Monday, September 17, 2007

About Interest Rates & Credit Scores

Here is an article I found interesting. It basically states that your interest rate is based more on what your loan to value (LTV) is, rather than your credit score. The article focuses on home equity loans and lines of credit. I do firtst mortgages, I constantly hear people complain that the rate I am offering them is because of their credit. It is as often a case that they are combining a high LTV (80% or above), the loan purpose, and credit scores...in that order.

The less equity you have in your home, the higher the rate on your loan. If you are purchasing a home, using 100% financing is going to yield the highest interest rate and PMI. Putting at least 5% down will give you a better rate and 20% down will avoid the PMI altogether. The reason behind this is proven by statistics. The higher the LTV the more likely the loan is to default. Think about it. If you buy a home at 100% (no down payment) and you start to have issues making payments, if you have nothing into the home, the easier it is to walk away.

Loan purpose makes a big difference on rates. If you are refinancing and only refinance your current balance plus closing costs, the rate you will receive will be better than if you cash out for debt consolidation or home improvements. Combining a cash out refinance and a high LTV (80% is again the magic number) the better the chance your interest rate will increase.

Your credit score is next on the list. A score of 620 or more traditionally will get you an approval. The higher the score the more likely you are going to get a better interest rate.

So what do you do if you have a high LTV, a need to consolidate credit card debt, and a low credit score? Don't panic. Other aspects of your loan file can help offset your weaknesses. Providing your lender with assets can make a huge difference on your credit score. If you have other bank accounts, give your lender the last two months. Provide your most recent 401k or equivalent to your lender. Does your life insurance have a cash value? If so, provide that too.

The above article also references knowing the details of credit cards. Check out the Discover card that is on this page. Discover offers good cards, at decent rates, and offer cash back on your purchases. Good deal all the way around.

Also if you are wondering what your credit score is, check out the Equifax ad right beside the Discover Card ad on my page. If you do pull your credit and have any questions...feel free to contact me, I'd be happy to answer any questions you may have.

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