If you’re thinking about getting a mortgage or about refinancing your existing one, now would be an excellent time to act. The reason for this is because a few weeks ago on a 30-year, fixed- rate mortgage, the average rate rose 0.07 of a percentage point to 3.98%. This makes these rates the highest since the week of April 12, 2012. And fixed mortgage rates moved up even further this last week – according to the mortgage giant Freddie Mac..
Why are mortgage rates increasing?
The job market has improved recently, which is likely to lead to more home buying. In turn, this may push interest rates even higher. Plus, the Federal Reserve has indicated that it may start buying fewer securities that are mortgage backed. If this were to happen, lenders would probably increase rates to make the securities more attractive to other buyers.
What will happen to homebuyers?
Even though this interest increase might seem very small, it will increase monthly payments on mortgages by about $33 for every $100,000 borrowed. This might be enough to discourage you from doing a refi if you already have a fairly competitive rate. However, it shouldn’t be a major obstruction for people buying homes.
A double loss
This increase in interest rates could mean a double loss for homebuyers. When you add this increase in interest rates to the fact that home prices are up more than 10% in the year that ended on March 31, it could be much more expensive for some people to buy a house.
The prequalification myth
If you are shopping for a new house and go through prequalification, this doesn’t necessarily mean that you will get the mortgage you’ll need. Without going into all the bad details, suffice it to say that prequalification no longer means what it used to. For example, you could be told that you have been prequalified for a $200,000 mortgage write an offer on a house and then a month later discover that you really can’t qualify for that mortgage. This is the reason why some realtors are no longer recommending that their clients go through prequalification.
The real culprit
In the final analysis what will determine whether or not you get that mortgage and1 your interest rate will be governed by that little three-digit number called your credit score. If you are about to make any big-ticket purchase, whether a mortgage, an auto loan or a new kitchen, you need to know your credit score. Again, without going into all of the technical details, just know that your credit score is based on your credit report. In fact, it’s a mathematical representation of your credit report that was originated by the company now known as FICO. Credit scores range from 300 to 850 and as you might imagine, higher is better. If you learn your credit score is 700 or higher, you can probably get just about any type of credit you would want, including a mortgage. Conversely, if your score is 580 or lower, you may have a hard time getting any type of credit.
The effect of your credit score on your interest rates
When you apply for credit, the first thing the lender will look at is your credit score. This will not only determine whether or not you get the credit you applied for, it will also determine the interest rate you will be charged. In the case of a mortgage, a poor credit score could mean an interest rate 2% higher than if you had a good credit score. And this will cost you literally thousands of dollars over the life of that loan. In fact, according to the website www.myfico.com the difference in a monthly payment on a $300,000 mortgage between the highest and lowest credit score is almost $300. Over the course of the loan – 30 years – this will add up to around $100,000. Just think how much better it would be to have that $100,000 in your retirement account and not in the hands of your mortgage holder.
Watch this video for more information on how credit scores effect interest rates on loans and what you can do to improve a low score.
Get your score
If you haven’t ever seen your credit score and at least not recently, you need to get it. Your best bet is www.myfico.com as it’s the only place where you can get your true FICO score. It will cost you $19.95 unless you’re willing to sign up for a free trial subscription to its Score Watch program. In this case you would get your score free.
Where to get your credit score
You can also get your “estimated” credit score free from some other sources such as:
- www.creditkarma.com
- www.experian.com
- www.equifax.com
- www.transunion.com
The scores you get from these Creditkarma and Bankrate will not be the same as your FICO score but should be close enough for you to know how you will look in the eyes of a prospective lender. And they’re free, which is tough to beat.
There is also a scoring model that was developed jointly by Experian, Equifax and Transunion named the Vantage Score. You should be able to get it free from any of the three credit reporting bureaus. Again, it will not be identical to your FICO score but should be close enough.
What can you do if you have a poor score?
Unfortunately, there’s not much you can do to improve your credit score short-term. Your credit score is made up of five components. One is called credit usage or the amount of credit you have available versus the amount you’ve used. Supposing that you have a total credit limit of $10,000 and have used $6000. In this case, you would have a debt-to-credit ratio of 60%, which is much too high. You could pay down some of that debt, which would help your score somewhat. However, if the reason why you have a low credit score is because your credit file contains negative items like a lien, a debt that has gone to collection, a judgment or debt that has been written off, there’s not much you can do about that. They will eventually fall out of your credit report but eventually is seven years from the time the negative item was reported. In other words, if you had a debt written off last year, it would be sometime in 2019 before it dropped out of your file. And if you have had a bankruptcy, this would stay in your file for either seven or 10 years, depending on the individual credit-reporting bureau.
