Deciding between a fixed or a variable interest rate? Watch this short video for a quick tip to help you choose.
How Do I Know if I am Getting a Good Interest Rate?
Watch this short video for a quick tip on how to know if the rate you are being offered is good or not.
Why Should I Care What My Interest Rate Is?
In our last video we talked about what interest is. View the video below to find out how your interest rate affects you.
2018 Market News versus the First Time Buyer
If you are looking to buy a home in 2018, early market news does not sound very promising. According to recent reports from Zillow and Realtor.com, prices are going up, mortgage rates are going up and inventory is going down. All across the country lack of available homes is creating a buying frenzy with bidding wars driving prices up even further. Add to that, the tax incentives for home ownership are now uncertain. If you listen to the reports, you are probably thinking, “Why bother?”
Renting does make sense at times. When you move to a new area that you are not familiar with, it’s a great idea to rent while you figure out where you want to settle down. When you are just starting out, renting an apartment with a group of friends is the way to go. When your future is uncertain, by all means, rent. However, there are still many reasons that buying makes sense as well.
One of the biggest reasons to seek home ownership is that buying allows you to invest in your home. Put simply, when you buy a home, you are paying rent to the bank. When you sell that home, assuming all goes well and you accrued some equity, you get that rent that you paid back in profits, so you basically lived there for free. That doesn’t happen when you rent.
Investing in your home can pay off over time, too. Real estate has a history of appreciation, even with the ups and downs of the market. Consider what your grandparents paid for their home. Is it worth the same amount today? Likely not. If your grandparents sold that home today, what would their profit be? More than they paid for it, most likely, and more likely than not, more than they paid for it with interest. And, even if it wasn’t worth more than they paid for it with interest, the home is now paid for, and what more can you ask for than that in retirement?
A family is another reason to own versus rent. Owning a house gives children a place to call home. They have a hometown, a community they know, and friends to grow up with. There will be a place to go home to on holidays when they have a family. There will be a place that their children know. Our nation is changing daily, but kids still crave routine, and a home is one way to give them that.
Lastly, don’t forget the American dream. It may have changed in recent years, but for most people, a home is still part of it. What you want just because you want it matters too.
If owning a home is a goal of yours, it can still happen. Interest rates remain historically low, making borrowing money less expensive than it has been in a long time. Rates went up in 2017, but even with those increases, rates are still lower than they have been since the 1970s. A lower interest rate means you can afford to finance a higher purchase price while still staying within your monthly budget. (To see the impact interest rates have on your payment, use this mortgage calculator from BankRate.)
In short, don’t give up on your dreams because of what you hear on the news. While it may not be fake news, it doesn’t tell the whole story, and it certainly doesn’t mean the end for you. You may have to look a little longer or look a few streets over from the neighborhood you want to be in, but your dream is still within reach.
Your Credit Score: What It Is and How to Maximize It
Credit is the trust granted to you when you buy something that you don’t have the money for, so you borrow it from someone else. When you borrow it from bank or credit card, that is called buying on credit. Pretty basic. What happens when you go to pay it back is where it gets complicated.
Banks don’t lend money for free, as we discussed in our blog on interest. You must pay it back, plus an extra amount for the privilege of borrowing it (interest). You must also pay it back on their schedule, not yours. Payments can be monthly, quarterly, or yearly. The most common payment schedule is monthly.
When you pay back the money back, the bank reports this to the credit bureaus and you are given a score based on how you adhere to that schedule. It’s kind of like your credit report card. Pay the right amount on time, you get a high score. Pay late or not at all, you get a low score. The higher the overall score, the better you are at paying back your debts.
The banks use this score to determine if you are going to pay back future money you want to borrow, and how much interest to charge you. A high score means they will likely get their money back, so they don’t have to charge as much interest on top of it. A low score means they probably won’t want to lend you money, and if they do, they want to get as much back as quickly as possible in case you decide to stop paying it back, so they charge you a higher interest rate.
Why does this matter? A higher interest rate equals a higher payment, so you want your interest rate as low as possible. Refer to the last post on interest rates, where we outline the difference between two rates and show how much higher your payment each month can be with a slightly higher rate. To make sure you are getting the best possible rate, you want your credit score as high as possible. Scores range from 300-850. Anything above 700 is usually considered very good. The national average score is 687. Anything below 650, and you may want to consider some repair work.
How do you do this? Make sure you pay your bills on time. Pay close attention to due dates and the amount of the payment on credit cards. Pay your medical bills, utility bills, and other miscellaneous bills so they don’t go to collection. Collection accounts become a blight on your credit report and stay there for seven years. They also go right to the top of the report, so the banks will be sure to see them first.
We understand that life gets in the way sometimes, and everyone has missed payments for one reason or another. It is important to try to fix the issue right away, so it doesn’t compound. If you miss a payment, contact the payee right away and determine the best way to fix it so that it doesn’t affect your credit score.
If you didn’t do this, or fell on hard times and had to let things go for a while, all is not lost. There are things you can do to repair your score.
First, order a copy of your report from all three credit bureaus. You can do this for free once a year at www.annualcreditreport.com. Review it for any charged off accounts or other blemishes, like late or missed payments. They are highlighted and at the top of your report, so they will be easy to spot. Make sure everything listed there is correct, and if not dispute any errors. You can open a dispute online. You will need an explanation of what occurred and any documentation you may have in support of your dispute.
Next, you will want to negotiate any items that cannot be resolved with a dispute. Contact the lender directly and negotiate a settlement in exchange for removing the item from your credit report. If they are unwilling to do this, it will still show as a paid collection account. This is better than a charged off account, because it means you paid the bill, just not on time. Banks look at this more favorably than simply not paying it.
Focus on paying off delinquent (late) or charged off accounts first. Then you can move on to your limits, or, you do not have delinquent accounts, you can start with this step.
Scores are also computed based on how much of your available credit you use. For example, suppose you have a credit card with a $10,000 limit and you have used $9999.99, and you are now asking for more money from the bank for a new purchase. To the bank, this appears like you have a spending problem. This makes you a credit risk and gets you higher interest rates, if you get the loan at all.
Check to make sure your limits are being reported correctly. If they are not, contact the lender and ask them to update the limits on your credit report. If they are and you have high balances, focus on the one with the highest ratio of balance to available credit first. This may not be the one with the highest balance, so go through each one to make sure what you are focusing first on will have the greatest impact. Pay this card below 50%. Then move on to the next highest ratio, and pay that below 50%. Do not pay each down a little bit each month, as the impact on your score will be negligible. Focus on one card at a time and your impact will be maximized. Once all of your cards are below 50%, go back and do this again to get them below 30%. As you do this exercise, you will see your score start to increase.
If you have a low score because you don’t have much credit, open a new credit card. You may need to deposit a small amount of money with the bank to hold while they extend you credit. This is called a secured card, and is commonly used when a person has little credit or has experienced a bankruptcy. This may feel painful in the beginning, but it only takes a few months for your credit to improve and you will be able to open unsecured cards. Do this as soon as you can, because it will improve your score even more. The caveat is that you need to use your cards, but not too much. Keep those balances below 30% of your limit, otherwise you will see your score start to drop. Do not close one card as you open another, because that will also cause your score to drop. The more credit you have available that you are not using, the better your score will be.
Make sure you pay your bills on time as you do this. Timely payments accounts for 35% of your score, so it doesn’t help you if you are skipping one payment to make another in the hopes of repairing your credit. If you can, pay extra on each card, or pay twice a month. That will reduce your balances and increase your score even faster.
When it comes to credit, there is no fast fix. There are things you can do to improve it, but it will take time. It is much easier to protect a high score than it is to work back from a low score. It can be done, and with a little dedication and perseverance, you can raise your score.
Remember, the sooner you start, the better it will be for you. Order your report today and get started!
What Is the Big Deal About Interest Rates?
Interest rates are up! Interest rates are down! Interest rates have stabilized! It seems like there is a new, and often conflicting, headline about interest rates every week. But what does this ultimately mean for you, and why should you care?
Interest itself is relatively simple. It is what the bank charges you to borrow their money. To pay back a loan plus interest means that you are paying back the money borrowed, plus a fee for the privilege of using it while you had it.
Where it gets tricky is how it is applied, particularly in the mortgage industry. I could write an entire blog post on the intricate details of points, pre-payments, APR, daily interest, prime rate plus whatever, but it is overwhelming. So much so that you probably even skipped over that last sentence halfway through.
All you need to understand about interest for the purposes of a mortgage is the impact that interest rates have on your payment. Again, it is pretty simple – a higher rate equals a higher payment. The bank charges a percentage of the amount you borrowed, calculated on a yearly basis on the amount owed, and then broken up into monthly payments. (This is where fixed rate vs. variable rates come into play, and the length of time of the mortgage. We will address that in a separate post, for today we will just concentrate on the basics.) As an example, let’s say you are borrowing $100,000 for a period of 10 years, and let’s look at the difference the rate can make in your payment.
Disclaimer – there are other factors that go into a payment that we are not going to discuss right now. This is about the loan amount and interest only.
Loan Amount: $100,000/10 years = $10,000 per year that you need to
pay back, called principal
Interest Rate: 10% = $10,000 per year
Payment: $10K principal + $10K interest = $20,000/12 months = $1666.67/month
Now let’s look at this again, with an interest rate of 5%.
Loan amount: $100,000/10 years = $10,000 principal
Interest rate: 5% = $5000/year
Payment: $10k principal + $5K interest = $15,000/12 months = $1250.00/month
That is a difference of $416.67 every month, for 10 years. Over the life of the loan, in the first scenario, you are paying an additional $50,000.04 to borrow that money over and above what you pay in the second scenario. That is a hefty difference, considering the amount borrowed was $100,000.00.
Typically, the interest rates change less than 1% at a time, so the difference will not be this great in your situation. This was just to illustrate the point of why they are important.
This is, very simply put, why interest rates matter. Remember, a higher rate = a higher payment.
In our next post we will discuss some of the factors that can increase or decrease your rate, so make sure to stay tuned!
No down payment? No problem!
“I don’t have enough for a down payment.” If I had a dollar for every time I have heard that, I would have a down payment! And guess what? Almost all of the people who have said that to me are home owners now.
Real estate has changed. You no longer need 20% down before you can even think about buying a home. There are programs out there with as little as 3% down needed, and even some with zero. No, they are not those “bad” loans we remember from years ago. These are legitimate programs from legitimate lenders. Sound too good to be true? It isn’t. But, if you are one of those that wants to go the traditional route to home ownership, saving for a down payment isn’t what it used to be either.
Let’s use $500,000.00 as a purchase price as an example. We know prices can be higher than that, especially in southern California, but there are many areas where you can buy a very nice home for much less than that, so for the sake of this example, we will use that number. $500,000.00 x .03 (3%) = $15,000.00, which means you will need $15,000.00 for a down payment.
Great! Now, how do you get there?
We all know your savings is not going to grow by leaps and bounds like it might have 30 years ago. All this means is that you will need to make little sacrifices. Let’s start with your Starbucks habit. At an average cost of $4.50/drink, that is almost $1500.00 in one year. I lost you, didn’t I? Don’t want to go the next sixty years without coffee? I don’t blame you. I don’t want to go the next sixty minutes without it, so I wouldn’t expect you to. That is okay though, there are other ways to save that you may not have thought of.
• Cable – at almost $300/month now, cutting out cable television could save you $3600.00 in one year.
• Coffee outside the home – If you make coffee at home, you will spend an average of $15/week, assuming you buy good beans and creamer of some sort. Compare that to the $30.00 for your daily latte, and you are saving another $750.00 in one year. Also, let’s be real here…we know some days there is more than one latte, so lets bump that up to $1000.00
• Cancel the lawn service and the cleaning lady. You can do anything for one year. After that, go back to it, but cleaning your own house and mowing your own lawn will save you $6000.00 in one year. Yes, really.
• Razor blades – this is a ridiculous expense. You can spend $60 or more on one month on razor blades. Sign up for Dollar Shave Club instead. You can get a razor and good blades for as little as $3/month. If you have to have the best, the Executive razor and blades is only $9/month. That is $600.00 in one year.
These things alone are $11,200.00 in one year. Pretty close to that $15,000.00 mark, isn’t it?
Now, let’s look at a few more.
• Alcohol – how much do you spend on alcohol? I bet it is around $500/month, when you total what you drink at home and everything you spend going out. Let’s be conservative and say $300/month. That is $3600.00 in one year. Now, if you stopped altogether, that is the balance of your down payment. However, I know that is unrealistic. What if you had one less when you are out with friends, and cut in half what you drink at home? There is another $2300.00 each year.
• Uber – your Uber budget? You can cut it in half with UberPool. I can’t put a number on this because I don’t know what it is, but you can add accordingly.
• Dining out – cut it out, with the exception of twice a month with friends. It stinks, but it is called sacrifice for a reason, and it’s a small one to make to get to that $15,000.00 number. This could be what does it.
So there you go. Zero to home owner in one year!
Can you do it? I challenge you! 😊