Credit Utilization Affects Your Score

Credit utilization reflects how much of your available credit is being used at a given time.  Lower credit utilization indicates that a borrower is not heavily relying on their credit and that they are using their credit responsibly.

Is calculated by dividing your total credit card balances by your total limits.  The higher the percentage, the higher the risk which adversely affects the credit score according to most of the companies.  It is recommended that your credit utilization be under 30% to positively impact your credit score.

If the available limit on a credit card is $12,000 and their normal monthly balance is around $3,000, they have a credit utilization of 25%.  If for whatever reason, the borrower's available limit was reduced to $6,000, and their long history of having a monthly balance of $3,000, the ratio, then, increases to 50% which will likely lower their credit score.

For borrowers who use more than 30% of their available credit and regularly pay off the bill each month, they should consider making payments toward the balance more frequently, like every two weeks.  This keeps the balance lower, and, in many cases, the card issuer will only report the credit activity once a month to the credit bureau, usually on the monthly closing date of the account.

Another option may be to use multiple cards, if they are available, for the purchases during the month.  Based on the limits of each card, this could result in lower utilization on a single card.

You could also ask for your available credit to be increased.  Assuming you have a good history of paying on time, this may be an easy fix.  Before doing this, ask if it could negatively impact your credit score because it will be reported as a hard inquiry on your credit.

If you are trying to improve your score to qualify for a mortgage, consult with a trusted mortgage professional who can advise you specifically for your situation.  If you would like a recommendation, please contact meBill@BillFlagg.com.

Larger Payment, Shorter Term, Bigger Savings

Some people consider a house payment as basic as monthly utilities but with a plan and some discipline, you can be mortgage free.

Consider a person borrowed $300,000 at 3% for 30 years, the principal and interest payment would be $1,264.81 and at the end of 12 years, the unpaid balance on the mortgage would be $210,900.

If that same person had financed the home on a 15-year term at 2.5%, the payments would have been $2,000 but the unpaid balance at the end of 12 years would be $69,310.  The homeowner will have a larger equity but they have also had to make higher payments.

15-year mortgages usually have a lower interest rate than the 30-year loans and at the time this article was written, the difference in a 30-year loan was about 0.5%.  A 15-year loan gives the lender their money back in half the time.  If rates go up during the interim, they will be able to loan it at the higher rate sooner.  For that reason, they are usually willing to offer a slightly lower rate on the shorter term.

Having a lower rate means paying less interest but another remarkable thing happens, lower interest rate loans amortize faster than higher rate loans.

	30-year	15-year
$300,000 mortgage for 30 years	3%	2.5%
Monthly payment	$1,264.81	$2,000
Unpaid balance at end of 12 years	$210,900	$69,310
Increased equity		$141,590
Additional monthly payment		$735.56
Additional total payments for 12 years		$105,920
Savings		$35,670

This recognized wealth building technique with higher payments, saves interest and retires the mortgage sooner.  The shorter-term mortgage requires a commitment to make the higher payments each month rather than giving the borrower flexibility to spend or invest the difference each month for as long as the loan is in place.

To make you own calculations, go to the 30yr vs. 15yr Comparison.

Have you checked these lately?

Homeowners know the need to periodically check certain things around the home to ensure that things operate properly and efficiently.  If maintenance is required, it may be less expensive to take care of it early rather than waiting until it is not working at all.

Checklists are helpful because it requires little effort to know what must be done.  They are usually concise and provide enough information to complete the task.  These items apply to most homeowners but in no way offer a comprehensive list.

1. Vacuum dryer exhaust ... not only does it affect the efficiency of your dryer itself, the accumulation of lint along with the hot air can ignite and create a fire hazard.
2. Replace HVAC filters 4 to 6 times a year ... This is one DIY project that almost everyone should feel confident in handling.  Locate the filter, make a note of the size, and keep replacements available.  Turn off the unit, open the door or housing, remove the dirty filter, and replace it with the new one.  Pay attention to the direction of the air flow; filters are marked to indicate the correct direction.
3. Test all GFCI breakers. - GFCI breakers, as well as outlets, have a test button on them.  Pressing the test button should cause the breaker to trip which shuts off all power to the entire circuit.  To reset the breaker, push it completely to off and then, back to on.
4. Vacuum refrigerator coils ... Coils on refrigerators can be in different places depending on the model and manufacturer.  Locate the coils and clean the dirt and dust from them using a soft bristle brush or a vacuum cleaner with a brush.
5. Replace batteries in smoke detectors ... smoke detectors should be tested monthly by pushing the test button.  Annually, the batteries should be replaced, even if they appear to still have life in them.  After replacing the batteries, test the smoke detector to see if it is functioning properly.
6. Check windows and doors for leaks ... There are several ways to check for leaks.  One method used on a cold day would be to hold your hand a few inches from the window or door frame to feel for drafts.  Another method would be to light a candle and trace the outline of the window or door to see if the flame or smoke pull in one direction, indicating an air leak.
7. Inspect all sprinkler system stations to see if heads are leaking or need adjusting. ... Manually, turn on each of the stations and look at each sprinkler that is running to see if it is leaking or if it is properly covering the area intended. 
8. Check garage door opener to see that safety features engage properly ... Place a cardboard box in line of one of the sensors before trying to close the door.  The door should reverse itself after sensing the obstruction.
9. Check and clean fireplace(s) annually, if used ... this may be a job that you want to have someone else do but you may be able to recognize indicators that the chimney needs cleaning.  These things include evidence of birds or animals; fireplace smells like a campfire; smoke fills the room; difficulty starting or keeping a fire going; the fireplace walls have oily marks; the damper is black with soot and creosote. The frequency of use on wood burning fireplaces will impact the need for cleaning.

If you need a recommendation of a service provider for repairs, contact me Bill@BillFlagg.com with what you are looking for.  I'll get back to you quickly.

Uncle IRRRL wants to refinance your VA loan

You don't have to have an Uncle IRRRL but you must be a veteran with a current VA-backed home loan. IRRRL is an acronym for Interest Rate Reduction Refinance Loan. To refinance with this program, also called the VA Streamline, the loan must provide a net tangible benefit (NTB) which would be in the financial interest of the Veteran. 

Obtaining a lower interest rate is usually the reason behind refinancing but there needs to be enough difference in the current and the new mortgage to justify the expenses incurred.  Significantly lower payments or a shorter term are examples of acceptable benefit.

The Veteran must currently have a VA-backed home loan to refinance using this program.  The Veteran does not have to currently live in the home as long as it can be certified that he or she did at one time.

In most cases, an appraisal is not necessary and less verifications are required.  A minimum 640 credit score is needed, and borrower must be current on their payments with no 30-day late payments in the previous 12-months.  A two-year employment history is required.

There are expenses associated with the IRRRL but they can be rolled into the loan balance.  The VA funding fee, required on new VA loans for purchases or refinances is lower on the IRRRL at 0.5%.  Disabled Veterans and qualifying surviving spouses refinancing under this program are exempt from the VA funding fee.

This program is not available for a cash-out refinance.  There is a $6,000 exception for additional funds to pay energy improvements completed 90-days prior to closing.  Your lender can provide more information for you.

If you are a Veteran and considering a refinance, ask your mortgage professional about this program.  If you need a recommendation of a trusted mortgage professional who is experienced in VA loans, give me a call at (908) 603-8040 or Bill@BillFlagg.com.

Buy Before You Sell Options

The decision to buy first or sell first, has always been a little of the "Which came first: the chicken or the egg?" type of question.  Is it better to buy another home before you sell your current one or sell the current one before you buy the replacement?

Some buyers don't have a choice because they need the equity out of the current home to purchase the new one and possibly, their income limits their ability to qualify for having both mortgages at the same time.  However, some buyers, with sufficient financial resources, may have other options available to facilitate the move.

A home equity line of credit, HELOC, is a type of loan that a traditional lender like a bank will loan up to the difference in what is currently owed on the home and 75-80% of the value.  A borrower is approved for the line of credit and then, can borrow against it as needed. 

A homeowner with sufficient equity, would want to secure a HELOC prior to contracting for the new home.  Typically, the interest will be due monthly.  When they sell the home, the loan would be paid off along with any other liens on the property like the first mortgage.

A bridge loan is different in that it is usually a specific amount of money for a short term used to "bridge" the time frame necessary to acquire the replacement property and sell the existing home.  The amount available is like the HELOC, usually, up to 80% of the home's value less the existing mortgage.

Some lenders may require being in the first position which may require retiring the existing first from the proceeds from the bridge lender.

Hard money lenders are a little more flexible in some of their requirements compared to typical lenders, but it comes at a cost.  They could charge two to three percent, called points, of the money borrowed paid up-front and the interest rate will be higher than long-term mortgage money. 

Another alternative is to find a conventional lender who has a program that allows you to recast the loan in a specified period.  The borrower would get a low-down payment mortgage on the replacement home and after the original home is sold and funded, the lender will apply the lump sum toward the principal amount owed and recalculate the payments and amortization schedule.

By recasting the loan, the borrower does not go through the process of getting a new mortgage by refinancing and saves the costs involved.  Most conventional loans and conforming Fannie Mae and Freddie Mac loans allow it after 90-days.  FHA, VA, GNMA loans do not allow recasting.

Borrowers with 401(k) retirement accounts may consider borrowing against that asset which could be a lower interest rate than other temporary options.  Depending on the size of the 401(k), the amount available to borrow could be up to half the balance or $50,000 whichever is less.   If the loan isn't repaid in a timely fashion, there can be taxes and penalties.

In each of these options, the seller is involved in borrowing money to accommodate a purchase and sale of a home.  There will be expenses involved but the advantage is that they have a better chance of realizing most of their equity while facilitating a purchase before they sell their home.  This is particularly helpful in markets that are low in inventory.

One last options is to consider selling your existing home to an iBuyer or private investor.  The attraction to this alternative is that they will make you an instant offer, buy your home and you'll have cash to use to purchase your new home.  These companies or investors, intend to resell the property, so they must discount the price they pay for your property taking into mind they will be responsible for repairs, maintenance, selling fees and other expenses.

While it may sound appealing, you may discover that the amount you will realize will be less than if you sell your home in a conventional manner.

Your real estate professional will be able to do a comprehensive market analysis to indicate market value and the net proceeds you can expect to have.  This will assist you in determining which option makes sense for you at this time.  They can also recommend lenders and approximate timelines for each alternative.