If you were asked to make an investment in which you were told you would never see your money again, how much would you invest?

If you put money in a savings account each month, and the bank guaranteed you that you could never withdraw the money again, would you keep depositing checks?

If your savings account was only available to keep your bank from losing money, but you could still lose money, would you keep money in that savings account to protect your banker?

If you put money in an account that was guaranteed to never pay you more than 0% interest, would you want to save your money in that account?

What if the money in the 0% account could lose money, even if it couldn’t gain money?  How much would you put there?

What are these horrible accounts I am talking about?

Did you guess Home equity?

Think about it -

• When you make a big down payment on a house, you don’t get paid money each month by the bank for that, do you?
• When you send in extra principal payments, does the banker pay you interest?
• If your home loses value, does the bank lower your mortgage balance, or does your ‘Home equity Savings Account’ disappear?
• If you have a lot of equity, does that make your house go up in value?

Down Payments, Home equity and mortgage repayment or early payments are all questions regarding where you should store your wealth over the long term.  Equity in your house doesn’t make you safer or wealthier – it just sits there.

Big down payments are safe for the banker – not you!

Of course, you pay interest on money you borrow, but that is a choice – you can pay interest, and store your money elsewhere, or not pay interest, and maybe keep the bank from losing money.

Make sure your mortgage provider asks a lot of questions about down payment amounts and home equity before you structure your mortgage.

If you already are in a mortgage, get an annual checkup to make sure your mortgage is helping you to succeed financially, rather than helping the bank succeed.

If your mortgage is owned by Fannie Mae or Freddie Mac.  For most people, they have no idea who owns their mortgage – all they know is the servicer.  The Servicer of your mortgage is the bank that you send your check to each month.  They collect the escrow payments, chase down late payments, and send the owner of the mortgage their check each month.  Fannie Mae and Freddie Mac own most conventional mortgages in the US.  (Over $6 Trillion worth).

The Federal Housing Finance Agency has extended the government’s Home Affordable Refinance Program by 12 months.

HARP’s new end date is June 30, 2011.

Originally known as Making Home Affordable, HARP aims to help North Carolina homeowners refinance their mortgage who may otherwise be ineligible because of falling home values.

There are 4 basic HARP criteria every borrower must meet:

1. The existing home loan must be guaranteed by Fannie Mae or Freddie Mac.
2. Your home must be a 1- to 4-unit property
3. You must have a perfect mortgage payment history going back 12 months. No 30-day lates allowed.
4. Your first mortgage balance must be 125% or less of your home’s market value

If you’re not sure whether Fannie Mae or Freddie Mac back your mortgage, you can look it up. Fannie’s website is http://www.fanniemae.com/loanlookup; Freddie’s is http://freddiemac.com/mymortgage.  If you don’t locate your loan on either website, your mortgage is backed by a third-party and is not HARP-eligible.

For homeowners that meet HARP’s criteria, there are some underwriting details of which to be aware.

First, if your original mortgage does not require mortgage insurance, your HARP mortgage will not require it, either — regardless of your new loan-to-value.

Second, all HARP refinances require income verification. It doesn’t matter if your original mortgage was a stated income or no income verification loan. You should expect to produce 1040s and W-2s for your HARP refinance and asset statements, too.

And, lastly, second (and third) mortgages may not be “rolled in” to a new first mortgage loan balance. Junior lien holders must agree to remain in a junior lien position, regardless of combined loan-to-value.

There is a thorough HARP FAQ section on the government’s website, but it’s for general questions only. For specific Home Affordable Refinance Program information, first make sure you’re program-eligible, then pick up the phone to call your loan officer.

While this program hasn’t been too successful nationally, we have helped many, many homeowners in the Charlotte area over the past year with this program.  If the resources listed in the post aren’t enough to get you started, feel free to give us a call for more answers.

WARNING: This a graphic story of the financial destruction of an otherwise financially successful man.

Here’s a secret for you – your credit score will go down every time you do something that people did previously just prior to defaulting on their debts.  The credit scoring model is trying to predict the likelihood of you going 90 days or more late on an account.  If someone ever defaults on a debt, they leave clues well in advance of that default.

Here is the pattern of clues John left as he trashed his credit following a medical incident that left him out of work for a few months:

1. John needed some cash, so he applied for new credit.
2. Having a lot of equity in his house, John applied for a home equity line, but the application was denied since he wasn’t working.
3. With the financial pressure of medical bills and no income, John could no longer pay off his cards in full each month.  The amount owed starts to increase close to the limit on the cards.
4. Needing cash, he turned to alternative sources, getting a signature loan at a high interest rate.
5. He was late on a few credit card payments as the money just wasn’t there to make the payments on time and he was juggling the many open accounts.
6. Creditors turned over John’s accounts to collection agencies, who immediately notified the credit bureaus of the collections.  Collection agencies wanted to lower his credit score to prevent him from opening new accounts, leaving him with a greater chance of paying the collection agency off.
7. (Trying to sell his house didn’t help as the market was slow and declining, so his equity was disappearing).
8. John first went to a credit counseling firm and then eventually filed for bankruptcy.
9. Some debts were wiped out in the bankruptcy, and he just quit making payments on the remaining debts, feeling the situation was hopeless.
10. Creditors file suit and judgments get reported to his credit report.
11. Being unable to manage then debt load, he is late paying his taxes and a tax lien is filed in court against him.
12. Unable to even make his mortgage payment with the high costs of his other bills, the house is lost in foreclosure and all the equity in the house disappears in the soft real estate market.

John’s credit destruction was now complete after just a few tragic months.  The impact will last for years, as most of these items will impact his score and stay on his credit report for seven to ten years.

While this story is a myth, the events and results happen to good people every day.

Following the StartwiththeHouse.com strategy would have helped:

1. Always have an emergency fund – this would have tied John over during the short period when he wasn’t working.
2. Keep credit cards and other loan payments very low
3. Have proper insurance against all the threats out there – not just uninsured motorists, but illness, sickness, death or lawsuits as well.
4. Store your cash where is can be accessed.  In the above story, John had over $200,000 of equity in his house – but with no job, he couldn’t access it and lost his house in addition to destroying his credit.

Your mortgage can’t be just a loan to be hated – today it has to be an integral part of your overall financial plan to help you succeed financially.  Could you survive two months without work with the increased expenses of a health issue?  If not, what are you doing to make sure you have a different outcome?

Mortgage markets improved last week on domestic jobs data and international banking concerns. The news triggered buying in the bond market and, as a result, conventional, FHA and VA mortgage rates in North Carolina improved for the 4th consecutive week.

Mortgage rates are now at a 6-week low but probably shouldn’t be.  It underscores just how important global events can be to U.S. mortgage markets.

For example, corporate earnings continue to improve and key elements of the economy are strengthening.  Even the Federal Reserve acknowledges this.  In most circumstances, that would be a boon for the stock markets and bond markets would suffer, including mortgage bonds.

Last week, that wasn’t the case.

Early in the week, as (1) China tightened its monetary policy, (2) Greece did little to quell lingering default fears, and (3) Spain raised its deficit forecasts, global investors sought to reduce their collective risk exposure. For safety of principal, many sold some of their more aggressive positions and moved the cash proceeds into the U.S. bond market — which includes mortgage bonds.

On Wall Street, this type of trading pattern is called a “flight-to-quality”.  Because mortgage bonds are backed by U.S. government entities, the debt is considered to be ultra-safe.  Last week’s extra demand for bonds helped to push prices up and mortgage rates down.

And that was before Friday’s weak jobs report. Although the Unemployment Rate fell to 9.7%, the government reported a net loss of 98,000 jobs last month and this, too, helped mortgage rates tick lower.

This week, we’ll hope for momentum to continue.

There’s very little domestic news to move rates this week so keep an eye on the global market for similar stories like what we saw last week.  Or, if you’re not sure what to look for, just give me a call or send me an email and I’ll be happy to watch the markets and mortgage rates for you.

Know what you are working with!

If you haven’t seen your credit report in a while, get a copy now.  There is only one place for a truly ‘Free’ report – but it comes with a catch – www.AnnualCreditReport.com will give you a copy, but the catch is you have to pay for your score.  At this point, you don’t really need the score, but you can pay the extra money if you want to.

Other services (with catchy radio jingles) offer free reports, then try to sell you their service.  Use with caution.

When you get your report, you need to decide if you are in one of two camps:

1. I don’t have enough credit and need more credit history
2. I have very established credit history, and too much credit.

Your credit score will usually reflect the categories above – if you are below a 720-740 range, you need more or better credit history.  If you are above a 750, your score won’t improve further with more credit accounts, in fact, you probably have too many accounts to keep your score from getting even higher.

Credit scores range from 350-850

The lowest I’ve ever seen is in the 400’s, and I routinely see credit scores in the 800-810 range.  Above 820 is just luck.

What Score do you need?

• To buy a house with an FHA loan: 620 (Although the FHA says 580 officially)
• To buy a car:  700
• For a Jumbo Mortgage:  680-720
• Best rates on a Conforming mortgages: 740

Above a 740, credit scores are really just bragging rights, but the higher the score is, the more buffer you have in case something happens to your score. If you have an 810, for example, and a credit card payment gets lost in the mail, the late score won’t affect your home mortgage rate. However, if you have a 741, and then make a late payment, you will drop below 740, and then your mortgage rate would be higher.

Step One:

After getting a copy of your credit report – count the number of active “tradelines”, or active accounts that are on your report.

• More than 4 tradelines:  We’ll probably close some of them down.
• 4 or fewer tradelines: You will want to get some new credit.

Check back in a few days after you get your credit report copy and we’ll talk specific strategies for both groups.

1.       Do you pay your bills on time? The answer to this question is very important. If you have paid bills late, have had an account referred to a collection agency, or have ever declared bankruptcy, this history will show up in your credit report.

2.       What is your outstanding debt? If the amount you owe is close to your credit limit, it is likely to have a negative effect on your score.

• Keeping your credit cards balances at 20-30% of their limit is the fastest way to increase your credit score.

3.       How long is your credit history? A short credit history may have a negative effect on your score, but a short history can be offset by other factors, such as timely payments and low balances.

• Parents, help your children establish good credit habits – not using credit at all will hurt them as they get older and want to buy a house, so help them get credit when they turn 18, and then make sure they treat it with respect.

4.       Have you applied for new credit recently? If you have applied for too many new accounts recently that may negatively affect your score.

• The 10% you saved at a department store last month by opening a new account can lower your score.  If your score lowers just prior to buying a house or getting an auto loan, that 10% store savings is nothing compared to the cost of a lower credit score.

5.       How many and what types of credit accounts do you have? Many credit-scoring models consider the number and type of credit accounts you have. A mix of installment loans and credit cards may improve your score.

• When I see credit scores above 800, the owner of that score will never have more than two credit cards, one mortgage, and maybe a car loan.  To get an 800 credit score, you need to have used credit in the past, but now only use 1 credit card, pay if off every month, and close all the accounts you don’t use.
• Closing accounts is normally bas for your credit.  If you have a score below 720, this is usually true.  When you get a score above 750, closing old accounts will further increase your score.

Keeping your credit score above 740 is necessary in today’s economy. People with lower credit scores will pay more for home loans, car loans, cell phones, and it can even effect employment hiring, auto insurance and home owner’s insurance rates.