fixed rate, 15 year mortgage. We’re on the hook for title and recording fees as well as the settlement attorney, whereas the broker is covering all other fees. Yes, we’ll have to bring extra money to the table for the items that we escrow (taxes and insurance), but we’ll be getting a refund of our escrow account from our old mortgage lender.

We’re only refinancing the actual balance due, so the principal on the loan is somewhat lower than our previous mortgage (though not dramatically – remember, it’s only been a year and a half). When combined with the lower rate, our overall payment is only increasing by about $225/month, yet the term of our mortgage is getting cut in half.

The actual savings are a bit hard to pin down because we’ve been overpaying our mortgage and the math is a bit convoluted. Moreover, we don’t have a crystal ball, and thus can’t necessarily project our overpayments going forward. Just comparing the raw numbers (ignoring overpayments), however, refinancing to the 15 year option could save us upward of $150k. Of course, this difference is narrowed by overpayment as well as by the fact that we’re effectively throwing away the 18 months of interest payments that we’ve already made.

A question of timing

Given yesterday’s interest rate cut, a logical question would be whether or not now is the right time to be refinancing. That’s a great question, and I don’t know the answer for certain. But given that longer term, fixed rate mortgages are relatively insensitive to short term rate fluctuations, at least in the near term, I’m comfortable with our decision. We’re reducing our rate by 1.5%, and saving thousands (and thousands) of dollars. Could we do slightly better by waiting? Maybe. But maybe not. And in the mean time, we’d be paying down a much more costly mortgage.

Update: Rates slipped further today, with PenFed offering a 15 year fixed rate for 4.625%. Oh well, 4.875% is still really low.

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Related Articles at fivecentnickel.com:

» Reaching the Mortgage Crossover Point
» Deciding When to Refinance Your Mortgage
» Mortgage Refinance Complete
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“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” – J. Paul Getty

Unless you’ve been living under a rock, you’ve no doubt heard that the White House has plans for a subprime bailout. In order to stem the tide of foreclosures, the Bush administration has unveiled plans to freeze the ultra-low teaser rates that were dangled in front of borrowers that shouldn’t have been lent money in the first place.

The simple fact here is that people who couldn’t afford to buy houses bought houses, and lenders that shouldn’t have loaned them the money to do so did just that. Now that these rates are resetting, many borrowers can’t afford the payments, and lenders are facing staggering losses.

Obviously, this is bad for everyone involved. The White House’s proposed solution is to freeze these teaser rates for five years for borrowers that fit certain criteria. But will this really help? As far as I can tell, a temporary rate freeze of this sort will just drag out the inevitable. Given that the affected individuals didn’t have good credit in the first place, and that credit standards have tightened up, they won’t be able to refinance to a more competitive rate in the interim, and this entire mess will just play out in slow motion.

To me, this is a bit like removing Band-Aid. We can either peel it off slowly and prolong the pain, or we can give it a good rip and get the pain and suffering over with. Yes, I realize that sounds insensitive, but… Things have gotten way out of hand, and the people who got us into this mess (on both sides) are in for some rocky times one way or another.

The other thing that really, really bugs me about this “solution” is that it smacks of an administration trying to push the worst of these problems off onto someone else. These loans will ultimately reset, but… That’ll be someone else’s problem at some point down the road. I pity whoever winds up being our next President, as this whole mess is likely to unravel in their lap right as they’re going up for re-election.

So what do you think? Am I being naive in thinking that we should just suck it up and weather the storm right here and right now? Will spreading this debacle out over time help to minimize the damage to our economy? Or will it just prolong the pain?

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In digging for information on how to deal with a wayward debt collector, I ran across a good bit of information on the Fair Debt Collection Practices Act. Here’s a plain English rundown of the protections that the FDCPA affords if a creditor turns your account over to a third party debt collector…

First off, according to an article from Bankrate.com, collection agencies can’t:

» Call before 8 a.m. or after 9 p.m.

» Talk to anyone but you (or your attorney, if you have one) about the debt.

» Threaten to garnish wages or seize property unless they actually intend to do so. Garnishment is illegal in some states, and in others requires a court order. In many cases, property seizure is not permitted. Check with your state attorney general’s office or state consumer protection office to find out what is legal in your state.

» Threaten to sue unless they are actually taking legal action. In some states, third-party collection agencies may not sue.

» Threaten you with arrest or jail.

» Use obscene language.

» Annoy or harass you with repeated calls.

» Call at work if you have asked them to stop.

» Falsely claim to be an attorney, a representative from a credit bureau or a member of law enforcement.

After digging though the FDCPA myself, I also learned that they can’t:

(1) Threaten you with violence or other criminal means of physical harm or harm to your reputation or property.

(2) Repeatedly or continuously call you with the intent to annoy, abuse, or harass you (although it seems like “intent” is a bit nebulous and hard to prove).

(3) Publish a list of debtors.

(4) Contact you (except for very specific purposes) if you notify them in writing that you want to cease further communication.

(5) Use false, deceptive, or misleading practices in connection with the collection of any debt (this includes the false threats of litigation mentioned above).

Beyond this, they also have to provide you with “validation” of the alleged debt (assuming that you ask for it in writing). Such validation includes the amount of the debt, the name of the creditor to whom the debt is owed, a statement that the debt will be assumed valid unless you object to it within 30 days, a statement that they will obtain verification of the debt or a copy of the judgment against the you if you object to the debt, and the name and address of the original creditor (again, if you object).

There are actually a number of other useful tidbits contained within the FDCPA, so I encourage you to give it a quick read if you’re ever faced with a call from a collection agency.

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Last week I saw an interesting interview with Alan Greenspan, former Chairman of the Federal Reserve Board, on The Today Show. He has a new book out, and thus appears to be making the rounds in support of its release. While I can’t cover everything he said in painstaking detail, I did jot down a few of the more interesting tidbits…

» He claims that his biggest frustration was President Bush’s “unwillingness to wield his veto against out of control spending.” He thought that the structure of the Bush tax cut was fine, but also felt that it needed to be paid for.

» He doesn’t accept any blame for the not foreseeing the problems with the housing bubble in the United States – he claims they tried to get mortgage rates up, but failed. He further claims that all 20-30 other countries have the same problem because the low interest rates were caused by “global forces” (i.e., a sharp decline in long term interest rates).

» He thinks oil would be in the $130-$140 per barrel range if we hadn’t gone to war in Iraq: “The way I read Saddam, that’s where he was going.”

» Does he have any thoughts for new homebuyers? Yep… He’s “worried” about the current credit crunch. He further stated that “we’re going to have to go through this adjustment” just as other countries that have been experiencing a housing bubble will have to do. He further recognized that a lot of people will have “very tragic stories.”

» Finally, does he think we’re headed for a recession? Not yet. There are some open questions, but for the moment “we’re doing okay.”

For more info, check out “The Age of Turbulence: Adventures in a New World.”

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A reader recently wrote in with what he termed a “complex question” about creative strategies for debt reduction.

My wife and I have FICO scores around 750. We have about $28K of debt on top of $238K in two mortgages (191K & 47K). The first is at 5.75% for another 5 years, while the second is at 11.25%. I just thought about loaning ourselves the $28K from our 401K in order to pay that portion of the debt off (temporarily), closing all open credit lines, then applying for AmEx cards that offer 4.99% lifetime rate on balance transfers in order to balance transfer back the $28K plus some of the second mortgage. Now the questions… How long would the loan be necessary before applying for the cards to ensure maximum credit from AMEX? How much credit might we expect?

First of all, it’s nearly impossible to predict how long it will take to secure new cards and get the balance transfer to come through. In fact, nothing is guaranteed, so there’s a risk of not being able to get enough new credit to pull this off.

Setting those issues aside for the moment, I’m not sure that cancelling the cards is the best course of action. Since he and his wife have high credit scores, it’s possible that they’d be able to get low (or no) interest balance transfers straightaway, without having to play games with their 401(k). This would also circumvent the risk of borrowing from the 401(k) and then being unable to come up with funds to pay it back.

Another strategy would be to apply for one or more 0% balance transfer credit card offers up front. While these offers won’t necessarily provide 0% for life, there are a ton of 12 month offers that can be rolled over to a new offer if/when they expire. These funds could then be used to kill off the high interest credit card debt as well as a portion of the second mortgage. The key here is to avoid piling up more debt while trying to dig themselves out from under. Moreover, you need to be dedicated to paying it off aggressively – you can’t borrow your way out of debt, but you can minimize your costs while paying it off.

Of course, the above depends on their ability to secure the additional low interest credit. But with high credit scores, they might be able to do it. A final tip would be to time the additional credit applications to happen on the same day. The prevailing wisdom is that this will increase their odds of getting the credit that they need, as the left hand (one card issuer) won’t necessarily know what the right hand (another card issuer) is doing.

If you have any thoughts on the above situation, feel free to share them.

This article is part of my Money Q&A Series.

Photo Credit: Brett L.

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It’s fairly well know that if you’re not at least 59-1/2 years old, you can’t generally take a distribution from your traditional or Roth IRA (or SEP-IRA, for that matter) without incurring a 10% penalty (note that Roth IRA contributions can be withdrawn at any time, for any reason, without incurring a penalty). There are, however, a number of exceptions to this rule, and one of them has to do with buying a home.

Ever since the 1997 Taxpayer Relief Act went into effect, people have been able to withdraw funds to pay up to $10,000 in first-time homebuyer expenses without incurring any penalties. Such withdrawals are, however, potentially subject to taxes. Interestingly, the IRS has a somewhat obtuse definition of “first-time homebuyers.” As it turns out, anyone that hasn’t owned a home for two years is considered a first-time buyer. And guess what? You don’t even have to be the one buying the house to qualify… The first-time homebuyer can be the owner of the IRA, the IRA owner’s spouse, or any of his or her (or his or her spouse’s) direct descendants (e.g., children or grandchildren).

Other major restrictions include a 120 day time limit for buying the house from the day after the withdrawal is made, and the house must be purchased for use as the buyer’s principal residence. Just keep in mind that the $10,000 limit is a lifetime limit – if you do this now, you won’t do it again in the future.

So.. While you can use IRA funds to aid in the acquisition of a house, does that mean that you should? In our case, my wife and I raided our Roth IRAs for cash to help with buying our first house. In fact, we knew that this was a possibility when we were funding our IRAs in the years leading up to our home purchase. Nonetheless, we figured it would be a good idea to max out our Roth contributions on the off chance we could pull off the home purchase without needing those funds. Alas, we couldn’t, so we had to pull some of that money back out.

In retrospect, I have very mixed feeling about this. On the one hand, it allowed us to buy our house without having to carry private mortgage insurance (though we still ended up going with an 80/10/10 mortgage). On the other hand, IRA contributions are limited on an annual basis. Thus, when we pulled money out, we were limited in our ability to put it back in. We’re now in the situation where we can’t contribute to our Roth IRAs because we exceed the income limits. I’d love to have more money in our Roth IRAs but, for the time being, that’s not in the cards.

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Related Articles at fivecentnickel.com:

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» Q&A: Using IRA Funds to Purchase a Home Outside the U.S.
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If you’ve ever applied for a mortgage, you’re almost certainly familiar with a “Good Faith Estimate,” which gives you a rundown of costs associated with your mortgage. According to a recent sidebar in Money Magazine, the average costs associated with a $200,000 mortgage (excluding taxes, prepaid interest, and insurance) are $3,024 (roughly 1.5% of the loan). If you’re being asked to pay much more than that, then alarm bells should be going off in your head.

So what fees should you target when talking your mortgage broker down? Here’s a rundown of types of fees as well as average costs for each:

Just say no to the following fees…
Commitment (rate lock): $371
Application: $250

Negotiate these fees…
Origination: $779
Processing: $386
Document preparation: $291
Title work: $196

These fees are legit…
Title insurance: $663
Closing attorney: $362
Appraisal: $343
Underwriting: $201
Pest or other inspections: $60
Credit report: $22
Flood certification: $14

So… The next time you apply for a mortgage, be sure to take a close look at the Good Faith Estimate and make sure there aren’t any outlandish fees.

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Related Articles at fivecentnickel.com:

» Carnivals – Week of 09/03/07
» Refinancing Our Mortgage
» Calculating Your Mortgage Refinance Payback Period
» The Best of August 2007
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» The Best of FCN – Selections from 04/06

This article is a guest blogger submission written by KMC of Advanced Personal Finance. If you like what you see, why not subscribe to his RSS feed?

There’s an interesting wrinkle developing in the ongoing housing bubble/sub-prime saga. It looks like many large banks may be coming to the rescue of defaulting borrowers. Why would they do something like that? Because it lets them avoid huge payouts to hedge funds.

Credit Default Swaps

There’s a common derivative called a Credit Default Swap (CDS). It’s essentially an insurance property against mortgage defaults. A Mortgage Backed Security (MBS) is sold by a bank to a hedge fund (or anyone else). To hedge the exposure, the fund buys a CDS that pays off big if certain default criteria are met. Interestingly, the hedge fund doesn’t even have to own the MBS to buy the swap. Kind of like taking out a life insurance policy on someone else with you as the beneficiary.

So what we have is banks lending money per their normal business model. But because they’ve also sold CDSs, they really, really, really don’t want people to default on their mortgages. If enough do, the bank will be on the hook for serious cash.

What’s a mega-bank to do? Help out the borrower, of course. Banks are rewriting loans to borrowers at risk of defaulting in an effort to prevent the default criteria from being met.

Market manipulation or good banking practices?

Hedge funds and other purchasers of CDSs are naturally not pleased with this development. They’re arguing banks shouldn’t be able to do this to avoid paying on the swaps. The hedge funds call it market manipulation. Banks say they’re doing nothing of the kind, they’re just trying to help the little guy keep his or her home.

Hedge funds have a real problem here for precisely the same reason they normally the freedom they do – they’re very lightly regulated. There’s no governing body to make the decision on whether what the banks are doing is ok or not.

So if you read or hear about banks benevolently reworking loan terms for at-risk borrowers, now you know that they’re not doing it out of the goodness of their hearts.

But you already knew that, didn’t you?

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Related Articles at fivecentnickel.com:

» Fannie Mae and Freddie Mac Failure is Looming, Takeover Imminent
» Inside the Housing Rescue Bill
» What Happens to Your Mortgage if Your Bank Fails?
» From the Archives (December 2nd – December 8th)
» Escape Your Mortgage Due to a Bank Failure?
» How to Save Money on Homeowners Insurance
» Banks and Fraud: Bank of America Better Than Expected?
» Help a Reader: Upside Down on a Condo

Yesterday I noted that we need to decide whether or not to refinance our mortgage, and I outlined our thought process. It’s not like we’re having any sort of mortgage problems, we really just want to ratchet down our rate. In short, we’ve been presented with an opportunity to do a no-cost refinance of our current mortgage balance from 6.375% to 6.125%. The total savings from this would be around $12.5k. Alternatively, we can pay closing costs and get a rate of 5.875%. In this case, our total payment would drop by $74/month which would increase our overpayment to $224/month (we’re currently overpaying by $150/month). When all is said and done, this approach would reduce our total mortgage cost by roughly $11k, for a total savings of roughly $23k vs. doing nothing.

Of course, that latter value ignores closing costs. We also have to consider that the mortgage savings really come on the back end, and are thus worth less in future dollars. So… If we assume closing costs of $2k (currently just a guess) and project that amount forward 20 years (that’s roughly when our mortgage will be paid off using the above parameters), compounding at a relatively conservation 5% (and ignoring taxes), our closing costs will be worth $5,306 in future dollars — well below the additional $11k savings.

The other issue at play here is the near-term future of mortgage rates… According to BankRate.com’s Rate Trend Index, the experts say “Don’t rush to lock. Wait for rates to go down.”

This brings up the possibility of a middle-of-the-road scenario in which we do the no-cost refi right now, and then watch rates and possibly pay closing costs for a rock-bottom rate if they fall in the coming month. Here’s my question for all of you…

What would you do?

(a) Sit tight, watch rates, and do nothing for the time being.
(b) Do the no-cost refi to 6.125% right now, and then watch rates to see if it’s worth acting again.
(c) Pay the costs for the 5.875% and then be done with it (unless, of course, rates tumble dramatically).
(d) Something else that I haven’t thought of…

I’m not running this as a standard poll with checkboxes because I want to encourage everyone to share their thoughts beyond simply picking a letter. Don’t be shy! I want to hear your thoughts!

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Related Articles at fivecentnickel.com:

» From the Archives – (March 16th – March 22nd)
» Deciding When to Refinance Your Mortgage
» Carnivals – Week of 03/26/07
» Reaching the Mortgage Crossover Point
» More Thoughts on Paying Off Your Mortgage Early
» Refinancing Our Mortgage
» Mortgage Refinance Complete
» Help a Reader: Mortgages from ING Direct

I just got an e-mail for our mortgage broker saying that rates have dropped a bit since we closed on our house about a year ago, and offering to refinance our mortgage (i.e., remortgage) with no cost to us. Here’s how it would work…

The 30-year fixed par rate (i.e., the rate without paying points) is currently 5.875%. If we take the higher rate (6.125%) we’d get -0.75 points which would offset the closing costs. Nothing additional would be rolled into the mortgage balance; we would simply refinance the existing balance into a new mortgage. We would, of course, have to bring additional escrow funds to the closing table, but we’d then get a refund of our escrow account from our existing mortgage, so that would be a push.

The bottom line here is that we can shave 0.25% off our mortgage rate for free. The only downside is that we’d be resetting the mortgage ‘clock’ to a full 30 years. However, we’re currently only about 9 months in). It’s a no-brainer, right?

Deciding When to Refinance

First off, note that I’m ignoring taxes and insurance for the sake of simplicity — those values will be the same under either scenario.

For starters, our original mortgage balance was $175k. At 6.375% over 30 years, that works out to $1092/month ($393,120 over the life of the loan). However, we’ve been paying an additional $150/month toward principal. Assuming that we continue this for the life of the loan, we’ll pay it off about eight years early for a grand total of $323,665 (a savings of $69,455).

If we were to go ahead with the refinance, we’d be rolling our current balance ($172,136) into a new mortgage at 6.125%. Over 30 years this works out to $1046/month, or a total of $376,560. Assuming that we keep our payments the same, however, we’ll be overpaying by $196/month ($150 + the $46/month savings from the refi), that figure drops to $299,836, a savings of $76,724. However, we’ve already paid nine months into our current mortgage, so we can’t neglect that in our total cost figures. Nine months at $1,092 + $150 = $11,178. Thus, we’re looking at a total cost of $299,836 + $11,178 = $311,014.

Comparing the two scenarios reveals that we’ll come out about $12.5k ahead if we opt for the no-cost refinance. Of course, these sorts of calculations are only as good as your assumptions, but these scenarios are as realistic as I can make them.

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Related Articles at fivecentnickel.com:

» Mortgage Refinance Rates Continue to Fall
» Beware the “No-Cost” Mortgage Refinance
» Deciding When to Refinance Your Mortgage
» More Thoughts About Refinancing Our Mortgage
» Calculating Your Mortgage Refinance Payback Period
» Checking Out Current Mortgage Refinance Rates
» From the Archives – (March 16th – March 22nd)
» Mortgage Refinance Complete

Earlier this week we got a call from the Bank of America loan officer letting us know that they were ready to close on our home equity line of credit (HELOC). This morning, my wife and I stopped in and signed the paperwork. As expected, the closing was completely uneventful.

Since there’s a three day right of recision in our state, we have until close of business on Monday to cancel the contract (of course, we can also close the line at any point without penalty) and it won’t be active until Tuesday. With regard to concerns over using an equity line for overdraft protection, I double-checked and the equity line is subject to the same fraud protection as a standard Bank of America account. This means that if our checking account was ever compromised, we wouldn’t be liable for any losses (either in the account or on the equity line) as long as we report the problem within 60 days.

To be perfectly honest, if we don’t notice fraudulent activity on our account for over two months, then we probably deserve to be taught an expensive lesson.

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Related Articles at fivecentnickel.com:

» Opening a Bank of America Home Equity Line of Credit
» What’s a Piggyback Mortgage?
» Banks and Fraud: Bank of America Better Than Expected?
» Banks Reducing Overdraft Fees
» Our Online Banking Changeover
» Bank of America to Improve ATM Deposits
» Bank of America’s “Out of State” Check Policy
» Bank of America Online Banking Annoyance

My wife and I do our local brick and mortar banking through Bank of America. Before our move, we had a checking account as well as a home equity line of credit (HELOC) at US Bank. We originally used the equity line as a second mortgage. Although we killed that off in short order, we opted to leave the equity line open as it was linked to our checking account, and therefore provided overdraft protection.

While we didn’t actually need a HELOC to support our home purchae this time around, we keep our the balance in our checking account quite low such that we can stash the majority of our money in an online bank account with a much higher rate of return (currently HSBC Direct, though we have accounts with Emigrant Direct and ING Direct, as well). Thus, we run an increased risk of slipping up in our record keeping and inadvertently bouncing a check (yes, we’ve done this before)…

With that in mind, we decided that we’d go ahead and open a new home equity line of credit and once again tie it to our checking account. Sure, we could link a Bank of America savings account to our checking account for overdraft protection, but the interest rate on their savings account isn’t that much better than that of a free checking account, so we’d be leaving money on the table by funding it with money from our online savings account.

All in all, the application process was very painless. We answered a few questions and were out of there within about 20 minutes. Later in the week we received a call from their underwriter asking us for a copy of our settlement statement, and that’s the last we heard. While it’s still not a done deal, we have stellar credit, and we know that we’ve been approved — they’re just doing their due diligence with respect to the property.

In terms of cost, there were no fees associated with establishing this HELOC, and we’re free to close it whenever we want with no penalites. The rate is prime + 0%, and we won’t have to pay a penny unless we carry a balance. Of course, if we do end up carrying a balance, the bit of interest that we’ll pay will be well worth it, as it’ll have saved us from one or more bounced checks.

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Related Articles at fivecentnickel.com:

» Opening a Bank of America Home Equity Line of Credit, Part II
» What’s a Piggyback Mortgage?
» Banks and Fraud: Bank of America Better Than Expected?
» Bank of America to Improve ATM Deposits
» Banks Reducing Overdraft Fees
» Our Online Banking Changeover
» Bank of America’s “Out of State” Check Policy
» Bank of America Online Banking Annoyance

This one has been a long time coming, but… I finally got around to creating a ‘roadmap’ of sorts for everything that we went through this past spring/summer as we prepared for our move, and then actually relocated. So… If you’re interested in learning more about what you can expect when moving, decisions that have to be made, etc., then look no further. And be sure to read the comments as well as the posts, as a lot of people pitched in with tips, tricks, and suggestions that ultimately made the process a lot easier for us.

Here we go… Broken down into general categories, and then presented chronologically…

General Topics/Articles:
- Staging Your Home for Sale
- The Lengths to Which Mortgage Lenders Will Go
- How to Write a Mortgage Gift Letter
- What’s a Piggyback Mortgage?
- Rules Regarding No-Interest Family Loans
- All About Title Insurance
- The Cost of a Failed House Deal

The Process:
- Help Us Find a Realtor
- Storing our Stuff
- Preparing for our Moving Sale
- Moving Sale Results
- Improving Our Curb Appeal
- Finding a Mortgage
- Our House is on the Market
- First (Lowball) Offer Received
- Roadtrip – Time to Buy a House
- Offer Made, Offer Received
- Counter Offer Made, Another Offer Received
- Bought and Sold in Under Six Days
- Help us Choose a Mover
- Home Inspection Today
- Home Inspection Complete
- The Countdown Begins…
- Ten Days Until Closing
- Final Walkthrough Today
- We’re Homeless…
- Wire Transfers When Closing on a House
- (Another) Final Walkthrough Today
- Homeless No More
- Our Mortgage was Sold
- Pre-Paying our Mortgage

Moving With Kids:
- Eight Year Olds and Real Estate
- We Bought (and Sold) a House
- The Big Move Approaches

Random Headaches and Other Minutiae:
- SunTrust vs. Bank of America Online Bill Pay Question
- Broadband Internet Woes
- Broadband Internet Crisis Averted
- Broadband Internet Coming Soon(er than Expected)
- Reducing Our Electrical Usage
- Our Dish Network TV Experience (So Far)
- Our Dish Network Experience (Continued)
- Cut Your Own Grass or Use a Lawn Service?
- Our John Deere Model 125 Lawn Tractor
- The Dish Network Runaround
- Our Online Banking Changeover
- Money Saving Tip: Live Next Door to Someone Who’s Moving
- Cell Phone Overages – A Hidden Cost of Moving
- Bank of America’s “Out of State” Check Policy
- Dish Network Customer Service SUCKS
- Paint Recommendations?
- What Would You do With a Bunch of Bricks?
- Dish Network Customer Service STILL Sucks
- Summer Electric Bill Pain
- Termite Control: Sentricon vs. Termidor
- Compact Fluorescent Lightbulb Changeover Complete
- Solving Dish Network Customer Service Problems

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Related Articles at fivecentnickel.com:

» We’re Homeless…
» The Countdown Begins…
» Roadtrip – Time to Buy a House
» Bought and Sold in Under Six Days
» Our House is on the Market
» Homeless No More
» Ten Days Until Closing
» Help Us Find a Realtor

After playing with the numbers a bit, we decided that it might be a good idea to start pre-paying the mortgage on our new house. And what better time to do so than with our very first payment? We ultimately decided to overpay each month by roughly 1/12 of our payment — our current monthly payment (including taxes and insurance) is $1412.98, so I decided that $120 was a nice, round number for our extra payment — that equates to a little better than one extra payment each year.

Since the first payment went to the lender that originated our loan just before they sold the mortgage servicing rights, I logged in yesterday to make sure that the additional funds found their way to Wells Fargo Home Mortgage. But when I logged in, I learned that I had made a $174.58 overpayment, not a $120 overpayment. I double-checked our checkbook register as well as the math, and they were right — for some bizarre reason I had written the check for $1587.56 and, for the life of me, I can’t figure out why. It’s not like I was rounding off to some nice even number — rather, I had written the check for a seemingly random amount. Weird. Oh well, I guess there’ll be an extra $54.58 working for us over the life of our mortgage.

For more information on moving, check out my Roadmap for a Successful Relocation.

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Related Articles at fivecentnickel.com:

» Reaching the Mortgage Crossover Point
» More Thoughts on Paying Off Your Mortgage Early
» How to Decide When to Refinance Your Mortgage
» Pay Off Mortgage Early? Or Invest?
» What is a Mortgage Escrow Account?
» Beware the “No-Cost” Mortgage Refinance
» Adjustable Rate Mortgages (ARMs) – A Positive Perspective
» Escape Your Mortgage Due to a Bank Failure?