Squandered Equity

Appreciating prices in real estate is a good thing if you control the situation. It does a homeowner no good to be in an environment where real estate is appreciating at rapid rates and financially your are not able to benefit.

In the past, we have been relying on the “market” to benefit from the purchase of a home. Now more than ever, we must take control of our financial situations to make sure that when there is a negative change in the market, we do not become victims.

When you rely solely on the market, your are allowing outside forces to have a major affect on your financial destiny. If an event happens that has a negative affect on your neighborhood, you will be adversely affected if you are relying on the market to increase the value of your property.

Buyers and current homeowners must take control of their financial situations and be aggressive in all phases of the mortgage process. The penalty of the wrong mortgage can be devastating.

Don’t be an impulse buyer. Plan your purchases. Make sure that you are getting the best rate. The best way to get the best rate is to know your credit score. Credit scoring was created by the Fair Isaac Corporation (FICO) in the 1950’s but became widely used in the credit industry in the early 2000’s.

The current credit score range is 300 to 850 which is divided into five (5) risk categories:

  • 780 to 850—low risk
  • 740 to 780—medium to low risk
  • 690 to 740—medium risk
  • 620 to 690—medium high risk
  • 620 and below—high risk

The score that you have today can change drastically tomorrow when a positive or negative item is reported. The following are a few things that can make positive changes to your score:

  • make all payments on time
  • do not max out your credit card—a 50% of maximum is recommended
  • do not create unnecessary credit accounts

Use your score to research the market to get the best rate. If you can not get the rate that you feel you need, do what is necessary to get your score to the level that will get you the rate you desire. I recommend that you read the book Credit Scores & Credit Report by Evan Hendricks.

It is the mortgage that has the most impact on your appreciation, so it is in your best interest to keep that mortgage in check and under control. It is your credit score that controls your mortgage. The lower your credit score the higher your interest rate and the higher your payment.

The difference in payment on a $200,000 mortgage between a 600 FICO score and a 700 FICO score can be as much as $240.00 per month or $2,880.00 per year or $86,400 over the life of the loan.

FICO Score    | Interest Rate     | Payment

760 to 850     | 5.677%                | $1,169

700 to 759     | 5.989%                | $1,198

660 to 699     | 6.272%                | $1,234

620 to 659     | 7.081%                | $1,342

580 to 619     | 7.784%                | $1,438

500 to 579     | 9.070%               | $1,619

*similar comparisons can be view at www.myfico.com

While your home is appreciating in value, your negative credit habits are eating away at your equity. Higher interest means that over the life of the loan you will pay more.

While deferred maintenance and late fees eat away at your equity, it is the credit score that has the most affect. If you are 30 days or more late on any debt, it will lower your score, when that debt is reported to the credit bureau.

So start today by getting a FREE copy of your credit report from the three (3) major credit bureaus at www.annualcreditreport.com . The free report does not contain your score, but you can review the report and the necessary forms to make corrections are attached.

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