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Reasons to Own #8 | Keeping Current Matters

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Our guest blogger for today is Carrie Van Brunt-Wiley, Editor of the HomeInsurance.com blog. The HomeInsurance.com blog provides tips for consumers on a wide variety of topics ranging from home maintenance to insurance shopping. – The KCM Crew

Your credit score and your insurance payments- what’s the connection?

You’re likely not surprised when your loan officer asks for your social security number- a thorough credit check is standard when applying for a loan. However, many consumers are caught off-guard when a homeowners insurance agent asks for their social security number. It’s widely debated, but quite commonly practiced- for an insurance carrier to use a customer’s credit score to determine their insurance premiums.

What does your credit score really mean to your potential insurance carrier?

While many businesses will use a consumer’s credit score to determine eligibility for a line of credit or to discern whether a deposit should be held for an advance of services, insurance companies actually perform a different type of credit inquiry that they use for a very different reason.

A Soft Credit Check

First and foremost, it’s important to know that when an insurance company runs your credit they are actually performing what is called a soft credit check which accesses only your credit score and is not reflected as an inquiry on your credit report. As you probably can surmise, this is different from a hard credit check that a lender, for example, may run which does show up on your credit report as an inquiry. Since credit inquiries from hard credit checks can hurt your overall score it’s good to limit these types of credit checks when shopping for a mortgage, for example. However, since insurance carriers only perform a soft credit check you can feel free to shop for multiple insurance quotes without worrying about hurting your credit rating.

What they use it for

Here’s where a lot of confusion, and sometimes even frustration, can set in from a consumer’s perspective. Once an insurance company has your credit score, they use it (along with many other factors about you and your home, car, etc.) to assign you an insurance score. This insurance score reflects your potential risk to the insurer.

The insurance carrier then takes your risk potential and calculates your premiums. The more risk you pose, the higher your premiums will most likely be. This is where the real question comes in:

What does poor credit history have to do with my potential to file a claim?

If you’re asking this question, you’re not alone.

There is much debate over the use of credit scoring as a way to determine risk, and therefore assign rates to insurance consumers. However, insurance companies defend the practice saying that studies have shown a direct correlation between a person’s credit score and their likelihood to file a claim. Therefore, consumers with a lower credit score often pay higher rates for insurance.

Whether you agree with the practice or not, qualifying for better insurance premiums is just one other way that you can save money by keeping a good credit rating.

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We are enjoying extremely low interest rates, for sure. With the global economy, the national economy and unemployment where they are, no one is predicting a dramatic change in rates any time soon. BUT, on Monday, the Obama Administration floated out some interesting proposals they are considering through the Acting Director of the Federal Housing Finance Agency (FHFA), Edward DeMarco. It appears that two significant changes in housing financing are on the table.

You should know that FHFA is the new regulator that is overseeing the restoration of viability of Fannie Mae and Freddie Mac. They are charged with reducing the risk on loans delivered to the GSEs in order to protect the U.S. taxpayer.

In a speech this past Monday, Mr. DeMarco mentioned two potential changes:

Increasing the role of the private sector to lessen the risk held by the public sector.

The method mentioned was increasing the insurance coverages assumed by the PMI (Private Mortgage Insurance) companies. One result could be higher insurance rates for loans where customers put less than 20% down. The second wrinkle is potentially more damaging…the idea that PMI coverage may be required on loans with 21%-25% (maybe even 30%) down! Clearly, this is an attempt to get more fee income to the MI companies to entice them to remain viable and continue to serve those with less than 20% down. Regardless, the net result is that more people will have to pay more money for private mortgage insurance. “How much?” and “To what extent?” is yet to be defined; however, more costs to more people is bad.

Adjusting fees.

Recognize that the GSEs charge fees. Explaining what they are and why they exist is a topic for a different day. Suffice to say, today, fees are fairly standard geographically speaking. Mr. DeMarco is talking about adjusting the fees (i.e., increasing them) for areas that have proven more risky. This proposal means the hardest hit areas will have the most difficult time recovering because the increased fees always get passed on to the consumer. Rather than “spread the risk”, FHFA is talking about punishing the defenseless.

The predictable outcome of these “strategies” is higher costs to the consumer which makes buying a home more expensive. As costs go up, desire to buy goes down (as does the borrower’s ability to be approved for a mortgage). 

Message: Buy sooner rather than later!

by Dean Hartman

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Sep
15

How To Pick Your Lender

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In the whirl wind that surrounds the home buying and mortgage process, how can a consumer be sure that they are working with the right lender? I mean there are so many choices…here’s some things to consider:

What type of company is it?

There are mortgage brokers, mortgage bankers and banks/credit unions. Mortgage brokers have been hamstrung by many of the recent regulatory changes and typically lack the actual ability to approve and/or lock a loan. Banks are usually limited in program choices and hamstrung by tighter underwriting. Mortgage bankers have the financial stability and direct lending capability of the bank coupled with the wide product menu and expertise of the mortgage broker. From a global perspective, I see mortgage bankers as a clear winner.

How does the company operate?

Many people are dismayed when they find out where their loan is processed or underwritten….or where the appraiser is from. It is important to work with a company (and their affiliates) who understand the nuances of your local market. Asking the questions up front can save you headaches down the road.

What about the individual loan officer?

Your relationship with your LO (and their processor) becomes the most important ingredient to a successful transaction. How well do they educate you about the process, the requirements…the factors that determine your approval or the interest rate you will get? Many LOs are “order takers”. Others are weak in follow up or communication. This is difficult to determine on your own which is why the referral from another person who used them or your real estate agent has far more value than most people know (until it’s too late).

Too many people stay focused on quoted rates and fees and neglect to see the whole picture of what is needed from a lender. Look for great communication, superior information and education, understanding of the local market and someone who looks at your application as something more than a number. Be prepared to pay a little more to get a better experience (even though it might not cost you any more)….in the long run, lowering stress can be more important.

By Dean Hartman

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Do you know how much to save or what debts to pay off first? This article clarifies in an easy to understand way exactly what needs to be saved and how to spend so that you make the most of your income!

MSN Money suggests…

Retirement, Part I: “Save 10% for basics, 15% for comfort, 20% to escape.” This rule of thumb works pretty well if you start to save for retirement by your early 30s. Saving at least 10% of your income ensures you won’t be eating pet food. Fifteen percent should get you a more comfortable living, while 20% gives you a shot at an early retirement (and yes, you get to count employer contributions as part of your percentage). Wait just a decade to start, though, and you’ll need 15% for basics and 20% for comfort; an early retirement may not be in the cards. For a more customized estimate of how much you need to save, check out MSN Money’s Retirement Planner.

Retirement, Part II: “Retirement money is for retirement; until then, keep your mitts off it.” There’s rarely a good reason to borrow against your retirement accounts, and almost never a reasonable excuse for cashing them out. Look elsewhere to find money to pay your debts or buy a home. Let your retirement money keep working for you undisturbed. Someday, you’ll be glad you did.

Student loans: “Your total borrowing shouldn’t exceed what you expect to make your first year out of school.” Many graduates have learned to their chagrin that student lenders will gladly loan you far more money than you can comfortably repay. Students and parents need to put their own limits on how deeply they go into debt, or they could face a literal lifetime of student-loan payments. Read “How much college debt is too much?” for more details.

College savings: “Saving for retirement is more important, but try to put at least $25 a month per kid in a college savings plan.” Your child can get student loans, but no one will lend you money for retirement. That’s why retirement comes first. But contributing even a small amount each month will help reduce the amount of debt your child eventually incurs. Thanks to recent tax law changes and reductions in fees, 529 college-savings plans have emerged as the best way for most parents to save. To learn more, read “How Uncle Sam wants you to save for college.”

Cars, Part I: “Buy used and drive it for at least 10 years.” This one rule of thumb easily could save you tens of thousands of dollars over your lifetime compared with what you would pay buying cars new and owning them just five years. Not only will you buy half as many cars, but you’ll avoid the 20% or so loss to depreciation that happens as soon as you drive a new car off the lot. Today’s cars are better built and will last longer than ever before, so buying used isn’t the gamble it used to be.

Cars, Part II: “If you must borrow to buy a car, follow the 20/4/10 rule.” Which means: Make a 20% down payment, don’t borrow for more than four years and don’t agree to a monthly payment that’s more than 10% of your income — or 8% if you plan to buy a home in the next few years. A substantial down payment ensures you’ll have equity in your car when you drive off the lot — which is important, since owing more on your car than its worth can leave you financially vulnerable if the vehicle is totaled or stolen. (Read “Close the gap in your car insurance” for more details.) Limiting the loan term and monthly payment will keep you from overspending.

Credit cards: “If you carry a balance, look for the lowest rate. If you don’t, get rewards at least equal to 1.5% of what you spend.” Your primary goal if you carry credit card balances should be paying them off as quickly as possible. That means avoiding reward cards, which tend to have higher interest rates, in favor of the lowest-rate card for which you qualify, given your credit history. But if you already pay off your balances in full every month, you should look for cards that give you cash back or reward equal to 1.5% or more of your spending (read “People who charge everything” for more details). Sites like CardRatings.com and Bankrate.com can help you sort through the offers.

Debt repayment: “Pay off maxed-out cards first.” When paying down credit card debt, the argument used to be between those who advocated paying the highest-rate card first (to save the most money) and those who argued for paying the smallest balance first (for a faster feeling of accomplishment that can motivate you to keep going). These days, though, you should first tackle any card that’s close to its limit, since maxing out cards hurts your credit scores and can trigger penalty rates and fees.

Mortgages, Part I. “If you can’t afford to buy the house using a 30-year fixed-rate mortgage, you can’t afford the house.” There are good reasons for choosing less traditional loans, but buying a house you couldn’t otherwise afford isn’t one of them. Too many people today are wrestling with foreclosure because they used an adjustable or interest-only loan to buy too much house for their means. Read “Who’s at most risk for foreclosure?” for the grim details.

Mortgages, Part II. “Fix the rate for at least as long as you plan to be in the home.” Lenders, brokers or real-estate agents may tout the low, low payments of adjustable-rate loans, but sooner or later those payments will jump — sometimes substantially. Protect your family and your investment by opting for a loan with a fixed-rate period that matches how long you expect to live there. If you’re sure you’ll move in five years, for example, a five-year hybrid is a good option. If you think you’ll stay put for 10 years or more, you might just go for the certainty of the 30-year fixed.

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