Financing

Mortgage Burning Party!!!

 

A Mortgage Burning Party— just wth is that you might ask?  In this world awash with mega-debt I imagine that most people have never heard of a mortgage burning party.  But, back in the day, it was not uncommon.  And ’twas a goal that many aspired to.

Few people can pay cash for a new home, so they get a mortgage loan from a lender to make up the difference between their cash down payment and the purchase price.  Then, when they write the mortgage lender a check on the 1st of each month, a portion of that payment goes toward the principal.  That amount grows with each passing month.  Pay on it long enough and you’ll eventually own your home free and clear.  Paying a mortgage loan down builds financial security and wealth.  For most people, the equity in their home is the largest piece of their financial wealth. 

So, just exactly how does one go about paying off their mortgage?  Let’s take an example, using a typical $140,000 house.  (Btw, that’s the current median average sales price of a home in Central Indiana.)  Option A would be what most folks do- they take out a loan for 30 years.  The current rate on that loan is around 4%, making for a loan payment of $668.  At the end of the first 5 years you would have reduced the loan balance from $140,000 to $126,519.  Pay faithfully for another 5 years and you’d owe just $110,298.  Pay another 20 years and the bank will send you the mortgage document stamped “Paid in Full!” and you can pull out the box of matches.

Now, let’s look at how you can accelerate this so you can envision that happening on the near horizon.  Rather than a 30 year, consider taking a 15 year mortgage.  The rate’s a little better- like 3.5%.  That combination would put your monthly payment at $1,001.  It’s more, but you can buy and budget accordingly if your goal is to own your home free and clear— and save yourself tens of thousands of dollars in interest charges.  (I’m sure you can find a better use for that money!)  So, with that set-up, at the end of 5 years you’ll have paid down to $101,211 (less than what you’d still owe on a 30 year mortgage after about 14 years).  And after 10 years you’d have the balance paid all the way down to just $55,015!  Just another 5 years and you could have yourself a good ol’ fashion Mortgage Burning Party!  Thinkaboutit…      

 

Just HOW good does one’s credit need to be?

I had an email from a prospective buyer yesterday saying she was going to hold off on buying until she got her credit in order.  Now, that can certainly be a good strategy.  But just how good does one’s credit have to be— before the time is right to get a mortgage and buy a house?

For the most part (ie. there are exceptions to everything) as long as you are above a certain threshold, how much above the threshold makes very little difference.  For instance, whether your credit score is 741 or 759 makes absolutely no difference whatsoever.  And the difference between 719 and 779 might amount to $8 on your monthly payment.  I doubt that for most people waiting a year to bring one’s score up to save $8/month makes much sense.

The minimum required score changes from time to time, and there is some variability between lenders.  As a general rule, you’ll find mortgage brokers to be more flexible on credit scores than banks.  Currently, you can find lenders who will make competitive, fairly priced, fixed rate mortgage loans based on the following credit scores:

VA- many lenders make VA loans with scores starting at 620.  For those close to that mark, they’ll probably insist that there be no loan, rent or credit card payments more than 30 days past due during the most recent 12 months.

RD- lenders making these loans often dip to scores beginning at 600, and for the lower scores will have similar requirements to VA lenders.

FHA- lenders making FHA loans may dip even lower… say into the 580 range.  And once again, the lower the score, the more likely there will be stricter requirements on the absence of payments 30 days late in the past year, and on proving one’s rental payment history.

Getting a mortgage can be a PITA.  There is no doubt about that.  And for those with lower scores, an extra dose of patience and determination will likely be required.  However, with the right attitude, one with a lower credit score can obtain a mortgage and buy a new home.  To get the facts, just ask.

 

How your credit score is determined

Everyone realizes that, when it comes to determining your credit score, payment history matters.  What most don’t realize is that payment history comprises only 35% of one’s score.

The second biggest factor, weighing in at 30% considers the amount owed on all accounts versus your total credit line.  Keep the balances on your credit cards under about one-third of the credit limit and you’ll help boost your score a good deal.  Fail to do that, and you’ll work against yourself.

The remainder of one’s credit score is determined by the amount of new credit (a negative factor), length of credit history (the longer the better), and the types of credit you have (mortgages and loans are better than finance company credit or credit cards).  Manage your sources of credit accordingly and your score will benefit. 

And btw, when it comes to payment history, mortgage payments matter most, followed by loan payments and auto leases, and finally credit card payments.  Most other payments don’t factor in as most other creditors (think utillity companies, insurance companies, etc.) do not report to the credit bureaus.  And here’s another thing about payments to keep in mind.  As long as you’re not 30 days or more late with your payment, it will still be reported as having been paid timely.  So, do whatever you can to be certain that all mortgage, loan and credit card payments are received by your creditors within that 30 day timeframe.

Take care of your credit bureau file, and it will take care of you.  If you have questions concerning your specific situation, let me know.