Average Consumers: Fico Score Too Low for Good Rates
Your FICO score determines the interest rate you’ll pay for a home mortgage or a car loan – the higher the score, the better the rate offered. But the minimum score to obtain the best rates has gone up, while the average consumer’s score has remained static.
According to John Ulzehimer of Credit.com, the average credit score is 690. Not long ago, consumers only had a short jump – to 720 – to receive the best interest rates. Many could accomplish that by removing errors and making a few changes in their credit usage.
No more. As we head into 2009 the minimum score to get the lowest interest rate on a 30-year fixed rate mortgage is 760, while a 15-year home equity loan requires a score of 740. You can still get the best rates on a 36-month auto loan with a score of 720.
Attaining these scores will take a bit more effort on the part of consumers, but is well worth the time and trouble for anyone contemplating the purchase of a car or a home.
The very first step is to get a copy of your credit report – with scores. The “scoreless” reports that Experian, Equifax, and Trans Union are required to provide each year are useful, but limited. If you don’t know where you stand now, you won’t know how far you need to go.
Upon receiving your reports, look first for errors. According to a 2004 study from the U.S. Public Interest Research Group, 25% of all credit reports have an error that could result in a lower credit score.
When you find an error, contact each company reporting it and follow their procedures for getting it removed. And be polite – remember that while a data entry error can occur at any time, they’re probably just reporting data that’s been supplied to them.
One error you might see is an incorrect address. This is a red flag that signals possible identity theft, so investigate immediately. If identity theft has occurred, you’ll need to report it and get started repairing the damage as fast as possible.
While you’re working on these steps, do begin taking other steps to raise your scores. This includes paying down existing debt, asking creditors for increased credit lines, and even “piggybacking” with someone who has a very high score.
“Piggybacking” was eliminated under the original provisions of FICO 08, but has returned due to uproar from consumers. Piggybacking simply means being added as an authorized user on someone else’s credit card account – so that their information from that account is added to your credit report. Parents have long used this method to assist children in building a credit record.
Be sure to check your FICO scores regularly to see how you’re doing – and wait until you attain the higher scores before you apply for that mortgage or car loan.
Mike Clover
http://www.articlesbase.com/finance-articles/average-consumers-fico-score-too-low-for-good-rates-713155.html
Are Option ARM loans REALLY as bad as everyone talks about?
We are looking at this option to better utilize extra cash to pay off some consumer debt (that cannot be included in the refinance) but people are so negative about it. We are going with an option ARM and WILL be making the full amortization payment (based on a 40 year loan). We are going to be using the 12MAT program (I can’t seem to get enough information on this) but it appears to be relatively stable based on the 12-month Treasury Average. I understand about the "interest only" payment and are fully avoiding that. We can’t go with a decent fixed rate due to our income to debt resulting in a 680 FICO score. Will our plan, we should be able to pay off most of the consumer debt in 2 years then refinance into a fixed rate. Does this sound like a realistic plan. With paying as we will (fully 30 year), does this loan have a chance for negative amortization? Believe me, we have learned our lesson on using credit cards and taking out loans.
We own our house, valued at 700K and have 1 mortgage, HELOC and the consumer debt. We want to combine the 1st and HELOC to lower our payments to start paying off our debt (which cannot be added to the refi). The lender will let us borrow up to 95% of the value of our home. Again, what is so bad about Opt ARM when you can make a fully amortizing payment?
The problem is buying more house than you can afford with adjustable rates. You have consumer debt and are already thinking of refinancing before you even buy.
Refinancing is very expensive and in two years you may not have a job or your credit could be trashed for some reason, you house value could be down. Buying a house on an ARM for 40 years especially when you have the option to pay interest only is very high risk.
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They are only bad if you want to keep your home .
If you don’t mind being homeless in a few years ,
(or going back to an apartment )
Go for it !
>
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Sounds like you have it backwards. You are badly in debt and want to buy the house NOW?!??!!
Pay off your debts, THEN buy the house.
NEVER go for an ARM. What happens when the rates go up? (we’ll refinance) Well, what if you get injured or lose a joba and CAN’T refinance? What if your plans fall through and you DON’T pay off the debt and CAN’T refinance? What if both cars break down and the roof leaks?
Get in a good financial position with a good credit score first, THEN think about buying a house.
Note that you don’t BORROW your way out of debt. You don’t do a REFI to pay off credit cars. You really want that anniversary dinner you charged last year to be payed off over the next 15 years?!?!?! YIKES. Very poor financial judgement here.
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Be very careful of what you are getting into. I am a mortgage broker myself and know something about how these option arms work. While the media are declaring that the subprime loans are the problem for our housing crisis, I believe the option arm loans are a big contributer, not just the 2/28 or 3/27 loans. Normally an option arm has 4 options: 15 year fully amortized, 30 year fully amortized, interest only, minimum payment. The interest only payment is not bad as long as you make sure you pay exactly what they tell yo for the interest payment. The biggest danger is in making the minimum payment. It depends on the size of the loan and the "true" interest rate (index+margin), which is adjustable. The true interest payment may be around 7% but the minimum payment only requires you to pay somewhere between 1-3%. The extra 4-5% that you are not paying gets added to the loan balance which can be $1,000 or more per month. The biggest danger is the re-cast amount, which is normally 115% or 110% or the original loan amount. So for instance, a $500,000 loan would have a recast amount of $575,000 (115%). If the minimum payment was 2.5% the paymment would be $1041.66/mo, and if the "true" interest rate was 7.5% the payment would be 3125.00/mo just to cover the real interest amount due each month. The difference between the two is $2083.00. That $2083 is the amount short to cover the real interest due and it adds to your loan balance. After a year your loan will have increased $24,996! Remember your original loan was $500k and the recast amount is $575k. In three years you will hit the recast amount. At that point the loan will be "re-amortized" for the remaining 27 years at the true full amoriztized (not just interest only) interest rate (whatever it may be at the time because it is adjustable. But just say it was still 7.5%. Now your loan is $575,000 for 27 years remaining, the payment required will be $4144.22. The new payment is 4X what the original "minimum payment" was. Be very careful. Loan officers love these because they show you how much you can lower your payment and they make a very good commission from them. I have never done one myself after I explained to my clients the potential problems. Don’t make the minimum payment unless you know exactly how much you are going to be adding to your loan each month. Good luck to you!
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