Archive for March, 2008
How to compare loans
Posted by: | CommentsHow to compare loans
Asking these questions when comparing loans can help you save money and find the loan that best suits your needs.
Comparing mortgage loans is one of the most important things you can do when you’re buying a home. The decisions you make will determine the size of your monthly payments, how much you pay upfront, and how much interest you’ll pay over the life of the loan.
You might find it simpler to compare loans if you ask each lender a series of questions, including:
- What is the loan’s interest rate?
- Will I be charged points?
- What are the closing costs and all other fees?
- What is the annual percentage rate, or APR – the rate you’ll pay per year for all the costs associated with the loan?
- Is there a pre-payment penalty?
- How is the loan amortized, meaning how quickly is the principal paid off?
Find out the answers to these questions no matter what type of loan you’re considering. Each can affect the overall cost of your loan.
If you are considering an adjustable-rate mortgage, or ARM, you can compare loans by asking:
- When does the rate adjust?
- How often does the rate adjust?
- Is there a cap limiting the amount by which the rate can adjust? What would my monthly payments be if my interest rate hit that cap?
- What is the index and margin that will determine my rate? How has the index changed over time?
ARMs are inherently more risky than fixed-rate mortgages because you’re gambling on whether interest rates will go up or go down before your rate adjusts. Understanding the best- and worst-case scenarios can help you weigh the pros and cons as you compare loans.
But there’s one other big question to consider before you get an ARM:
- How does the discount introductory rate compare with rates for 30-year fixed-rate loans?
If there’s not much difference when you compare the two, the fixed-rate loan might be a safer bet. You won’t save much in the short-term, and could save a lot over the long term. Plus, you reduce your risk if interest rates shoot up and you can’t refinance before the rate adjustment.
Finally, to truly compare loans, you have to ask yourself some questions:
- How long do I expect to stay in my home?
- Are my job and income secure over the long term?
- Will I be able to afford higher payments in the future?
- How comfortable am I with risk?
In the end, the best loan is the one that works for your needs.
Tips to raise your credit score
Posted by: | CommentsTips to raise your credit score
A better credit score can help you get a better loan rate.
Your credit rating can help determine whether you get a loan and what interest rate you pay, so getting your score as high as possible can save you big bucks.
The difference in interest rates for mortgage loans is nothing to sneeze at. Someone with a FICO score, or credit rating, of 760 to 850 could pay $188 less per month on a $216,000 30-year fixed-rate mortgage than someone with a score of under 658, according to MyFICO.com. The amounts are based on interest rates of 5.99 percent for the higher rating and 7.31 percent for the lower rating.
Credit scores are grouped into five basic categories, according to MyFICO.com. In general, about 35 percent of the score is based on your payment history, about 30 percent on how much you owe, 15 percent on the length of your credit history, 10 percent on new credit and 10 percent on types of credit used. The mix can vary depending on your situation.
Credit ratings evolve over years, but there are ways to raise your credit score a few points at a time.
Pay your bills on time.
“I’m not sure a lot of people understand that,” said Jack Guttentag, professor of finance emeritus at the Wharton School at the University of Pennsylvania and the man behind The Mortgage Professor Web site (mtgprofessor.com). “They always say, ‘I always pay it eventually.’ ”
Pay more than the minimum on your credit cards every month.
Your score could go up a few points as your credit card balances go down. Just a few larger payments can help if you previously were paying the minimum.
Limit the number of new credit-card accounts you open.
An exception is for people who are trying to re-establish credit after a bankruptcy or other financial crisis, according to MyFICO.com. “Opening new accounts responsibly and paying them off on time will raise your score in the long term,” says the Web site, which is published by Fair Isaac, the company that invented the FICO score.
Keep your balance well below the credit limit on revolving accounts like credit cards.
Your credit score will likely be higher if you have small balances on four or five credit cards (as an example) than larger balances on two or three cards, especially if the balances are close to the credit limits, Guttentag said.
Pay off any uncollected items.
Your credit score is being hurt if you’re withholding payment because of a dispute with the lender, no matter how “right” you are.
And finally, always remember that paying down your revolving credit, or credit cards, is the best way to improve the portion of your credit score that looks at how much you owe.