Mortgage info and your Credit Score.
Looking to get a house? good stuff. I'm sure you going to start thinking about how many bed rooms and bathrooms you need. how much living space, how big you want the yard, where you want to be. school zones, distance to work. etc etc etc. that's part of the fun. But like I and some of my friends have found out, just because you WANT a house, even if you can AFFORD it doesn't mean the bank is going to give you the money.
4 years ago I wanted to buy a house (glad i couldn't in hind site, the market TANKED). I went to the bank and started asking lenders "hey, I'm a responsible guy, gimme some cash" and their response was almost always the same "you've got no credit kid". True statement, I never purchased anything on credit, if i wanted something I always saved up the money and paid in cash. why did i want to pay an extra 20% on something? so i had 0 credit (which oddly is worse than having BAD credit) so I had to find a way to boost my credit score. There are a number of ways of doing this.
- Get a credit card and use it a little (I did this, works nice. although i do caution DONT BUY WHAT YOU CANT AFFORD).
- Go to your bank and get a starter loan. this sounds idiotic on paper but bear with me. A starter loan (or secured loan) is a loan that is secured with your (or somebody else) money. So lets say you want a Starter loan for 500$. Ok, well you walk into the bank with 500$ and give it to them, then they give you a loan for 500$ and as you pay on the loan that money gets put back in your account. so in the end your just proving to the bank than you can sit on money and pay your monthly bills. (did this, worked well)
- Get a loan for something *ie. buy a car, and pay on the car loan* (did this, now I DID pay it off early, only AFTER I bought my house, which paying off the loan early doesn't help your credit nearly as much as paying on it monthly)
- DONT let bills go into collection
- DONT say "fuck it, I'm just not going to pay for this"
- DONT pay your bills late (because you can use years of paid on time accounts as an alternative line of credit)
- DO check your credit score every year. its free to check it once a year, do it.
- DONT cosign for somebody, unless you absolutely have to *my parents refused to cosign for me to get a house, i was pissed at first but now I'm glad i did it on my own*
I would like to mention a couple misconceptions about credit. Paying your non loan bills on time does NOT positively affect your credit score. I'm serious. You pay your mobile phone bill on time for 4 years and the credit agency's just do not care. they only raise an eyebrow when you CANT pay your monthly bills.... however. if your looking for a loan some agencys will let you use alternative lines of credit. (like your phone bill) but it has to be PERFECT. like one LATE payment in a 2 YEAR SPAN and you cant use it.
But what if i don't plan on getting a house? do I rely need to worry about my credit score?
you betcha, Credit scores are used when you need a loan, want to rent a house or apartment, even some jobs are running credit checks on people applying. (who wants to hire somebody bad with money?)
But I can still get a credit card or car loan even though I have no credit!
Ok, yes, dealerships are always advertising BAD CREDIT OK!, but they nail your ass to the wall with the interest rate. I don't know about you, but id rather have a 3.5% interest rate on my car than a 17%. that can be the difference of several thousand dollars. same deal with any loan. the better your score the lower the rate can go. ALSO works for credit cards, somebody with a mediocre credit score can get a credit card with 20% interest on it. again, id rather not pay 120$ for a 100$ item. but that's just me.
So back to the topic in the beginning. You've done everything right and gotten a good credit score, you were able to get a home loan locked in at a decent interest rate because your not a n00b and you are living it up.. good for you!
but lets take a look at that home loan.
your locked in at 5% interest but the bulk of your monthly payment *way more than 5%* is going to interest! what gives?
well, home loans you pay mostly interest up front, mainly because the bank is worried something is going to happen so they want to get their money from you first, so in the beginning most of your monthly payments are going straight to interest and not actually going into the equity of your home *that sucks*. but wait there is something you can do! pay EXTRA!
yea, that sucks, i know. but think about this lets say that your paying a monthly of 900$ and only 200$ of that is going to your principle. that means in 1 year you've only paid in around 2400 *it will be slightly more because with each payment a little more goes to principle and a little less to interest, but were talking a dollar and some change*. So what if you had an extra 2400$ lying around? *because i know SO many of us have 2400$ and NOTHING to spend it on* well you can toss is straight at your home loan and shave a full year off and save around 8,000 in interest. Now mind you, you wont notice this at ALL until your house is paid off. so you may be thinking to yourself *this isn't going to help me for 20+ years why should i do it?* well if you cant think more than 5 min in front of your face, just stop reading my blog, this isn't for you and I'll be glad to rent you one of my houses in 20 years, provided you have a credit score i find acceptable! ;).
Ok, most of us don't have big money to toss at a loan that wont end up helping us out for over a decade.. but you don't have to go big or go home in this case. just pay a little extra every month. if you can toss an extra 50$ a month at it you'll shave off years and save potentially tens of thousands.
I am getting a room mate as I type this and the money he is paying me to live here is not going to beer, its not going to a new car, its not going to shit i don't need. Its going to the principle of my home loan. If he lives here a year and i put it all into my house I'll shave off over 2 years and save around 14,000$. my goal is to keep paying around 100$ a month extra after he moves out and I should have my house paid off in 20 years instead of 30. why is this so important to me? in an earlier post i mentioned i retire in 20 years. I plan on having my house paid off by then. (even if i don't retire, Not having a house payment will be awesome)
Plans with in Plans. Short term goals giving way to long term goals. You must have both to survive financially. else one day your going to look around and wonder what happened.
I mentioned a while back about talking about ways to make more money, unless i get the urge to write something else I think that will be next. and I'm going to talk about 2 different types of Income, Active and Passive.
4 years ago I wanted to buy a house (glad i couldn't in hind site, the market TANKED). I went to the bank and started asking lenders "hey, I'm a responsible guy, gimme some cash" and their response was almost always the same "you've got no credit kid". True statement, I never purchased anything on credit, if i wanted something I always saved up the money and paid in cash. why did i want to pay an extra 20% on something? so i had 0 credit (which oddly is worse than having BAD credit) so I had to find a way to boost my credit score. There are a number of ways of doing this.
- Get a credit card and use it a little (I did this, works nice. although i do caution DONT BUY WHAT YOU CANT AFFORD).
- Go to your bank and get a starter loan. this sounds idiotic on paper but bear with me. A starter loan (or secured loan) is a loan that is secured with your (or somebody else) money. So lets say you want a Starter loan for 500$. Ok, well you walk into the bank with 500$ and give it to them, then they give you a loan for 500$ and as you pay on the loan that money gets put back in your account. so in the end your just proving to the bank than you can sit on money and pay your monthly bills. (did this, worked well)
- Get a loan for something *ie. buy a car, and pay on the car loan* (did this, now I DID pay it off early, only AFTER I bought my house, which paying off the loan early doesn't help your credit nearly as much as paying on it monthly)
- DONT let bills go into collection
- DONT say "fuck it, I'm just not going to pay for this"
- DONT pay your bills late (because you can use years of paid on time accounts as an alternative line of credit)
- DO check your credit score every year. its free to check it once a year, do it.
- DONT cosign for somebody, unless you absolutely have to *my parents refused to cosign for me to get a house, i was pissed at first but now I'm glad i did it on my own*
I would like to mention a couple misconceptions about credit. Paying your non loan bills on time does NOT positively affect your credit score. I'm serious. You pay your mobile phone bill on time for 4 years and the credit agency's just do not care. they only raise an eyebrow when you CANT pay your monthly bills.... however. if your looking for a loan some agencys will let you use alternative lines of credit. (like your phone bill) but it has to be PERFECT. like one LATE payment in a 2 YEAR SPAN and you cant use it.
But what if i don't plan on getting a house? do I rely need to worry about my credit score?
you betcha, Credit scores are used when you need a loan, want to rent a house or apartment, even some jobs are running credit checks on people applying. (who wants to hire somebody bad with money?)
But I can still get a credit card or car loan even though I have no credit!
Ok, yes, dealerships are always advertising BAD CREDIT OK!, but they nail your ass to the wall with the interest rate. I don't know about you, but id rather have a 3.5% interest rate on my car than a 17%. that can be the difference of several thousand dollars. same deal with any loan. the better your score the lower the rate can go. ALSO works for credit cards, somebody with a mediocre credit score can get a credit card with 20% interest on it. again, id rather not pay 120$ for a 100$ item. but that's just me.
So back to the topic in the beginning. You've done everything right and gotten a good credit score, you were able to get a home loan locked in at a decent interest rate because your not a n00b and you are living it up.. good for you!
but lets take a look at that home loan.
your locked in at 5% interest but the bulk of your monthly payment *way more than 5%* is going to interest! what gives?
well, home loans you pay mostly interest up front, mainly because the bank is worried something is going to happen so they want to get their money from you first, so in the beginning most of your monthly payments are going straight to interest and not actually going into the equity of your home *that sucks*. but wait there is something you can do! pay EXTRA!
yea, that sucks, i know. but think about this lets say that your paying a monthly of 900$ and only 200$ of that is going to your principle. that means in 1 year you've only paid in around 2400 *it will be slightly more because with each payment a little more goes to principle and a little less to interest, but were talking a dollar and some change*. So what if you had an extra 2400$ lying around? *because i know SO many of us have 2400$ and NOTHING to spend it on* well you can toss is straight at your home loan and shave a full year off and save around 8,000 in interest. Now mind you, you wont notice this at ALL until your house is paid off. so you may be thinking to yourself *this isn't going to help me for 20+ years why should i do it?* well if you cant think more than 5 min in front of your face, just stop reading my blog, this isn't for you and I'll be glad to rent you one of my houses in 20 years, provided you have a credit score i find acceptable! ;).
Ok, most of us don't have big money to toss at a loan that wont end up helping us out for over a decade.. but you don't have to go big or go home in this case. just pay a little extra every month. if you can toss an extra 50$ a month at it you'll shave off years and save potentially tens of thousands.
I am getting a room mate as I type this and the money he is paying me to live here is not going to beer, its not going to a new car, its not going to shit i don't need. Its going to the principle of my home loan. If he lives here a year and i put it all into my house I'll shave off over 2 years and save around 14,000$. my goal is to keep paying around 100$ a month extra after he moves out and I should have my house paid off in 20 years instead of 30. why is this so important to me? in an earlier post i mentioned i retire in 20 years. I plan on having my house paid off by then. (even if i don't retire, Not having a house payment will be awesome)
Plans with in Plans. Short term goals giving way to long term goals. You must have both to survive financially. else one day your going to look around and wonder what happened.
I mentioned a while back about talking about ways to make more money, unless i get the urge to write something else I think that will be next. and I'm going to talk about 2 different types of Income, Active and Passive.