Mortgage by Randy
monthly update to our clients, colleagues, family & friends
By: Randy Mitchelson, January 2009
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In This Issue We Touch On:
Government Marketing Gimmicks
New FICO Model Puts Your Score at Risk
Real Life Example - Should I Refinance?
The era of hope and change is upon us as we officially transition to the Obama presidency this month. Faced with economic and confidence challenges of historic proportions, Obama has an uphill battle. Although a honeymoon period is inevitable where the stock market rebounds, Congress passes trillion (yes with a "t") dollar stimulus legislation under the banner of job creation, and interest rates and fuel prices float within consumer friendly ranges, the honeymoon will end and reality will smack us in the face. No one can say for sure when. An international crisis could hasten things (terrorist attack, escalation of Israel's actions, Pakistani use of nuclear weapons, etc).
The popular question these days is how long will this recession last? Most predictions you read will be wrong and only right by accident. However, it is safe to say that there is plenty of more bad news to come and despite government's best efforts to borrow and spend at unprecedented levels, it is pure market forces that will rule the day. Just as it took several years to reach this point, it will take several years to work out of it. Economics is cyclical just like the seasons of the year.
What does all this mean to you? First, if you have a job, make yourself indispensable so that you keep it. If you are out of work, take the steps necessary to get working, even if it means a cut in pay. Save money and lower your luxury expenses (Starbucks, plasmas) so you have a cushion to fall back on. Keep stashing money into your retirement plan and in the short term consider investment options that are cash and highly rated corporate bond focused. Ease into stocks and stock funds on days when the market is the big news because of big declines.
The current newsletter and all prior newsletters are archived at our blog space mortgagebyrandy.spaces.live.com. Bookmark it and share with your friends and family. You can enter your own comments and feedback as well. Time for the news...
Mortgage Market: Interest Rates Still Grabbing Headlines Thanks to Government Gimmicks
Mortgage rates are relatively unchanged since the last newsletter. However, based on headlines, you would be lead to believe that rates have continued on a sliding trend. The government entities that purchase many mortgages, like Freddie Mac and industry lobbyists like MBAA stole a marketing tactic from the banks to create the appearance of lower rates! They assumed points into their calculation of national average rates. The higher the points, the lower the rate. The desired outcome was achieved as mortgage rates are top of mind thanks to water cooler talk and nightly news stories.
Personal Credit: New Credit Score Formula May Impact Your Score
A more newsworthy headline that the media seems to have overlooked is that the formula is changing for how our credit scores are calculated. Remember hearing that in the news? Didn't think so, but you are getting the facts here. Starting this month, the 3 credit bureaus will begin offering lenders the latest formula from Fair Isaac (the company that owns the credit scoring formula commonly known as FICO). Fair Isaac says that the new score will do a better job predicting defaults than the current formula (used by more than 90% of US lenders). The new formula, called FICO 08, is more sensitive to your credit utilization and will penalize you even more if you use a high percentage of your available credit. Last month we explored the impact of banks slashing credit limits or closing your unused credit cards. FICO 08 will exacerbate the impact of these actions. Also, FICO 08 will be more harsh for consumers who have "thin" credit (i.e., not a lot of credit accounts).
It is not all bad news for consumers with FICO 08. Here are a few victories:
1.Small Collections: Unpaid medical bills and other small accounts under $100 will be ignored.
2.Serious Chargeoffs: FICO 08 will be more forgiving to consumers that have had a serious chargeoff IF their other accounts are in good standing (big if !).
3.Authorized Users: Despite massive efforts by credit bureaus to ignore "authorized users", consumer groups ultimately won this battle. Although there is corruption which goes on where people with good credit can "lease" their accounts to a person with bad credit for a fee, it was determined that the impact to spouses would be too severe. In other words, if the credit bureaus had their way, if a credit card was approved in a husband's name and the wife was listed as an authorized user, the account would not count toward the wife's credit score.
As always, if you need assistance navigating the sea of confusing credit report information, contact me about a credit analysis service where you can get a personalized action plan to manage to your credit.
Economy & Financial Insights: Lower Interest Rates Help Homeowners with Adjustable Rates
Last year we heard doomsday scenarios about how the housing crisis will be even worse in coming years as homeowners with various types of adjustable rate mortgages (ARMs) reach their first adjustment point. The rate indices used to do this forecast were much higher back then and have since declined significantly. In fact, homeowners facing a rate adjustment today are likely to see their payment decrease! By no means is this a cure to the housing woes. Due to job losses and risky investments in second and third homes, there are many people still facing foreclosure even if their rate is zero.
Nevertheless, market forces have once again trumped government action and the laws of supply and demand are helping the housing industry fight its way back to equilibrium. Housing inventory stills sits at about 12 months nationally and new foreclosures are hitting the market regularly. This piece of the housing puzzle will take a couple of years to be resolved.
For people who have saved for a home and managed their credit wisely and avoided carrying debt, this is a historically optimum time to purchase a home. Yes, you can get a loan and you have pick of the litter from all the homes on the market. These buyers are like kids in a candy store. Also, for investors with cash on hand this is also a great time to purchase depreciated homes for 50 cents or better on the dollar. In Southwest Florida, homes with boat access to the Gulf of Mexico can be purchased for $250,000 or less. Given the horrific winter this year, many Northerners are jumping at this chance to live the dream of relocating to paradise where they can fish, swim and sun year round in a state with no income tax, a commitment to "green" living, and baseball every spring.
Question of the Month: Should I Jump at an Offer to Refinance to 4.25% by Paying 2.125 Points?
This scenario was presented to me recently by a fellow alumnus from Rensselaer. It is a common scenario that homeowners face and although lowering your interest rate seems like common sense there is more to this scenario than meets the eye. A licensed mortgage professional should always perform a break even analysis for you to help with the decision making process. Guess what? Your bank will not do this. The break even analysis is useful once you have an answer to the all important question - how long do you plan on living in this house?
The table above displays the basic elements of this scenario. First, notice that that loan balance for the new loan would rise about $7000. This is due to closing costs of the new loan including the 2.125 points (do not be intimidated by points - it is simply a fee paid to the bank to lower your rate - and is just a percentage of the new loan amount - 2.125% x $277,000 = $5886). Second, notice that the new loan is only a 20 year term. This alone will lower the rate without paying points since the bank is taking on 10 fewer years of risk. The new loan will allow the borrower to save interest and build equity faster, but how long will it take to earn back the $7000 rolled into the new mortgage? The table tells us 46 months. If the borrower is a young couple planning to have children that will require a bigger home within the next 3 years, this is not a good deal. However, if the borrower sees themselves living here for a long time, then this could be a great option for them. Other factors to consider that are too detailed to explore here are:
1. Tax Implication: the new loan lowers your mortgage tax deduction
2. Retirement: the $7000 rolled into the new loan could be invested elsewhere a better rate of return
3. Flexibility: You can pay down your mortgage without refinancing by just sending a principal reduction payment, but by refinancing you are locked into that new higher payment
Giving Back: Supporting Our Communities - Free Money to Donate to College Fund
We all know about the constantly rising costs of college. You may have your own kids to plan for or you might have nieces, nephews, cousins or friends with kids. Have you visited Upromise.com? This service provides a way for you to turn your everyday shopping into college savings which you can assign to any child in your life. Even people without their own kids can use Upromise.com to donate college savings to their friend's kids. This service is free, easy and secure. If you have ever purchased something on the Internet you should definitely check this out.
Most of us already go online to shop at Barnes and Noble or order from 1-800 Flowers and by linking to these sites through Upromise.com you will earn these rebates. That's it! No special codes or downloads. There are offline earnings too like at Mobil, Staples and McDonalds. Rebates are there for the taking at restaurants in your area and you also earn money back for buying everyday groceries at supermarkets and stores like CVS. The list of participating stores is huge and continues to grow.
In this economy, who else is giving away something of value?
Need volunteers? Do you have a fundraising event upcoming? Do you have a personal web site where you are raising donations for your cause? Submit the information to randy@mortgagebyrandy.com by the 5th day of each month and we will do our best to include your information in the next issue.
Enjoy the pomp and circumstance of the inauguration as well as Superbowl XLIII.
Randy
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Mortgage by Randy newsletter, Copyright 2009 Randy Mitchelson. All Rights Reserved.
Randy Mitchelson is a licensed mortgage professional. All material presented herein is believed to be reliable but we cannot attest to its accuracy. All material represents the opinions of Randy Mitchelson. Recommendations may change and readers are urged to check with their financial advisors before making any decisions. Opinions expressed in these reports may change without prior notice. Mitchelson can be reached at 239-851-6738.
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You have permission to publish this article electronically or in print as long as the following is included:
Randy Mitchelson, of Estero, Florida, is a business professional, entrepreneur and author with 15 years experience in financial services. Mitchelson has served in leadership roles for Global & Fortune 500 firms like Bank of America, KeyBank and CIBC.
As a member of National Association of Mortgage Brokers, Randy has earned the Lending Integrity Seal of Approval. He educates both individuals and groups about credit scoring by conducting personalized credit report reviews, action plans and one on one consultations. He is author of the free monthly newsletter, Mortgage by Randy, accessible at mortgagebyrandy.spaces.live.com. A licensed mortgage professional, Mitchelson also founded Trinity Home Financing, LLC.
He is owner of Estero, Florida based National Web Leads, LLC (www.nationalwebleads.com), an Internet lead generation service matching consumer finance lenders with customers. Through its network of partners, National Web Leads, LLC delivers innovative Web 2.0 software solutions such as lead generation platforms and real time desktop widget and mobile reporting tools for internet marketers.
Mitchelson earned his BS and MBA at Rensselaer Polytechnic Institute in Troy, NY. He is a founding member and Finance Chairman of the Southwest Florida Regional Technology Partnership (www.swfrtp.org) and Strategic Planning Director for the Michelle's Angels Foundation (www.michellesangels.com). He is married to Susan, a Pharmacy Supervisor in the Lee Memorial Health System in Fort Myers, Florida.
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