Your Guide to Credit and Personal Finance

Getting a 50-year loan is a perfectly rational way to avoid an interest-only or payment-option adjustable-rate mortgage. Both of these loans feature Adjustable Rate Mortgages (ARMs), but can also feature a negative amortization factor… which if the borrower doesn’t administer or manage properly, can cause problems in the long run.

With an interest-only mortgage, the minimum monthly payment puts little or no money toward principal. And, a payment-option ARM can go a little further… in some circumstances, the minimum monthly payment doesn’t cover the interest accrued that month. A borrower could make a minimum payment at the beginning of the month, and then going into the next month, could find that he now owes more than was owed before the payment. This situation is referred to as negative amortization, or “going negative.” It can be avoided if the borrower pays attention to his mortgage statements, and makes more than the minimum payment. However, some borrowers don’t pay attention and get into trouble.

For borrowers who want to avoid the possibility of going negative, the 50-year mortgage might make sense. It offers lower monthly payments than a traditional 30-year mortgage… like the interest-only or payment-option loan. And, it also offers a predictable and fixed housing payment. Additionally, in areas where housing prices are rising or have risen substantially, the lower payments provided by a 50-year mortgage make a home or property more affordable. Want more information about the 50-year mortgage? Consult your Mortgage Match loan consultant.

As a result of the “subprime fallout”, there are new rules in the business of getting a mortgage; particularly if you’re a credit-challenged borrower. If you’re not familiar with current events as they pertain to mortgages, and don’t exactly know what’s meant by the “subprime fallout”, here’s the situation in a nutshell. For the past 2 to 3 years, and perhaps as long as 4 years ago, mortgage lenders reached out to credit-challenged borrowers with new programs that essentially relaxed the standards for buying a home with no money down. For a time, borrowers with less than fair credit were able to obtain zero down loans. This might sound good so far, but things happened that caused lots of problems with these loans. It’s a little too long and complicated to recount the whole story and discuss all of the factors involved. But, the end result was that many of the borrowers who obtained these loans started defaulting on their payments. Soon, foreclosures followed in very high numbers, and the lenders who made these loans found themselves in serious trouble. A large number of these lenders have gone out of business because of this. And, this is what prompted the new rules of the mortgage “game”. While these new guidelines aren’t etched in concrete yet, new universal standards are beginning to take shape. Before the subprime fallout, borrowers with midscore FICOs down to 580, and who could document their incomes, could obtain zero down, interest only mortgages. Now, that magic FICO score is in the low 600s… with 600 being about the lowest acceptable FICO midscore number. Many lenders have put the minimum FICO at 620 for zero down. For a “stated income” loan, the new minimum FICO score seems to be 640. Since these standards are rapidly changing with modifications and new policies being added every week, it’s best to talk with a Mortgage Match loan consultant for the most up-to-date information.

What is an insurance score?
Your insurance score is based on your credit score and can be used to calculate your insurance premiums.

Think your credit score affects only your ability to borrow money? Think again. Your credit score also can affect your access to homeowner and car insurance and the size of your monthly premiums. In fact, your credit score can be used to determine your “insurance score.” Never heard of such a thing? Here are the basics on credit-based insurance scores:

Definition of insurance score
As defined by the Insurance Information Institute (III), a person’s insurance score is “a numerical ranking based on a person’s credit history.”

Use of insurance scores
In order to fairly calculate premiums and predict risk, insurance providers try to predict who will submit claims prior to this actually occurring. Insurance carriers do not charge their customers a standard rate, but rather, one that is tailored to each individual’s potential risk. According to the III, actuarial studies have found that a person’s financial stability serves as a good indicator for making these predictions, helping insurers determine a person’s insurance risk level and calculate premium charges equal to that risk level. That is, people with good credit are typically less like to suffer a loss or submit a claim than those with poor credit.

Insurance score criteria
Although a person’s credit record is used in determining his or her credit-based insurance score, it is not the only contributing factor. Some of the data taken from a credit record for use in calculating an insurance score includes:

• Payment history
• Credit history and type
• Length of payment and credit history
• Outstanding debt
• Available credit
• Items of public record - bankruptcies, etc.

When compared to a credit score, an insurance score generally relies more heavily on information such as whether you’ve paid your bills on time and for what length of time, and less so on the amount of debt you have outstanding. Moreover, the importance of your insurance score depends upon where you live - each state has different insurance regulations - and the insurance company you use.

How much do insurance scores matter?
Keep in mind that insurance scores are not the only criteria used to determine if you qualify for insurance and what rate you pay. Insurers also look at motor vehicle reports, your driving record, claims history, home condition or auto features, as well as other information. So an insurance score alone will not dictate the price you’ll pay for insurance or whether or not you qualify.

Also, your insurer may not even use a credit-based insurance score. Some states do not allow credit history to be used for insurance purposes or have regulations regarding how the information can be used. Different insurance companies weigh credit data differently. If you’re interested in knowing whether your insurer uses credit information and insurance scores in their underwriting decisions, contact your insurer directly.

Improving your insurance score
You can work to improve your credit-based insurance score in many of the same ways you would work to improve your credit score. The easiest thing you can do is always pay all your bills on time, as well as eliminate any outstanding balances on your credit cards. This does not mean closing all of your accounts when paying off your credit cards, because a good credit record typically includes one or two accounts that have been open and used responsibly for a certain amount of time.