What's Ahead For Mortgage Rates This Week : August 9, 2010

Mortgage markets improved again last week on softer-than-expected economic data, punctuated by Friday morning's weak jobs report. Conforming mortgage rates in Arizona dropped on the news, making new, all-time lows.

Mortgage rates have been on an extended rally dating back to mid-April.

This week, there's a lot of data and news due for release, the most influential to markets of which is the Federal Open Market Committee's scheduled policy meeting.

8 times annually, the FOMC meets to discuss the nation's monetary policy with respect to the current and projected U.S. economic conditions. Sometimes the FOMC takes action on the economy. Other times, it does not.

Either way, Fed meetings are market movers and it's a gamble to float a mortgage rate ahead of an FOMC get-together.

There's other's stories to watch this week, too. Each has the ability to change mortgage rates.

• Tuesday : FOMC meeting; Consumer Confidence data
• Thursday : Jobless Claims
• Friday : Retail Sales; Consumer Price Index

It's a busy week on Wall Street, to be sure, and rate shoppers would do well to pay attention. Not only can the FOMC meeting change mortgage rates for every product in every market, but it can also change the outlook for mortgage rates going forward.

Rates are at an all-time low and low rates can't last forever. We're in the middle of a Refi Boom today and, soon, the boom will be over.

If you haven't spoken to a loan officer about refinancing your home, or locking a mortgage rate, your best time to make the call is prior to the FOMC's Tuesday afternoon adjournment at 2:15 PM ET. Mortgage rates will get jumpy leading up to the meeting, and will most certainly be volatile afterward.

Home Values Within 12.5 Percent Of April 2007 Peak, Nationwide

According the Federal Home Finance Agency's Home Price Index, home values are now off just 12.5 percent from their April 2007 peak nationwide.  This, after a half-percent monthly increase in prices in May, on average.

Given the state of the market since April 2007, the Home Price Index results are a positive for both the housing market and the economy, but we have to remember that May's half-point increase is an average, and not specific to a particular area.

In contrast to "national markets", the real estate markets in which you and I live are decidedly local.  It's a major difference and the distinction renders the Home Price Index somewhat less important. 

After all, the HPI doesn't account for housing activity in individual neighborhoods , nor does it track value across cities like Scottsdale. Instead, it summarizes data in giant chunks of geography.

A quick look at the HPI regional data proves the point. Of the HPI's 9 tracked regions, only one was within one-tenth of one percent of the national, half-point average.  The others varied by as much 1.3 percent.

As a sample:

• Mountain Region : + 1.7 percent
• New England : + 0.2 percent
• South Atlantic : +1.0 percent

And this is on a regional basis. The HPI's applicability to state, city and neighborhood markets is even less appropriate.

Real estate values cannot be captured in a national survey. For home buyers and seller, what matters is the economics of a block, on a street, in a neighborhood.  That type of granularity can't be tracked in a report like the Home Price Index.

The best place to get that data is from a local real estate agent that knows the market well.

Nervous About Mortgage Rates Rising? Lock Thursday -- Ahead Of Friday's Jobs Report

Mortgage rates have been falling since April but that momentum could reverse tomorrow.

The Bureau of Labor Statistics releases the July jobs report at 8:30 A.M. ET Friday. With a stronger-than-expected reading, mortgage rates should rise, harming home affordability in Arizona. Jobs are a keystone in economic growth and growth is tied to rates.

Earlier this year, job growth went positive and reached as far north as 431,000 jobs created in May. That figure slipped negative last month, however, as the temporary, decennial census workers left the workforce.

Jobs matter to the U.S. economy. Among other concerns, unemployed Americans spend less on everyday goods and services, and are more likely to stop payments on a mortgage. These effects retard the economy, spur foreclosures, and harm home values.

The reverse is also true. More workers means more disposable dollars and, in theory, a stronger economy.

Analysts expect that a net 65,000 jobs were lost in July. Wall Street -- and Main Street -- have a big interest in those results.

Poor jobs data would likely result in a stock market sell-off which would, in turn, boost the value of government-backed mortgage bonds. This is because bonds tend to perform well when the economy is sagging and higher bond prices mean lower mortgage rates.

Strong jobs data, however, would likely push stock markets up and bond markets down. This would cause mortgage rates to rise. The stronger the employment figures, the higher mortgage rates should go.

So, if you're happy with where mortgage rates are today and you're concerned about what the jobs report may do to them tomorrow, consider talking to your loan officer about locking your rate as soon as possible.

Once the jobs report is released, it may be too late.

As The Pending Home Sales Index Falls, Home Buyers See Dollar Signs

The Pending Home Sales Index failed to rebound from a cliff-dive in May, falling by another 3 percent more in June.  The index remains at record-low levels.

A "pending home sale" is a home under contract to sell, but not yet closed. The data is culled from local real estate associations and large brokers and accounts for 20 percent of all purchase transactions in a given month nationwide.

The Pending Home Sales Index is a future indicator for the housing market; there is a high correlation between the PHSI and the monthly Existing Home Sales report.  This is because of the relatively large sample set used for the PHSI, and because 80 percent of homes under contract close within 60 days, according to the National Association of Realtors.

 

June's Pending Home Sales Index is weak by most measures, but if you're a home buyer in Cave Creek , the headlines aren't so bad. Fewer home sales can push negotiation leverage to the buy-side of a transaction.

Plus, there's other positives in the market for today's buyers:

• Home supplies are up, which creates competition among sellers
• Builder confidence is down, which leads to "free" upgrades and incentives
• Mortgage rates are low, which increases cash flow and disposable income

All things equal, the current home buying conditions haven't been this favorable in years.

The falling figures in June's Pending Home Sales Index hint that home sales will be down through the rest of the summer and into early-Fall. However, mortgage rates may not and higher mortgage rates can do more to change a monthly payment that a small reduction in home price.

If you're planning to buy a home later this year, consider moving up your time frame. 

It's an excellent time to be a buyer.

What Does It Mean To Escrow Taxes And Insurance?

The fiscal responsibility of a homeowner -- in Cave Creek and everywhere else -- extends beyond the mortgage's basic principal and interest repayments. Homeowners are also responsible for the real estate taxes on the home and its insurance premiums, too.

Failure to pay taxes can lead to foreclosure, and failure to insure is breach of your mortgage contract.

As a homeowner, you have a choice about how you manage your real estate tax and insurance bills.  You can choose to pay them from your own bank account when the bills come due, or you can choose to pay 1/12 of the annual bill to your mortgage servicer each month, and then let your servicer pay the bills on your behalf when they come due.

Not surprisingly, servicers prefer the latter method -- it reduces two major lender risks:

1. That the home's real estate taxes go delinquent and are sold to a third-party
2. That the home endures catastrophic damage during a lapse of insurance coverage

In theory, when the servicer is paying the bills, the home's taxes are always current and the home's insurance is always paid. This method of managing taxes and insurance is commonly called "escrowing".

To calculate a home's monthly escrow payment is simple. Just take the sum of the annual real estate tax bills and insurance bill, then divide it by 12 months in the year.

As a example, a $4,000 annual tax bill with a $800 insurance policy = $4,800 annually = $400 paid into escrow monthly. These monies are collected as part of the regular mortgage payment along with the mortgage's scheduled principal + interest payment.

Homeowners choosing to escrow tend to get the lowest rate, lowest fee loans. This is because lenders often charge a premium to "waive escrow" (i.e. pay their own taxes and insurance). Escrow waiver fees vary between banks, but can range up to half-percent of the amount borrowed. The larger the loan, the stiffer the penalty in dollar terms. 

Choosing to waive escrow can also raise your mortgage rate by up to 0.250 percent.

If you're unsure whether escrowing is right for you, talk to your loan officer and/or financial planner. There's good reason to go either route depending on your profile.

What's Ahead For Mortgage Rates This Week : August 2, 2010

Mortgage markets improved last week, pushing mortgage rates lower for the 6th time in seven weeks. 

Since April, rates in Arizona have been on a downward path, spurring refinances in most markets and sparking the start of a Refi Boom.

Last week, 3 key stories played a role in falling rates:

1. Demand was strong for U.S. government debt
2. Emerging concerns of a Japan-style deflation in the U.S.
3. Personal Spending since late-2007 was shown to be less than previously thought

Of the three, it's the measured drop in Personal Spending for which rate shoppers and home buyers in Scottsdale should watch. Drops in spending slow down the economy which, in turn, tends to pull mortgage rates lower.

Long-term, deflation could be a drag on rates, too. For now, though, it's just a conversation among academics and economists.

This week, mortgage rates could move up or down -- a lot hinges on the results on July's Non-Farm Payrolls report.

More commonly called "the jobs report", Non-Farm Payrolls hits the wires Friday at 8:30 AM ET. Markets are expecting a 75,000 net loss of jobs last month. If the actual number is higher, mortgage rates should rise. If the actual number is lower, mortgage rates should fall.

With the jobs numbers not due until Friday morning, expect choppy trading through Thursday's market close. There's a handful of economic data set for release including Personal Consumption Expenditures (Tuesday), Pending Home Sales (Tuesday) and Jobless Claims (Thursday). Each has the potential to move mortgage rates.

The Refi Boom is ongoing but when it ends, it will end in a hurry. If you've been thinking about a refinance, contact your loan officer about your options sooner rather than later.

30-Year Mortgage Rates Make New Lows, But Look Ready To Spike

No doubt you've heard that mortgage rates are low. They're lower than they've ever been in history.  The news is everywhere.

Just check out some of these headlines from the last 24 hours:

• Mortgage rates set new lows for the 6th straight week (Reuters)
• Mortgage rates fall again; 30-year fixed at 4.54% (Wall Street Journal)
• Mortgage rates hit another low : 4.54% (NPR)

Fixed mortgage rates are now down more than 1/2 percent from the start of the year, and 3/4 percent from just 1 year ago. The drop has dramatically improved home affordability for home buyers in Phoenix while creating refinance opportunities for existing homeowners.

From a payment perspective, a conforming, 30-year fixed rate mortgage is now cheaper by $41.94 per month per $100,000 borrowed versus July 2009.

A homeowner with a $300,000 mortgage, therefore, is saving $45,295.20 over 30 years.

Low mortgage rates rarely last long and rates appear to have troughed. After a big downhill between April and July, they're now flat. This could mean rates have finished falling, or that they're gearing up for another drop lower. Either way, if you haven't talked to your real estate agent about home affordability, or your loan officer about refinancing, it may be time to make that call.

If today's market marks the end of low rates, rates are expected to rise quickly.

You're Invited!!!

Dear Your, Rod's 52nd Annual St. Patrick's Birthday Celebration will be held at GRAPES Wine Bar and Italian Restaurant this year. Come have some great food and a glass of Green Beer and or Wine with me to celebrate. What: Rod's 52nd Annual St. Patrick's Day Birthday Celebration When: Wednesday, March 17th, 5 p.m.-8p.m. Where: GRAPES Wine Club (Map) R.S.V.P.: Reply to this e-mail or e-mail Rod@AmericasMortgageStore.com I look forward to seeing you and celebrating!    Rod Dennis America's Mortgage Store Rod@AmericasMortgageStore.com Wednesday, March 17th, 2010    5PM - 8PM GRAPES Wine Club 7337 E. Shea Blvd., Ste 105 Scottsdale, AZ Map RSVP: Please e-mail Rod@AmericasMortgageStore.com by March 15th to RSVP.  See you there!

 

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Report: Nearly 1M bank foreclosures in process - Phoenix Business Journal:

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Forecast shows Arizona economic losses continuing through year-end, stabilizing in 2010 - Phoenix Business Journal:

One firm is calling for a rebound to begin early next year. Let's hope they are correct!

Forecast shows Arizona economic losses continuing through year-end, stabilizing in 2010 - Phoenix Business Journal:: "Arizona will end 2009 with a 6.5 percent loss of jobs, a 3.6 percent dip in gross domestic product and housing prices down by 8.4 percent, though 2010 offers a more flat economic picture.

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Math Lesson For the Day 103%

Here is a little something that is indisputable mathematical logic. It also
made me Laugh Out Loud. This is a strictly mathematical viewpoint...it goes
like this:

What Makes 100%? What does it mean to give MORE than 100%?
Ever wonder about those people who say they are giving more than 100%? We
have all been to those meetings where someone wants you to give over 100%.
How about achieving 103%? What makes up 100% in life?

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FW: The Lion Tamer

A circus owner runs an ad for a lion tamer and two people show up. One person is a good-looking, older man in his early to mid seventies and the other is a gorgeous blonde in her mid-twenties.

The circus owner tells them, "I'm not going to sugar coat it. This is one ferocious lion. He ate my last tamer so you two had better be good or you're history. Here's your equipment -- chair, whip and a gun. Who wants to try out first?"

Read more of this story

FW: 10-Year ARM Comparison - 3rd Quarter 2009

Rod Dennis America's Mortgage Store Phone: (480) 850-6501 Fax: (480) 850-6522 rod@americasmortgagestore.com http://www.americasmortgagestore.com/

ARM Indexes: A 10-Year Comparison

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FW: fha changes coming

FHA is going the way of HVCC appraisal requirements soon.

 

 

A story in "Inside Mortgage Finance" from August 31^st stated, "The Federal Housing Administration is not considering adopting the Home Valuation Code of Conduct appraisal system now in place at Fannie Mae and Freddie Mac. Coming from a recent meeting with FHA executives, top officials of the National Association of Mortgage Brokers said they were assured by FHA Commissioner Dave Stevens that the HVCC is not in the agency’s plans."

Friday, however, the FHA Commissioner announced that after January 1, the FHA will require appraisals to be ordered via HVCC, and that instead of a net worth of $250,000 lenders must have a net worth of $1 million sometime in the next year. The FHA sent out a Mortgagee Letter to all lenders that they are adopting HVCC in most of its current form – the same one adopted by Fannie & Freddie in May. Mortgage originators will no longer be able to order appraisals from appraisers, but instead use AMC’s, which contributed to some of the popularity of FHA loans. Appraisers stand to make a little more, brokers will have less control, FHA appraisals will only be good for 4 months and not 6, and the FHA will allow appraisals to be transferred to another lender. Realtors can still give appraisers comparable sales data, but just not value: a fine distinction. In addition, the FHA said it may fall below its mandated capital level (2% reserves) for the first time in its history, but it will not require a taxpayer bailout, and that they will be hiring a chief risk officer. (Talk about a piece of cake job, right?)

Mini-eagle questions? “Lenders seeking approval to originate, underwrite, or service an FHA loan must meet the eligibility criteria for a supervised or non-supervised mortgagee. Mortgagees with this approval status must assume liability for all the loans they originate and/or underwrite. Loan Correspondents (mortgage brokers) will continue to be able to originate FHA-insured loans through their relationships with approved mortgagees; however they will no longer receive independent FHA approval for origination eligibility. Check it all out at: http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/HUDNo.09-177

Why the changes? According to the MBAA, almost 20% of FHA loans are delinquent in some form. The number of loans that they insure has grown from slightly more than 4 million 3 years ago to almost 5 ½ million now. Many originators view FHA loans as a substitute for the subprime loans from days gone by and some analysts feel that these loans will cause a huge negative impact on the industry and on the taxpayer. (Not everyone deserves a home loan, right? Why allow DTI’s above 36%? 3.5% or less down?) eceive it, let me know.)

FW: Your Weekly Blog Update From Rod Dennis

Here are a few good articles worth reviewing this week.

Housing Starts Slip, But Don't Think The Recovery's Been Halted Excerpt: Housing Starts on single-family homes took a step backwards last month, falling month-over-month for the first time since January. A "housing start" is new home on which construction has started. Don't let the... The Housing Market Index Reaches A 16-Month High Excerpt: According to home builders around the country, the housing market is looking good. Each month, the National Association of Home Builders releases its Housing Market Index report, a survey meant to... Ben Bernanke Leaves Clues About The Future Of Mortgage Rates Excerpt: On the 1-year anniversary of the Lehman Brothers collapse, Fed Chairman Ben Bernanke said Tuesday that the "recession is very likely over at this point".   His comments were supported by a... Using 401(k) Funds For A Downpayment? First, Consider The Tax Implications. Excerpt: As downpayment requirements increase, anecdotally, home buyers are tapping 401(k) plans for extra cash. Classified as a "hardship withdrawal", loans against your retirement funds can be cheap and simple. There's no credit check..

 

Bankruptcy and Monopoly

The other day we were playing Monopoly. Of course someone inevitably landed on

Park Place, which happened to have three houses on it, and he promptly declared bankruptcy, but then wanted to keep playing. It reminded me that "declaring bankruptcy" doesn't seem to have quite the finality that it once did. This year many well-known companies have done it, but still seem to be around. Individuals were sent (in the US until the 1830's; England until 1869) to debtor's prison, or at least threatened with being sent to a damp, dark, place with rats in it. In the United States, laws have always favored debtors versus creditors. But in 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act made it harder to declare bankruptcy, and prior to it taking affect there was a spike in filings that hit over 2 million! In 2008 there were about 1 million filings, which mean that in the US one in three hundred people declared bankruptcy.

But a bankruptcy is still, for the most part, considered a last-ditch option for dealing with overwhelming debt. Most of your assets go away, and your credit rating takes a fall (a bankruptcy for ten years, whereas a foreclosure remains on it for seven). Most homeowners will avoid a Chapter 7 bankruptcy and instead file for Chapter 13 if they want to avoid a foreclosure. A Chapter 7 filing can wipe out unsecured debts, but secured debts are tied to a specific asset, such as a mortgage secured by a home and which reverts to the creditor. A Chapter 13 bankruptcy doesn't actually wipe out the debt but can shield debtors from their creditors for several months during the forbearance period until a court-ordered repayment schedule can be worked out. During this time most homeowners try to work out a loan modification program.

Jumbo Foreclosures Continue to rise.

Foreclosures on Jumbo loans continues to rise. The high end home market has a ways to go before it stabilizes.

Foreclosure rates on prime jumbo loans, surpassed the 2.98% average for all loan types in July, and continue to rise faster than any other loan type. Prime jumbo foreclosure rates are up a staggering 634% versus January 2008 levels, according to LPS Applied Analytics. And other figures show that Alt-A loan problems could stabilize in the coming months.

The Mortgage Business: Back to the Past

OK, I admit it. I'm getting old. I have been in the mortgage business long enough to see things go full circle. Today the lending guidelines are similar to those of more than two decades ago when I first entered this industry. Loan approvals are once again based on sensible underwriting guidelines. No longer is everyone a candidate for home ownership as it has been for the past several years. There is no doubt that the system’s flaws of the recent past have been corrected. All of this change took place in the last 9 months and it’s incredible how quickly it has changed. It's about time. Just like fashion, it is interesting that trends come back around.

Today, like twenty years ago, the lenders are again using three things to determine eligibility for a loan; down payment, credit and income. While all three are important, more strength in one area can compensate for weakness in another. For example, if a client has good credit and an income that can be documented to support the house payment, a down payment may not be necessary. Or, if a client has marginal credit but a decent income and a large down payment, the lender may still offer a good loan. The third scenario is a client with good credit who is self employed or who has a source of income that is difficult to document. In that scenario, the lender may approve a loan, but require a higher down payment. The lenders’ current guidelines allow them to rest assured that the client can afford the home, has money at risk and is unlikely to make a payment late.

More on down payment guidelines. Lenders want borrowers to have their own money at risk. It has been proven over time that a client is less likely to walk from a home when they have some of their own hard-earned money invested in it. If a lender forecloses on a home and values have not changed, they will still be able to recoup approximately 80% of the original value of the home despite the cost of legal proceedings, missed payments, late fees, home rehabilitation and selling expenses. Considering that potential, a lender usually prefers a down payment of 20% of the sales price or requires the purchase of mortgage insurance that protects the lender from loss should they need to foreclose. Although 100% financing is available for the perfect situation, a down payment or equity in a home is almost always required. There is still money available for almost everyone, but only if you have enough invested to reduce the lenders risk of loss upon foreclosure.

Credit is equally as considerable to the underwriters. There are now several tiers of credit scores in which the interest rate is impacted. With a spotless payment record and adequate history of prudent borrowing, a client’s credit score will typically be in the 700s, giving the client access to the best money on the market. With just a few blemishes, the score may drop into the mid 600s, causing pricing and loan-to-value considerations to be negatively impacted. It is fascinating that just a few changes on a client’s credit file can make a significant difference in the score. Keep an eye on your score, if it drops below 700 and your payments have not been delinquent;; seek advice from a credit or mortgage professional to improve it. In certain situations, a higher score may be reached by simply shifting debt.

Income, of course, is a crucial factor. Lenders want to document that the client is generating enough income to make the house payment. Again, if the income is too low or can’t be documented, the lender will require a larger down payment to reduce its own risk. Often self-employed people can’t adequately document income due to their bookkeeping methods but still have enough income and cash flow to afford a home. In that situation, a stated income loan is most practical. A client will typically need to have been self-employed for two years or more and support that through business licenses or a letter from their CPA assuring the lender that self-employment has been disclosed to the IRS for at least the past two years. It must be a believable income for the profession to be considered. Again, the lender will want good credit and a down payment to offset the fact that the client cannot prove their income the way the lender wants.

No documentation loans are still available in some circumstances. Without being able to exhibit any income stream, a lender will still loan money as long as the client has invested at least 20% of the value of the home and is willing to pay an interest rate premium. These loans are only available with a good credit score that is typically 680 or greater.

Once it is established that a client is eligible for a loan, the property being secured becomes the final and sometimes deciding factor in the approval process. Many things are taken into consideration regarding the real estate being financed. For example, condos are restricted to lower loan-to-values (LTV) than single family homes by some lenders. Also, due to declining values in the valley and other areas of the country, some programs restrict the loan-to-value as well. A loan today at 80% LTV would not be at 80% LTV if the value were to drop, so the lender may require a larger down payment to protect against the potentially declining value of the asset.

So, just like 20 years ago, if a client can show financial strength and credit worthiness, there are excellent programs available to finance a home. The old adage holds true that if you can show you don't need to borrow money, the lender will most likely loan it to you. I am sure, however, that housing prices will increase again over time and lenders will revert to looser standards and allow anyone to borrow. The cycle will continue. Hopefully I will be retired by then.

Rod Dennis is the President of America’s Mortgage Store and can be reached at 480.850.6501.
To respond to this article, please email Rod@AmericasMortgageStore.com.

Don't Pay-Off

You don’t want a mortgage, you want a house, but to get a house, most people must obtain a mortgage. You hate having a mortgage and you’d love to pay it off as soon as possible. You know that over 30 years, you’ll pay more interest than you paid for the house in the first place. You’ve been taught that the best thing is to own your home outright.

Despite this, a big, long-term mortgage is best. Though advice you’ve been given to pay your mortgage off may have once made sense, today it’s not the best decision. In today’s economy, a high loan-to-value, long-term mortgage is great. Don't pay the mortgage rapidly, never pay extra, and never use a bi-weekly payment plan. You know paying off the mortgage early will save huge in interest cost, but there’s another side you may have overlooked. Consider the following justification for carrying a big, long-term mortgage.

Your home’s value has nothing to do with the mortgage
Despite how you finance your home, it’s going to fluctuate in value without consideration of the loan balance, and the odds are good that it’ll appreciate. Many homeowners try to build equity by paying off the mortgage, but that produces minimal results compared to the equity built through appreciation. Spend the extra money you’d pay on the mortgage to upgrade the home. You'll enjoy your home more and create a more valuable asset.

A mortgage is cheap money
There’s no way to borrow money at a lower rate than a mortgage. A high quality mortgage to a creditworthy borrower, secured by a residential property is considered one of the safest investments for lenders so they offer low rates to entice borrowing.

Mortgage interest is tax deductible
In addition to great rates, the government subsidizes borrowers by making interest tax-deductible. You can save as much as 33% on the interest. That means a 6% loan really costs as little as 4%, making the cheapest money even cheaper.

Mortgage interest is tax-favorable
Assume you have a 6% mortgage and a 6% profit on your long-term investments. The mortgage is deductible at your top tax bracket, but the long-term investments are taxed at 15%. Say you’re in the 33% tax bracket, the mortgage will cost you 4%, while the investment nets 5.1% after taxes. In other words, tax law makes it beneficial to maintain your mortgage. Compounding increases the yield of the investment as well, creating a greater arbitrage and thus enhancing the tax-favorable situation.

Mortgage payments get easier over time
A long-term, fixed rate mortgage guarantees the payment will never rise. Alternatively, inflation is eroding the value of the dollar and inflating income. Therefore, the payment becomes cheaper relative to your income, making it a smaller percentage of income and easier to pay.

Large mortgages are safer
Assume you have $200K and want to buy a $500K home. How much should you put down? The entire $200K or a 20% down payment? Put down 20% and borrow the extra $100K. This allows you to retain liquidity while controlling additional appreciable assets that can compound wealth. What if you were suddenly without income? The payment wouldn’t matter because with little to no reserve funds, you’d be in danger of default. With the additional $100K liquid investment, you’d have the ability to sustain the payment and your other life expenses for an extended period of time. What if the payment is just too much some months? Subsidize it by taking money from the liquid account. It probably made enough return to not have to draw against the principal anyway.

Mortgages let you create more wealth
Wealth is created by owning appreciating assets. Acquiring the assets is best done by diverting cash flow to purchase and sustain them. To do that, lower your expenses with a long-term loan with lower payments than a short-term loan requiring larger payments. They allow more cash flow to be diverted to control more assets.

To sum up, the advantages and safety of liquidity, controlling additional assets and current tax laws make borrowing more money a prudent decision. If you’re still hesitant, be sure to discuss your options with an experienced mortgage consultant and your personal tax advisor before making any decisions.

Credit Scores: How They Can Be Drastically Impacted

Everyone has heard how important credit scores are when applying for credit. The higher an individual’s scores, the better the terms of financing that are available. Understanding what actions to take to avoid getting a lower score or improving a score is something of a science.

Certainly the area of most concern is payment history. Being late however on a debt is not bad if the payment does not go beyond 30 days late. Only after being 30 days late (from the original due date, not the grace period date) will the institutions report you as delinquent. You will still have to pay the massive late fees however, which is a burden on your cash flow.

If your cash flow simply will not allow you to meet all of your obligations in a given month, pay your real estate debts first, your installment loans next and finally your credit cards. Missing even one mortgage payment in the last 24 months can disqualify you from some lenders’ best programs. The credit scoring systems assign more weight to installment loan delinquency than to credit cards.

Taking a cash advance on a credit card to pay other debt is much better than allowing any delinquency to take place. Although the extra debt will decrease the score temporarily, it will not be nearly as damaging as late payments. You can also recover from a balance increase and quickly erase it, but a delinquency will show on your report for 7 years.

Spread your debt around. It’s not how much outstanding credit a consumer has that is important, it is what amount of available credit is being used. For example, a person with a credit card that has a limit of $4000 and carries a balance of $4000 on the card is going to be severely impacted. While in comparison, the same $4000 distributed at $1000 each over four credit cards that have available balances of $4000 each will get a great score. The difference being the first consumer was carrying 100% of the available balance as opposed to the second one who was only carrying 25%. The logic holds true that if a person appears to need to borrow money, no one wants to loan it. Ideally keep the balances below 30% of the available credit limit on each card.

Have enough funds to pay down some but not all of your high credit card debt before applying for credit? There are computer programs now that allow lenders to input scenarios to determine where best to apply available funds. For example: If a borrower has $5000 to use to improve a credit score, some credit companies’ software will allow the lender to submit a “What If” scenario that will tell the consumer exactly which debt to apply the $5000 to for the best score improvement and it will even project what the new score will be. For example, it may tell you to not pay anything toward an old charge off, while telling you to pay down only $50 on a Visa card. This is a tremendous tool that can create thousands of dollars in savings if leveraged.

Don’t close that credit card account! A seasoned borrower will always score higher. Closed accounts are not given near the historical value as active accounts. Ideally, use available credit to continue to score in this area, but sparingly.

Remember that the credit score is a computerized calculation. Personal factors are not taken into consideration when a credit report is generated. It is merely a snapshot of today’s credit profile for any given borrower and it can fluctuate dramatically within the course of a week.