Real Estate Louisville REALTOR Theresa Weed

Why is an appraisal required?

An appraisal is an estimate of the value of a property. An estimate of the value of the property generally refers to its fair market value. The purpose and use of appraisals include transfer of ownership, financing and credit, taxation, condemnation, insurance and many others.

An appraiser is typically a state-licensed individual trained to render expert opinions concerning property values.

Authorized by Congress, The Appraisal Foundation sets minimum standards for licensed appraisers. The Foundation is the parent organization of the Appraiser Qualifications Board (AQB). States are required to implement appraiser certification requirements which are at least as rigorous as those issued by the AQB. Certified General Appraiser and Certified Residential Appraiser.

The AQB has issued criteria for the Certified General Appraiser and Certified Residential Appraiser. Each has education, experience, examination and continuing education requirements. Consider working with either a Certified General or Certified Residential Appraiser.

The appraiser considers three approaches to value when arriving at an opinion: sales comparison approach (formerly the market data comparison approach), cost approach and income capitalization approach. When evaluating single-family, owner-occupied properties, the sales comparison approach is most heavily weighted by an appraiser. This approach compares the subject property with other similar properties in the vicinity which have sold or are for sale. Real estate professionals also rely heavily on this approach.

Real estate agents approximate the appraisal process by conducting a Comparative Market Analysis (CMA), using the sales comparison approach to value. The accuracy of the agent's appraisal depends on the experience and skill of the agent. The CMA is not an officially recognized appraisal.

Most lenders will not lend money without an acceptable appraisal. You can be sure you are getting an expert appraisal when the appraiser is licensed or certified and is governed by the Competency Provision of the Code of Ethics of the Uniform Standards of Professional Appraisal Practice (USPAP), proclaimed by the Appraisal Foundation.

Credit Repair

You see the advertisements in newspapers, on TV, and on the Internet. You hear them on the radio. You get fliers in the mail. You may even get calls from telemarketers offering credit repair services. They all make the same claims:

"Credit problems? No problem!"
"We can erase your bad credit -- 100% guaranteed."
"Create a new credit identity legally."
"We can remove bankruptcies, judgments, liens, and bad loans from your credit file forever!"

Do yourself a favor and save some money, too. Don't believe these statements. Only time, effort, and a personal debt repayment plan will improve your credit report.

This document explains how you can improve your credit-worthiness and lists legitimate resources for low- or no-cost help.

The Scam

Everyday, companies nationwide appeal to consumers with poor credit histories. They promise, for a fee, to clean up your credit report so you can get a car loan, a home mortgage, insurance, or even a job. The truth is, they can't deliver. After you pay them hundreds or thousands of dollars in up-front fees, these companies do nothing to improve your credit report; many simply vanish with your money.

The Warning Signs

If you decide to respond to a credit repair offer, beware of companies that:

Want you to pay for credit repair services before any services are provided;
Do not tell you your legal rights and what you can do yourself for free;
Recommend that you not contact a credit bureau directly;
Suggest that you try to invent a "new" credit report by applying for an Employer Identification Number to use instead of your Social Security Number;
Advise you to dispute all information in your credit report or take any action that seems illegal, such as creating a new credit identity. If you follow illegal advice and commit fraud, you may be subject to prosecution.

If you provide false information while using the mail or telephone to apply for credit, you could be charged and prosecuted for mail or wire fraud. It's a federal crime to make false statements on a loan or credit application, misrepresent your Social Security Number, or obtain an Employer Identification Number from the Internal Revenue Service under false pretenses.

Under the Credit Repair Organizations Act, credit repair companies cannot require you to pay until they have completed the promised services.

The Truth

No one can legally remove accurate and timely negative information from a credit report. If you wish to dispute information contained in your credit report, the law allows you to request a reinvestigation of the information in question. There is no charge for this. Everything a credit repair clinic can do for you legally, you can do for yourself at little or no cost. According to the Fair Credit Reporting Act:

You are entitled to a free copy of your credit report if you've been denied credit, insurance or employment within the last 60 days. If your application for credit, insurance, or employment is denied because of information supplied by a credit bureau, the company you applied to must provide you with that credit bureau's name, address, and telephone number.
You can dispute mistakes or outdated items for free. Ask the credit reporting agency for a dispute form or submit your dispute in writing, along with any supporting documentation. Do not send them original documents.

Clearly identify each item in your report that you dispute, explain why you dispute the information, and request a reinvestigation. If the new investigation reveals an error, you may ask that a corrected version of the report be sent to anyone who received your report within the past six months. Job applicants can have corrected reports sent to anyone who received a report for employment purposes during the past two years.

When the reinvestigation is complete, the credit bureau must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the credit bureau cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the credit bureau gives you a written notice that includes the name, address, and phone number of the provider.

You also should tell the creditor or other information provider in writing that you dispute an item. Many providers specify an address for disputes. If the provider then reports the item to any credit bureau, it must include a notice of your dispute. In addition, if you are correct, that is, if the information is inaccurate, the information provider may not use it again.

If the reinvestigation does not resolve your dispute, have the credit bureau include your version of the dispute in your file and in future reports. Remember, there is no charge for a reinvestigation.

Reporting Negative Information

Accurate negative information generally can be reported for seven years, but there are exceptions:

Bankruptcy information can be reported for 10 years;
Information reported because of an application for a job with a salary of more than $75,000 has no time limitation;
Information reported because of an application for more than $150,000 worth of credit or life insurance has no time limitation;
Information concerning a lawsuit or a judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer; and
Default information concerning U.S. Government insured or guaranteed student loans can be reported for seven years after certain guarantor actions.

The Credit Repair Organizations Act

By law, credit repair organizations must give you a copy of the "Consumer Credit File Rights Under State and Federal Law" before you sign a contract. They also must give you a written contract that spells out your rights and obligations. Read these documents before signing the contract. The law contains specific protections for you. For example, a credit repair company cannot:

make false claims about their services;
charge you until they have completed the promised services;
perform any services until they have your signature on a written contract and have completed a three-day waiting period. During this time, you can cancel the contract without paying any fees.

the payment terms for services, including their total cost;
a detailed description of the services to be performed;
how long it will take to achieve the results;
any guarantees they offer;
the company's name and business address.

Have You Been Victimized?

Many states have laws strictly regulating credit repair companies. States may be helpful if you've lost money to credit repair scams.

If you've had a problem with a credit repair company, don't be embarrassed to report them. While you may fear that contacting the government will only make your problems worse, that's not true. Laws are in place to protect you. Contact your local consumer affairs office or your state attorney general (AG). Many AGs have toll-free consumer hotlines. Check with your local directory assistance.

For More Information

You can file a complaint with the FTC by contacting the Consumer Response Center by phone: toll-free 1-877-FTC-HELP (382-4357); TDD: 202-326-2502; by mail: Consumer Response Center, Federal Trade Commission, 600 Pennsylvania Ave, NW, Washington, DC 20580; or through the Internet, using the online complaint form. Although the Commission cannot resolve individual problems for consumers, it can act against a company if it sees a pattern of possible law violations.

Credit and Your Consumer Rights

A good credit rating is very important. Businesses inspect your credit history when they evaluate your applications for credit, insurance, employment and leases. Based on your credit payment history, businesses may choose to grant or deny credit, provided you receive fair and equal treatment. Sometimes, things happen that can cause credit problems: a temporary loss of income, an illness, even a computer error. Solving credit problems may take time and patience, but it doesn't have to be an ordeal.

The Federal Trade Commission (FTC) enforces credit laws that protect your right to obtain, use, and maintain credit. These laws do not guarantee that everyone will receive credit. Instead, the credit laws protect your rights by requiring businesses to give all consumers a fair and equal opportunity to receive credit and to resolve disputes over credit errors. This document explains your rights under these laws and offers practical tips to help you solve credit problems.

Your Credit Report

Your credit payment history is recorded in a file or report. These files or reports are maintained and sold by consumer reporting agencies (CRAs). One type of CRA is commonly known as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance, or a job. Your credit record contains information about your income, debts, and credit payment history. It also indicates whether you have been sued, arrested, or have filed for bankruptcy.

The Fair Credit Reporting Act(FCRA) is designed to help ensure that CRAs furnish correct and complete information to businesses to use when evaluating your application.

Your rights under the Fair Credit Reporting Act:

You have the right to receive a copy of your credit report. The copy of your report must contain all of the information in your file at the time of your request.
You have the right to know the name of anyone who received your credit report in the last year for most purposes or in the last two years for employment purposes.
Any company that denies your application must supply the name and address of the CRA they contacted, provided the denial was based on information given by the CRA.
You have the right to a free copy of your credit report when your application is denied because of information supplied by the CRA. Your request must be made within 60 days of receiving your denial notice.
If you contest the completeness or accuracy of information in your report, you should file a dispute with the CRA and with the company that furnished the information to the CRA. Both the CRA and the furnisher of information are legally obligated to investigate your dispute.

You have a right to add a summary explanation to your credit report if your dispute is not resolved to your satisfaction.

Your Credit Application

When creditors evaluate a credit application, they cannot lawfully engage in discriminatory practices.

The Equal Credit Opportunity Act (ECOA) prohibits credit discrimination on the basis of sex, race, marital status, religion, national origin, age, or receipt of public assistance. Creditors may ask for this information (except religion) in certain situations, but may not use it to discriminate when deciding whether to grant you credit.

The ECOA protects consumers who deal with companies that regularly extend credit, including banks, small loan and finance companies, retail and department stores, credit card companies, and credit unions. Everyone who participates in the decision to grant credit, including real estate brokers who arrange financing, must follow this law. Businesses applying for credit also are protected by this law.

Your rights under the Equal Credit Opportunity Act:

You cannot be denied credit based on your race, sex, marital status, religion, age, national origin, or receipt of public assistance.
You have the right to have reliable public assistance considered in the same manner as other income.
If you are denied credit, you have a legal right to know why.

Your Credit Billing and Electronic Fund Transfer Statements

It is important to check credit billing and electronic fund transfer account statements regularly. These documents may contain mistakes that could damage your credit status or reflect improper charges or transfers. If you find an error or discrepancy, notify the company and contest the error immediately. The Fair Credit Billing Act (FCBA) and Electronic Fund Transfer Act (EFTA) establish procedures for resolving mistakes on credit billing and electronic fund transfer account statements, including:

charges or electronic fund transfers that you, or anyone you have authorized to use your account have not made;
charges or electronic fund transfers that are incorrectly identified or show the wrong amount or date;
computation or similar errors;
failure to reflect payments, credits, or electronic fund transfers properly;
not mailing or delivering credit billing statements to your current address, as long as that address was received by the creditor in writing at least twenty days before the billing period ended;
charges or electronic fund transfers for which you request an explanation or documentation, due to a possible error.

The FCBA generally applies only to "open end" credit accounts, credit cards, revolving charge accounts (such as department store accounts), and overdraft checking accounts. It does not apply to loans or credit sales that are paid according to a fixed schedule until the entire amount is paid back, such as an automobile loan. The EFTA applies to electronic fund transfers, such as those involving automatic teller machines (ATMs), point-of-sale debit transactions, and other electronic banking transactions.

Your Debts and Debt Collectors

You are responsible for your debts. If you fall behind in paying your creditors or an error is made on your account, you may be contacted by a "debt collector." A debt collector is any person, other than the creditor, who regularly collects debts owed to others. This includes lawyers who collect debts on a regular basis. You have the right to be treated fairly by debt collectors.

The Fair Debt Collection Practices Act (FDCPA) applies to personal, family, and household debts. This includes money owed for the purchase of a car, for medical care, or for charge accounts. The FDCPA prohibits debt collectors from engaging in unfair, deceptive, or abusive practices while collecting these debts.

Your rights under the Fair Debt Collection Practices Act:

Debt collectors may contact you only between 8 a.m. and 9 p.m.
Debt collectors may not contact you at work if they know your employer disapproves.
Debt collectors may not harass, oppress, or abuse you.
Debt collectors may not lie when collecting debts, such as falsely implying that you have committed a crime.
Debt collectors must identify themselves to you on the phone.
Debt collectors must stop contacting you if you ask them to in writing.

Solving Your Credit Problems

Your credit report influences your purchasing power, as well as your chances to get a job, rent or buy an apartment or a house, and buy insurance. A history of timely credit payments helps you get additional credit. Accurate negative information can stay on your report for seven years. A bankruptcy can stay on your report for 10 years. If you are having problems paying your bills, contact your creditors at once. Try to work out a modified payment plan with them that reduces your payments to a more manageable level. Don't wait until your account has been turned over to a debt collector.

Here are some additional tips for solving credit problems:

If you want to contest a credit report, bill or credit denial, contact the appropriate company in writing and send it "return receipt requested."
When you contest a billing error, include your name, account number, the dollar amount in question, and the reason you believe the bill is wrong.
If in doubt, request written verification of a debt.
Keep all your original documents, especially receipts, sales slips, and billing statements. You will need them if you dispute a credit bill or report. Send copies only. It may take more than one letter to correct problems.
Be skeptical of businesses that offer instant solutions to credit problems.
Be persistent. Resolving credit problems can take time and effort.
There is nothing a credit repair company can do for you for a fee, that you cannot do for yourself for little or no cost.

If you can't resolve your credit problems yourself or if you need help, you may want to contact a credit counseling service. Nonprofit organizations in every state counsel consumers in debt. Counselors try to arrange repayment plans that are acceptable to you and your creditors. They also can help you set up a realistic budget. These services usually are offered at little or no cost.

Universities, military bases, credit unions, and housing authorities also may offer low- or no-cost credit counseling programs. Check the white pages of your telephone directory for a service near you.

For More Information

This document was written in January 1998 by the FTC.

Credit and Divorce

Mary and Bill recently divorced. Their divorce decree stated that Bill would pay the balances on their three joint credit card accounts. Months later, after Bill neglected to pay off these accounts, all three creditors contacted Mary for payment. She referred them to the divorce decree, insisting that she was not responsible for the accounts. The creditors correctly stated that they were not parties to the decree and that Mary was still legally responsible for paying off the couple's joint accounts. Mary later found out that the late payments appeared on her credit report.

If you've recently been through a divorce or are contemplating one, you may want to look closely at issues involving credit. Understanding the different kinds of credit accounts opened during a marriage may help illuminate the potential benefits and pitfalls of each.

There are two types of credit accounts: individual and joint. You can permit authorized persons to use the account with either. When you apply for credit, whether a charge card or a mortgage loan, you'll be asked to select one type.

Individual or Joint Account

Individual Account

Your income, assets, and credit history are considered by the creditor. Whether you are married or single, you alone are responsible for paying off the debt. The account will appear on your credit report, and may appear on the credit report of any "authorized" user. However, if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), you and your spouse may be responsible for debts incurred during the marriage, and the individual debts of one spouse may appear on the credit report of the other.

Advantages/Disadvantages: If you're not employed outside the home, work part-time, or have a low-paying job, it may be difficult to demonstrate a strong financial picture without your spouse's income. If you open an account in your name and are responsible, no one can negatively affect your credit record.

Joint Account

Your and your spouse's income, financial assets and credit history are considerations for a joint account. No matter who handles the household bills, you and your spouse are responsible for seeing that debts are paid. A creditor who reports the credit history of a joint account to credit bureaus must report it in both names (if the account was opened after June 1, 1977).

Advantages/Disadvantages: An application combining the financial resources of two people may present a stronger case to a creditor who is granting a loan or credit card. When two people apply together for the credit, each is responsible for the debt. This is true even if a divorce decree assigns separate debt obligations to each spouse. Former spouses who run up bills and don't pay them can hurt their ex-partner's credit history on jointly held accounts.

Account "Users"

If you open an individual account, you may authorize another person to use it. If you name your spouse as the authorized user, a creditor who reports the credit history to a credit bureau must report it in your spouse's name as well as yours (if the account was opened after June 1, 1977). A creditor may report the credit history in the name of any other authorized user.

Advantages/Disadvantages: User accounts often are opened for convenience. They benefit people who might not qualify for credit on their own, such as students or homemakers. While these people may use the account, you, not they, are contractually liable for paying the debt.

If You Divorce

If you're considering divorce or separation, pay special attention to the status of your credit accounts. If you maintain joint accounts during this time, it's important to make regular payments so your credit record won't suffer. As long as there's an outstanding balance on a joint account, you and your spouse are responsible for it.

If you divorce, you may want to close joint accounts or accounts in which your former spouse was an authorized user. You may ask the creditor to convert these accounts to individual accounts.

By law, a creditor cannot close a joint account because of a change in marital status, but can do so at the request of either spouse. A creditor, however, does not have to change joint accounts to individual accounts. The creditor can require you to reapply for credit on an individual basis. On that basis, the creditor may extend or deny you credit. In the case of a mortgage or home equity loan, a lender is likely to require refinancing to remove a spouse from the obligation.

For More Information

This document was written in January 1998 by the FTC.

Fair Credit Reporting Act

If you've ever applied for a charge account, personal loan, insurance, or job, there's a file about you. This file contains information about where you work, live, how you pay your bills, and whether you've been sued, arrested, or filed for bankruptcy.

Companies that gather and sell this information are called Consumer Reporting Agencies (CRAs). The most common type of CRA is the credit bureau. The information CRAs sell about you to creditors, employers, insurers, and other businesses is called a consumer report.

The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission, is designed to promote accuracy and ensure the privacy of the information used in consumer reports. Recent amendments to the Act expand your rights and place additional requirements on CRAs. Businesses that supply information about you to CRAs and those that use consumer reports also have new responsibilities under the law.

Here are some answers to questions consumers commonly ask about consumer reports and CRAs. You may have additional rights under state laws. Contact your state Attorney General or local consumer protection agency for more information.

Q: How do I find the CRA that has my report?
A: Contact the CRAs listed in the Yellow Pages under "credit" or "credit rating and reporting." Because more than one CRA may have a file on you, call each until you locate all the agencies maintaining your file. The three major national credit bureaus are:
- Equifax, P.O. Box 740241, Atlanta, GA 30374-0241; (800) 685-1111
- Experian (formerly TRW), P.O. Box 949, Allen, TX 75013; (888) EXPERIAN (397-3742)
- Trans Union, 760 West Sproul Road, P.O. Box 390, Springfield, PA 19064-0390; (800) 916-8800

In addition, anyone who takes action against you in response to a report supplied by a CRA--such as denying your application for credit, insurance, or employment--must give you the name, address, and telephone number of the CRA that provided the report.

Q: Do I have a right to know what's in my report?
A: Yes, if you ask for it. The CRA must tell you everything in your report, including medical information, and in most cases, the sources of the information. The CRA also must give you a list of everyone who has requested your report within the past year--two years for employment related requests.

Q: Is there a charge for my report?
A: Sometimes. There's no charge if a company takes adverse action against you, such as denying your application for credit, insurance or employment, and you request your report within sixty days of receiving the notice of the action. The notice will give you the name, address, and phone number of the CRA. In addition, you're entitled to one free report a year if (1) you're unemployed and plan to look for a job within sixty days, (2) you're on welfare, or (3) your report is inaccurate because of fraud. Otherwise, a CRA may charge you up to $8 for a copy of your report.

Q: What can I do about inaccurate or incomplete information?
A: Under the new law, both the CRA and the information provider have responsibilities for correcting inaccurate or incomplete information in your report. To protect your rights under this law, contact both the CRA and the information provider.

First, tell the CRA in writing what information you believe is inaccurate. CRAs must reinvestigate the items in question--usually within 30 days--unless they consider your dispute frivolous. They also must forward all relevant data you provide about the dispute to the information provider. After the information provider receives notice of a dispute from the CRA, it must investigate, review all relevant information provided by the CRA, and report the results to the CRA. If the information provider finds the disputed information to be inaccurate, it must notify all nationwide CRAs so that they can correct this information in your file.

When the reinvestigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the CRA gives you a written notice that includes the name, address, and phone number of the provider.

Second, tell the creditor or other information provider in writing that you dispute an item. Many providers specify an address for disputes. If the provider then reports the item to any CRA, it must include a notice of your dispute. In addition, if you are correct--that is, if the information is inaccurate--the information provider may not use it again.

Q: What can I do if the CRA or information provider won't correct the information I dispute?
A: A reinvestigation may not resolve your dispute with the CRA. In that case, ask the CRA to include your statement of the dispute in your file and in future reports. If you request, the CRA also will provide your statement to anyone who received a copy of the old report in the recent past. There usually is a fee for this service.

If you tell the information provider that you dispute an item, a notice of your dispute must be included anytime the information provider reports the item to a CRA.

Q: Can my employer get my report?
A: Only if you say it's okay. A CRA may not supply information about you to your employer, or to a prospective employer, without your consent.

Q: Can creditors, employers, or insurers get a report that contains medical information about me?
A: Not without your approval.

Q: What should I know about "investigative consumer reports?"
A: "Investigative consumer reports" are detailed reports that involve interviews with your neighbors or acquaintances about your lifestyle, character and reputation. They may be used in connection with insurance and employment applications. You'll be notified in writing when a company orders such a report. The notice will explain your right to request certain information about the report from the company to which you applied. If your application is rejected, you may get additional information from the CRA. However, the CRA does not have to reveal the sources of the information.

Q: How long can a CRA report negative information?
A: Seven years. There are certain exceptions:
- Information about criminal convictions may be reported without any time limitation.
- Bankruptcy information may be reported for 10 years.
- Information reported in response to an application for a job with a salary of more than $75,000 has no time limit
- Information reported because of an application for more than $150,000 worth of credit or life insurance has no time limit.
- Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer.

Q: Can anyone get a copy of my report?
A: No. Only people with a legitimate business need, as recognized by the FCRA. For example, a company is allowed to get your report if you apply for credit, insurance, employment, or to rent an apartment.

Q: How can I stop a CRA from including me on lists for unsolicited credit and insurance offers?
A: Creditors and insurers may use CRA file information as a basis for sending you unsolicited offers. These offers must include a toll-free number for you to call if you want to remove your name and address from lists for two years; completing a form that the CRA provides for this purpose will keep your name off the lists permanently.

Q: Do I have the right to sue for damages?
A: You may sue a CRA, or a user or provider of CRA data, in state or federal court for most violations of the FCRA. If you win, the defendant will have to pay damages and reimburse you for attorney fees to the extent ordered by the court.

Q: Are there other laws I should know about?
A: Yes. If your credit application was denied, the Equal Credit Opportunity Act requires creditors to specify why, provided you ask. For example, the creditor must tell you whether you were denied because you have "no credit file" with a CRA, or because the CRA says you have "delinquent obligations." The ECOA also requires creditors to consider additional information you might supply about your credit history. You may want to find out why the creditor denied your application before you contact the CRA.

Q: Where should I report violations of the law?
A: Although the FTC can't act as your lawyer in private disputes, information about your experiences and concerns is vital to the enforcement of the Fair Credit Reporting Act. Send your questions or complaints to: Consumer Response Center – FCRA, Federal Trade Commission, Washington, D.C. 20580.

For More Information

This document was written in January 1998 by the FTC.

What is a FICO score?

A FICO score is a generic term for a credit bureau score and specifically refers to the score derived from the FICO statistical model. A credit bureau score measures the relative degree of risk a potential borrower represents to the lender or investor. Each of the three credit bureaus have their own method, or statistical model, for calculating scores. The bureaus rely exclusively on their own data for calculating scores. The credit bureaus and their respective models are:

Equifax (formally CBI) / Beacon model
Trans Union / Emperica model
Experian (formally TRW) / FICO model

Fair, Isaac & Co. (FICO) began its pioneering work with credit scoring in the late 1950s. Since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.

FICO scores vary from approximately 375 to 900 points. Higher scores are better.To get the best interest rates, you will generally need to score 680 or higher. If your score is at least 680, you are considered to have 'A' credit. If your score is below 620, you will generally pay a higher rate on your mortgage, and your credit is considered "sub prime." Depending on your score and credit, you may be considered to be a 'B', 'C', or 'D' credit borrower. If your score is between 620 and 680, based upon factors such as income, assets, etc., the lender may decide into which credit category you fall. Presented below is a general guide which can give you an idea of your credit ranking (A+ through E) based upon your credit score:

	Credit Score	Debt Ratio	Max LTV	Mortgage			Revolve			Install
	Credit Score	Debt Ratio	Max LTV	30	60	90	30	60	90	30	60	90
A+	680	36	95	0	0	0	2	0	0	1	0	0
A-	660	45	95	1	0	0	3	1	0	2	0	0
B	620	50	85	2	1	0	4	2	1	3	1	0
C	580	55	75	4	2	1	6	5	2	5	4	1
D	550	60	70	5	3	2	8	8	4	7	6	2
E	520	65	60	6	4	3	10	10	6	10	8	3

FICO scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how millions of people have used credit. Some of the predictive factors used in the models are found in the reason codes.

Reason codes are included in credit reports and help explain why a credit report scored as it did, the weight given to factors making up the score, and where a consumer should direct their efforts toward increasing their score. The reason codes and their respective weights are:

Late Payments, Collections, Bankruptcies--35%
Outstanding Debt--30%
Length of Credit History--15%
Types of Credit--10%
Inquiries (Applications for New Credit)--10%

Frequently Asked Questions (FAQs)

How can I increase my score? While it is difficult to increase your score over the short run, here are some tips to increase your score over of time.

Pay your bills on time. Late payments and collections can have a serious impact on your score. Note that late payments, collections and bankruptcies are the most heavily weighted of the reason codes.
Reduce your credit-card balances. If you consistently have high balances on your credit cards, your credit score will be negatively affected. Note that this applies to the second most heavily weighted reason code.
If you have limited credit, obtain additional credit. Not having sufficient credit can negatively affect your score.
Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.

If several companies check my credit, will that hurt my score? That depends. The scoring system has changed to be more lenient in this regard. A few inquiries over a short period of time won't hurt your score. Mortgage lenders realize that when a borrower is shopping for a rate, their credit may be investigated by more than one lender.

For More Information

This document was written in January 1998 by the FTC.

How do I correct errors on my report?

Few aspects of both consumer and real estate financing have come under as much written and verbal gunfire as has the credit reporting industry. The skyrocketing volume of credit transactions has put a tremendous strain on credit reporting agencies which deal with millions of requests for information daily.

As a result, a recent report to the U.S. Congress stated that as many as 40% of individual credit histories contain errors of some kind. A single missed keystroke by a data entry clerk, for example, can assign a delinquent account to the wrong file. Corrective information submitted by an individual can be misrouted or entered erroneously.

Our economy could not function without credit reporting. We need it to make purchases both large and small, to enable retailers to accept our checks, to obtain loans for homes, cars or college education. It is necessary for corporations to manage their cash flow for the overall benefit of the economy, and for us as individuals to manage our own finances.

For all these reasons, we must be vigilant about the accuracy of our credit reports. We need to know what goes into them, how to read them, how they are used and how to challenge errors when they occur.

While credit might have once been a private matter between oneself and one's banker, this is no longer the case. Every purchase we make on credit creates a record somewhere and these records flow into the huge databases from which our credit histories are constructed. Those histories, in turn, are used by nearly all credit grantors to determine how reliable we are in the use of credit, and to decide whether or not to extend it to us.

One way to fix an error is to contact the creditor reporting it. If you can get the creditor to agree that what was reported is an error, have them give you that information in writing, plus agree to report the updated information to the bureaus.

The Fair Credit Reporting Act gives you the right to dispute both the accuracy and completeness of your credit history. Any of the three credit reporting agencies must respond to your dispute. They must reinvestigate and record the results of their investigation "within a reasonable period of time." While this period remains undefined, practice indicates it means thirty days. If you don't get results within thirty days, have your attorney send the bureau a letter, together with copies of your correspondence.

If the reporting agency cannot verify a disputed entry, it must delete it. If the information is incomplete, they must complete it. For example, if you were temporarily delinquent on an account, and then brought it current and the agency's report does not reflect that, they must correct your record. Also, should your file show someone else's account (this sometimes happens with "junior-senior" relationships or with common names) the agency must delete it.

At your request (be sure you do request it) the agency involved must send a notice of correction to anyone who has received your credit report within the last six months.

In the event that some unforeseen misfortune resulted in a cluster of late payments in your record, you may send a short statement about the circumstances to each of the agencies. You may wish to report illness, unexpected unemployment, the death of a spouse, military call-up, or unexpected medical expenses. Be brief and to the point. No whining. This statement will be added to your file and will be disclosed whenever your credit file is accessed.

Cosigning a Loan

What would you do if a friend or relative asked you to cosign a loan? Before you answer, make sure you understand what cosigning involves. Under federal law, creditors are required to give you a notice that explains your obligations. The cosigner's notice states:

You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.
You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.
The creditor can collect this debt from you without first trying to collect from the borrower.^* The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.
* This notice is not the contract that makes you liable for the debt.
Laws in your state may forbid a creditor from collecting from a cosigner without first trying to collect from the primary debtor.

Cosigners Often Pay

Studies of certain types of lenders show that for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan. When you're asked to cosign, you're being asked to take a risk that a professional lender won't take. If the borrower met the criteria, the lender wouldn't require a cosigner.

In most states, if you cosign and your friend or relative misses a payment, the lender can immediately collect from you without first pursuing the borrower. In addition, the amount you owe may be increased by late charges or by attorneys fees if the lender decides to sue to collect. If the lender wins the case, your wages and property may be taken.

If You Do Cosign

Despite the risks, there may be times when you want to cosign. Your child may need a first loan, or a close friend may need help. Before you cosign, consider this information:

Be sure you can afford to pay the loan. If you're asked to pay and can't, you could be sued or your credit rating could be damaged.
Even if you're not asked to repay the debt, your liability for the loan may keep you from getting other credit because creditors will consider the cosigned loan as one of your obligations.
Before you pledge property to secure the loan, such as your car or furniture, make sure you understand the consequences. If the borrower defaults, you could lose these items.
Ask the lender to calculate the amount of money you might owe. The lender isn't required to do this, but may if asked. You also may be able to negotiate the specific terms of your obligation. For example, you may want to limit your liability to the principal on the loan, and not include late charges, court costs, or attorneys' fees. In this case, ask the lender to include a statement in the contract similar to: "The cosigner will be responsible only for the principal balance on this loan at the time of default."
Ask the lender to agree, in writing, to notify you if the borrower misses a payment. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.
Make sure you get copies of all important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement, and warranties, if you're cosigning for a purchase. You may need these documents if there's a dispute between the borrower and the seller. The lender is not required to give you these papers; you may have to get copies from the borrower.
Check your state law for additional cosigner rights.

For More Information

This document was written in January 1998 by the FTC.

Types of Home Equity Loans

Fundamentally, there are two types of home equity loans.

Home Equity Line: When you get a home equity line, you obtain the right to draw money, whenever you want, over a certain period of time. You only pay interest on the amount you borrow. You may borrow, pay off and borrow again against the line of credit. You typically access the line with a check or credit card.
Second Mortgage (home equity loan): When you get a second mortgage, you obtain a lump sum of money. The interest rate and monthly payments are fixed.

**Home Equity Line versus Second Mortgage**
	Home Equity Line	Second Mortgage
Tax Deductible	Yes^*	Yes^*
Annual Fee	Yes (some lenders may waive this)	No
Draw money when needed	Yes	No
Fixed Rate	No^**	Yes

Before deciding which type of loan you want, consider how you'll use the money. If you need funds for a single expense, such as a room addition, remodeling, etc., you'll want to strongly consider a fixed-rate, second mortgage. You receive one lump sum at the beginning of the loan term. You pay it back in equal, monthly installments.

The certainty of a fixed interest rate and equal monthly payments make the fixed-rate, second loan very attractive. Will this type of loan be less expensive compared to an adjustable rate, home equity line? There is no way to know with certainty. One would have to be able to predict interest rates with accuracy. Consider one of the reasons why adjustable rate loans were invented: to shift interest rate risk from the lender to the borrower. When market interest rates rise above the interest rate on your fixed-rate mortgage, the lender is effectively losing money on your mortgage and you're getting a bargain. Lenders wanted a way to protect themselves from this situation--thus the adjustable-rate mortgage.

If you need periodic amounts of money over time, for a child's education tuition, for example, a home equity line may be ideal. You can borrow only the amount you need, when you need it. These loans carry adjustable (ARM) rates, but some banks allow you to convert a portion of your loan to a fixed-rate second. You may pay a premium for the convenience of an equity line, including a transaction fee for each draw and an annual fee if you draw or not.

Deciding in advance which type of loan is best for you helps when comparing the expense of various loans. Since the APR for a fixed-rate second is calculated differently compared to a home equity line, APR comparisons can be difficult when comparing a fixed-rate second to a home equity line. APRs of fixed-rate seconds account for points and other closing charges. APRs for home equity lines don't account for points and other closing costs. When comparing the same types of loans (apples to apples), APRs are much more meaningful.

^* Interest may be fully deductible. Consult your tax advisor regarding your particular situation.
^** Under certain circumstances, some loan programs let you convert part of your home equity line to a fixed-rate, home equity loan.

What is a Home Equity Line of Credit?

More and more lenders are offering home equity lines of credit. By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please, at an interest rate that is relatively low. Furthermore, under the tax law (depending on your particular situation) you may be allowed to deduct the interest because the debt is secured by your home.

If you are in the market for credit, a home equity loan may be right for you, or perhaps another form of credit would be better. Before making this decision, you should weigh carefully the costs of a home equity line against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. Remember--failure to repay the line could mean the loss of your home.

What is a home equity line of credit?

A home equity line is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses.

With a home equity line, you will be approved for a specific amount of credit--your credit limit. The credit limit is the maximum amount you can borrow at any one time while you have the loan.

Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example:

Appraisal of home	$100,000
Percentage	x75%
Percentage of appraised value	$75,000
Less mortgage debt	-$40,000
Potential credit line	$35,000

In determining your actual credit line, the lender also will consider your ability to repay, by looking at your income, debts, and other financial obligations, as well as your credit history.

Home equity plans often set a fixed time during which you can borrow money, such as ten years. When this period is up, the plan may allow you to renew the credit line. But in a plan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance. Others may permit you to repay over a fixed time, for example ten years.

Once approved for your home equity loan, you should be able to borrow up to your credit limit whenever you wish. Typically, you will be able to draw on your line by using special checks.

Using a special credit card or other means, some plans allow borrowers to make purchases, in addition to borrowing money. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some lenders may require that you take an initial advance when you first set up the line.

Shopping for a Home Equity Line

Is a home equity line what you need?

Before you apply for a home equity line of credit (HELOC), make sure it's the type of loan you want. If you need relatively small amounts of money over time, such as for school tuition, a HELOC may be right for you. If you need a lump sum for a particular purpose, such as building a room addition, a home equity loan would probably be better.

Carefully compare plans

Carefully compare several plans. Examine terms and conditions, annual percentage rates (APR), annual and initial transaction (set up) costs, indices, margins and caps. Some lenders may not charge setup or annual fees, but may charge a higher interest rate in return.

There may be an introductory, or "teaser" rate offered. This is a temporary rate which will have little beneficial value over the life of your loan. Since most HELOCs are variable rate loans, the rate you pay is the sum of the index plus the margin. Indices are expressed as rates and include Prime and T-Bill rates. The margin is explicitly stated in your loan documents and is also expressed as a percentage. For example, if your loan were tied to the Prime rate with a 2% margin, and the Prime rate were 8%, you'd pay 10%. Historical information regarding the behavior of various indices is available on-line and at your local library. A little research will help you determine which index you'd be most comfortable with.

Your variable rate plan will identify a maximum interest rate (ceiling or cap). Your loan may not exceed the rate cap during the life of the loan under any conditions.

Consider a loan which allows amortization--repayment in installments of principal and interest sufficient to retire the debt by the end of the plan. Try to amortize your loan, otherwise, you may incur a balloon payment at the end of the plan.

Negative Amortization

Under certain circumstances, depending on your program, the monthly payments may not adjust adequately to fully account for interest rate increases. In this event, negative amortization may occur. Negative amortization is when in which your loan balance increases. If this condition is a possibility with your loan, discuss with your lender how you can avoid it.

Some lenders may permit you to convert a variable rate to a fixed rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan.

Agreements generally will permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to get additional funds during any period the interest rate reaches the cap.

Borrow Wisely

Perhaps you discover you can borrow much more than you expected, or need. A HELOC may seem to turn your home into a new type of credit card. If you default on a credit card, you may only damage your credit. If you default on a HELOC, you could lose your home.

Repaying Your Home Equity Line

Before entering into a plan, consider how you will pay back any money you might borrow. Some plans set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued interest. But, unlike the typical installment loan, the portion that goes toward principal may not be enough to repay the debt by the end of the term. Other plans may allow payments of interest alone during the life of the plan, which means that you pay nothing toward the principal. If you borrow $10,000, you will owe that entire sum when the plan ends.

Regardless of the minimum payment required, you can pay more than the minimum and many lenders may give you a choice of payment options. Consumers often will choose to pay down the principal regularly as they do with other loans. For example, if you use your line to buy a boat, you may want to pay it off as you would a typical boat loan.

Whatever your payment arrangements during the life of the plan--whether you pay some, a little, or none of the principal amount of the loan--when the plan ends you may have to immediately pay the entire outstanding balance. You must be prepared to make this balloon payment by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose your home.

With a variable rate, your monthly payments may change. Assume, for example, that you borrow $10,000 under a plan calling for interest-only payments. At a 10 percent interest rate, your initial monthly payments would be eighty-three dollars. If the rate should rise over time to 15 percent, your monthly payments would increase to $125. Even with payments that cover interest plus some portion of the principal, there could be a similar increase in your monthly payment, unless the agreement allowed keeping payments level throughout the plan.

When you sell your home, you probably will be required to pay off your home equity line in full. If you are likely to sell your house in the near future, consider whether it makes sense to pay the up-front costs of setting up an equity credit line. Also keep in mind that leasing your home may be prohibited under the terms of your home equity agreement.

Glossary

Annual Fee: An amount charged annually for having the line of credit available. The fee is charged regardless of whether or not you draw against the credit line.

Annual percentage rate (APR): The cost of credit on a yearly basis expressed as a percentage. The APR is distinguished from the "named" or "nominal" rate which is the note rate.

Application fee: An application fee may include the cost of an appraisal and credit report. The fee is charged when applying for the loan.

Balloon payment: A lump-sum payment that you may be required to make under a plan when the plan ends. You should have the option to make payments sufficient to avoid making the balloon payment.

Cap: A limit on how much the variable interest rate can increase during the life of the plan.

Closing costs: Fees paid at the time of closing. Depending on the state in which you reside, these fees may pay for attorney's services, recording documents, real estate taxes, title search and title insurance.

Credit limit: The maximum amount you are allowed to borrow under the home equity plan. The limit can depend upon your income, debts, equity in your home and the bank's program guidelines.

Equity: The difference between the fair market value (appraised value) of your home and the debts claimed against it.

Index: A statistical indicator of a price level expressed as a rate. Examples include Prime, T-Bill, MTA, 11 Dist. COF, LIBOR, etc. The index is the base rate used by the lender to calculate the interest rate you pay on your loan.

Interest rate: The factor applied to the debt to determine the charge for borrowing money. The interest rate is expressed as a percentage.

Margin: The spread added to the index to determine the interest rate you are charged for borrowing money. The margin is expressed as a percentage.

Minimum payment: The smallest amount you are allowed to pay toward your debt. The minimum payment may include principal and interest.

Points: A point is equal to one percent of the amount of your credit line. Points are a closing cost which, under certain circumstances, may be recognized as interest by the IRS.

Security interest: "Security interest" is the type of interest a lender has in the property of the borrower. The borrower's property is set aside so that the lender can sell it if the borrower defaults on the loan. A mortgage and deed of trust are security instruments.

Transaction fee: The fee charged each time you draw on your credit line.

Variable rate: An interest rate that changes periodically. Payments may increase or decrease depending on a particular financial index.

Home Equity Loan Checklist

	Loan A	Loan B
Basic Features
Fixed annual percentage rate
Variable annual percentage rate
Index used and current value
Amount of margin
Current rate
Frequency of rate adjustments
Amound and length of any discount
Interest rate caps
Length of Plan
Draw period
Repayment period
Initial Feeds
Appraisal fee
Closing costs
Application fee
REPAYMENT TERMS
During the Draw Period
Interest and principal payments
Interest only payments
Fully amortizing payments
When the Draw Period Ends
Balloon payment
Renewal available
Refinancing of balance by lender

What is an APR?

The APR, often referred to as the Effective Rate, is a rate which shows the true cost of borrowing. This rate is different from the nominal (named or note) interest rate stated in your loan documents. The Truth In Lending Simplification and Reform Act requires mortgage companies to disclose the APR when advertising a rate.

To begin to understand the Annual Percentage Rate, it helps to understand the standard, fixed rate mortgage loan. A standard loan consists of:

Loan amount
Number of payments
Monthly payment amount
Nominal interest rate

Given any three of the above four items, the fourth can be determined with the aid of a financial calculator, computer program or algebraic formula. In other words, given any three factors, there is only one correct fourth factor. Here is an example of a fixed rate loan:

1. Loan amount:	$100,000
3. Number of payments	360 (12 payments per year for 30 years)
4. Monthly payment	$804.62
2. Interest rate	$9%

Let's consider a simplified, real estate loan transaction, using the above loan as our starting point. You borrow $100,000 and pay a 1.5 percent loan fee to the bank. For this example, that is the only fee you pay. At the completion of the transaction, how much money do you have? $100,000? No. You have $100,000 less the $1,500 loan fee, or $98,500.

You received	$98,500
Number of payments	360
Monthly payment	$804.62
Interest rate	?

Taking into account the cost of your transaction, let's take a second look at your new loan.

Remember, there can be only one correct interest rate given the other three factors. In this example, the interest rate is the APR--9.17 percent. Since the loan amount was effectively reduced (you didn't get $100,000), and the number of payments and monthly payment stayed the same, the interest rate had to increase.

Fundamentally, that's all there is to the APR in a real estate loan transaction. This simplified example recognized only one fee related to obtaining a loan. You'll incur many other costs when obtaining a loan, some effecting the APR, some not, but the principle is the same.

Theoretically, the APR is a number you can use to accurately compare loans among different lenders. Since the APR takes into account costs of obtaining the loan, you should be able to use APRs to find the best loan. Unfortunately, when calculating the APR, not all lenders include all fees, and some lenders may include fewer fees than another lender. What's a borrower to do?

Ask for a signed and dated Good Faith Estimate of Closing Costs (GFE). A properly prepared GFE will itemize all the costs associated with your loan. Only then can you accurately compare lenders' programs.

What fees are included in the APR?

The following fees are usually included in the APR:

Points - both discount points and origination points
Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
Loan-processing fee
Underwriting fee
Document-preparation fee
Private mortgage-insurance
Appraisal fee
Credit-report fee

The following fees are sometimes included in the APR:

Loan-application fee
Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)

The following fees are usually not included in the APR:

Title or abstract fee
Escrow fee
Attorney fee
Notary fee
Document preparation (charged by the closing agent)
Home-inspection fees
Recording fee
Transfer taxes

Points to remember

An APR is a starting point from which to begin to compare loans. You must get a signed and dated Good Faith Estimate of Closing Costs with which to accurately compare lenders' programs.

How Do Rate Locks Work?

In most cases when you shop for a loan, the rate and terms you are quoted represent those available that day. The rate quoted probably won't be available next month or next week. Therefore, you should only rely on the rate and terms a lender is willing to lock-in.

A lock-in, or rate commitment, is a lender's promise to close your loan at a certain interest rate and number of points. Depending upon the lender, you may be able to lock in the interest rate and points upon submitting your application, during application processing, upon loan approval, or later. A rate lock protects you against rate increases while your application is being processed. However, a locked-in rate could cost you money in the event rates drop and you want a lower rate.

You will need to lock the rate on your mortgage some time prior to closing. There are five components to a rate lock:

Loan program
Loan amount
Interest rate
Points
Length of the lock

You must identify each of the above mentioned items in a rate lock. A rate lock might look something like this: 30 year fixed, $150,000 loan amount, 7.5 percent, one point, 30 day lock period. The document describing the lock will contain the date the lock was made and usually the lock expiration date. The lender must disburse funds prior to the expiration of the lock period, otherwise, the rate lock is invalid.

A loan with a below-market interest rate is less attractive to a potential purchaser of the loan. The longer the lock period, the greater the risk that interest rates will increase before the loan closes. To offset this increased risk, the lender charges increasingly higher points and/or interest for longer lock periods.

If rates increase during the lock period and your lock expires, most lenders will let you re-lock at the new, higher rate or points. If rates decrease during the lock period and your lock expires, lenders usually will charge a penalty to take advantage of the new, lower rates. For a fee, some lenders allow a "float-down" option which allows you to take advantage of decreasing interest rates. Once a lock expires, be prepared to renegotiate the rate and points.

What do you do if the rates drop after you lock?

Unless you have the option to float-down, most lenders will not budge unless rates drop substantially (3/8 percent or more). Lenders incur fees when they lock loans. If lenders were to allow borrowers to cancel a lock every time rates improved, they'd spend too much time re-locking rates, and the increased costs would have to be passed to borrowers.

Lock and Shop programs.

Most lenders will let you lock an interest rate only in connection with a specific property. Some lenders offer lock-and-shop programs which let you lock a rate before you find your home. Both programs can be valuable when rates are rising.

New construction rate locks.

Most lenders offer long-term locks for new construction. Since these locks tend to be relatively long, they can be expensive. An up-front deposit is sometimes required also. Most long-term new construction locks offer a float-down.

Why do Interest Rates Change?

There are several types of interest rates. These include:

Prime rate: The interest rate banks charge their best (prime) customers.
Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills, they mature in less than one year.
Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They mature in one to ten years.
Treasury Bonds: Long debt instruments used by the U.S. Government to finance its debt. Treasury bonds mature in more than ten years.
Federal Funds Rate: Banks with excess reserves at a Federal Reserve district bank charge this rate to other member banks for overnight loans.
Federal Discount Rate: The interest rate the Federal Reserve charges its member banks for short-term borrowing to meet liquidity needs.
Libor: London Interbank Offered Rates. Average London Eurodollar rates.
6-month CD rate: The average rate that you get when you invest in a 6-month CD.
11th District Cost of Funds: A weighted average of the actual interest expenses incurred for a given month by the savings institutions headquartered in the 11th District of the Federal Home Loan Bank System.
Fannie Mae Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae backed securities. The rates on these securities influence mortgage rates very strongly.
Ginnie Mae-Backed Security rates :Ginnie Mae pools large quantities of mortgages, securitizes them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.

Interest rate movements are influenced by the fundamental forces of supply and demand. Given a fixed level of lendable funds, if the demand for credit (loans) increases, interest rates also increase. I.e., when more people (borrowers) bid for a limited resource (money) the cost of that resource increases. Conversely, if the demand for credit decreases, so will interest rates as lenders lower the cost to entice borrowing. When the economy expands there is a higher demand for credit and interest rates increase. When the economy contracts, the demand for credit lessens and interest rates decrease.

A fundamental concept:

Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).
Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).

A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too rapidly, the Federal Reserve increases interest rates to slow the economy and reduce inflation. Inflation is the increase in the general level of prices for goods and services. When the economy is strong there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up!

Effect of Economic Data on Rates

The number of + symbols indicate the potential effect on interest rates.
+ minimal effect
+++++ maximal effect

economic event	Effect on Interest Rates	Significance of event
Consumer Price Index (CPI) Rises	+++++	Indicates rising inflation.
Dollar rises	+	Imports cost less indicates falling inflation.
Durable Goods Orders Increase	+++	Indicates expanding economy
Gross Domestic Product Increases	+++++	Indicates strong economy
Home sales increase	+++	Indicates strong economy
Housing Starts Rise	+++	Indicates strong economy
Industrial Production Rises	+++	Indicates strong economy
Business Inventories Rise	+++	Indicates weak economy
Leading Indicators (LEI) Increase	+++	Indicates strong economy
Personal Income Rises	+	Indicates rising inflation
Personal Spending Rises	+	Indicates rising inflation
Producer Price Index Rises	+++++	Indicates rising inflation
Retail Sales Increase	++	Indicates strong economy
Treasury auction has high demand	+	High demand leads to lower rates
Unemployment Rises	+++++	Indicates weak economy

When do you lock?

You know when rates have hit bottom AFTER they start rising. Deciding when to lock your rate is a bit like gambling--you want luck on your side!

You must lock your rate prior to closing your loan. To help determine when to lock, consider the rate trend. When rates are falling, wait until the last possible moment to lock your rate. When rates are rising, lock your rate as soon as possible. In either case, you're basing your decision on something unknown--the future. Rate trends change quickly and interest rates usually change daily. Here are just a few of the factors affecting interest rates:

New economic data.
Supply and demand of debt. Example: The U.S. government sells 30-year bonds; the supply of bonds increases; an increased supply of bonds at a given level of demand causes the price of bonds to fall; falling bond prices create increasing bond interest rates. Conversely, when the demand for bonds increases at a given level of supply; the increased demand bids up the price of bonds, resulting in lower rates.
Inflation. Actual or expected higher inflation causes rates to climb. When inflation is on the rise, the Federal Reserve Board raises rates to curb inflation.
Political news and world events. A war in the Middle East could cause higher oil prices and inflation.
Market sentiment.

Bond rates and prices vary inversely--i.e., when bond prices rise, interest rates fall and vice versa. The 30-year bond is one of the most relevant rates to track, but the yield of mortgage-backed securities is more important. The supply and demand for mortgage securities may be different from 30 year bonds. There are times when bond prices move higher and mortgage security prices move lower.

If you want to follow interest rates, consider the following:

Find out all the economic news being released over the next two weeks.
Make a list of news that is most important to interest rates--inflation, industrial production, etc.
Follow bond- or mortgage-backed prices on a daily basis. These rates influence mortgage rates.
Follow mortgage interest rates on a daily basis. Bookmark web sites or obtain rates via e-mail.
In general, Fridays and three-day weekends are bad for interest rates. This is because traders hate uncertainty. In many cases, traders close out positions before a weekend, which often means that they have to sell bonds which causes rates to go up.

Why Refinance?

Fundamentally, people refinance because they either want to save money or spend money. This article discusses the most common circumstances in which you might save money by refinancing.

One way to save money is to obtain a loan with a shorter life compared to your current loan. For more information, read Switching to a 15 year loan. If you are attempting to save money by reducing your interest rate, read Should I pay points or closing costs? and Switching to a 15 year loan. If you are attempting to save money by consolidating debt, read Cash Out Refinance.

There may be conditions which require you save money in the short-run. An Adjustable Rate Mortgage (ARM) with a low start-rate can temporarily lower your mortgage payments. Depending on the loan, you could substantially reduce your payments for a year or more.

You might believe you'll save money in the long-run by switching from an ARM to a fixed-rate loan--and you could be right. In this case, you're assuming that rates will eventually increase enough to justify the cost of refinancing. There is less certainty of saving money in this scenario because the future is unknown and rate comparisons are hypothetical.

Whatever your reason for refinancing, the process begins by comparing the various loan options you have available, including keeping your current loan. Real estate loans usually have income tax effects. Before rushing into a new loan, consider having your figures checked by your tax advisor. Talk to your current lender. They may reduce some of their fees in an effort to keep your business, or because they may have reduced paperwork.

For each loan you are considering, obtain an amortization schedule and Good Faith Estimate (GFE). A complete amortization schedule will identify the principal and interest portion of your monthly payments over the life of the loan. With it, you can accurately determine the interest paid within any time period. The (GFE) will itemize costs associated with obtaining the loan. The immediate costs of the transaction will be shown on the GFE, while the interest expense over time will appear on the amortization schedule. The information in these documents is required to make an informed decision regarding the best loan for you.

Zero Point / Zero Fee Loans

The Hype

"Now you can lower your monthly payment at no cost to you." Sound familiar? Many people took advantage of the historic downtrend in interest rates during the 1990s. Reducing your monthly payment can be, and often is a good idea. If you invest the monthly savings, you'll be doing everything possible to maximize the benefits of refinancing. In the 90s, many people refinanced numerous times with zero-point/fee loans--and why not? When you can lower your mortgage payment for "free", shouldn't you always do so? As you'll see, simply because you can refinance with a zero-point/fee loan, doesn't mean you should.

The mechanics

Rebate pricing (yield spread pricing, service-release premium) makes zero-point/fee loans possible. Simply put, you pay a higher-than-market interest rate in exchange for cash. The cash is used to pay your closing costs. Here is a hypothetical example of rate/points combinations. The negative points are rebates. One point is 1 percent of the loan amount.

7.25%,   2 points
7.75%,   1 point
8.00%,   0 points
8.50%, -1 point
9.00%, -2 points

On a $100,000 loan, you can pay 9 percent interest and receive two points, ($2,000) which you can use to pay your closing costs.

What are the benefits of a zero-point/fee loan?

You can lower your monthly payment with no out-of-pocket expenses. In the short-run, you can save money. There may be some recurring costs collected from you at closing, but you'd pay these costs if you didn't refinance. They are not a cost of the transaction. Recurring costs include property taxes, insurance and pre-paid mortgage interest.

What are the disadvantages of a zero-point/fee loan?

The obvious disadvantage is that you're paying a higher rate in order go obtain the rebate. If you pay closing costs from your personal funds, you receive a lower interest rate. If you keep the loan long enough, (approximately two to three years) you'll pay more than if you had paid points, closing costs and received a lower rate.

Not quite as obvious is something that can happen each time you refinance: you extend the time you have a mortgage. Suppose you purchase a home and obtain a $100,000, 9 percent, 30-year, fixed-rate loan. After three years your loan balance is $97,750. You get a new, $97,750, 8.5 percent, 30-year, zero-cost/fee loan. After another three years your loan balance is $95,330. You obtain a new, $95,330, 8 percent, 30-year, zero-cost/fee loan. You keep the 8 percent loan and pay it off over 30 years. This scenario may seem unlikely, but many people refinanced this way more than once in the 90s. In this situation, refinancing cost more than holding the original, 30-year, 9 percent mortgage. This scenario will cost more because you twice exchanged a 27-year mortgage for a 30-year mortgage. Your home will be mortgaged for thirty-six years instead of thirty.

Zero-point/fee loans can be advantageous. Make sure the rebate covers your closing costs. Don't increase your new loan amount by adding your closing costs to it. For example if your old loan amount was $100,00, your new loan amount should be $100,000. Zero-point/fee loans are especially attractive when rates are declining and you plan to sell your home in fewer than two to three years.

Should I Pay Points?

There is an inverse relationship between points and interest rate on your loan. The higher the points you pay, the lower the interest rate, and vise versa.

There are fees other than points associated with a loan transaction, but for a given loan amount and service provider, these other fees are fundamentally fixed. Other fees may include appraisal, credit report, lender's inspection, tax service, processing, underwriting, wire transfer, flood certification, title and escrow fees, notary fees, recording fees, etc. For example, consider a $100,000, 30-year, fixed rate loan on a home valued at $200,000. No matter what the points and interest rate you pay, an independent appraiser won't give you a "zero-fee appraisal", nor will a title company give you rebate pricing for a policy of title insurance.

Because of the inverse relationship between points and interest rate, you can obtain a rebate from the lender to cover some or all of your points and other fees. By increasing the interest rate on your loan, the lender might pay some or all loan fees. By reducing the interest rate on your loan, you'll pay some or all of the loan fees.

As a borrower, you should answer these questions before you commit to a new loan: Should I obtain a lower interest rate, pay points, loan fees, or both? Should I get a higher interest rate and reduce out-of-pocket fees? To answer these questions, estimate how long it will be until you plan to sell or refinance. The task then becomes finding the interest rate / fee combination which is the least expensive during this window of time.

Here is a hypothetical example. For simplicity, "other fees" are fixed at $1,000. You own your home and are interested in refinancing your high-interest loan to take advantage of a new, low-interest loan. The interest rates for zero point / zero fee loans are well below your current rate, so you know it's time to refinance. Your employer has indicated you might be transferred in approximately three years. You compare three rate / fee combinations to identify which is the least costly over the next three years. You're considering a 30-year, fixed loan.

Comparing the expense of different loans allows us to consider only the interest portion of the monthly payments. The principal portion of the monthly payment is not considered an expense. Therefore, only the interest portion of the monthly payments are considered in these examples. A financial calculator or spreadsheet program can provide the interest portion of the monthly payments. Here are the loan comparisons.

Loan: 30-year, fixed, $100,000, 8.0%, monthly P&I payment = $733.82
Month		1	2	. . .	23	24
8.0%	Interest	666.67	666.22		656.11	655.59
	Points	0
	Other Fees	0
	Cumulative Total	666.67	1332.89		15,214.70	15,870.29

Loan: 30-year, fixed, $100,000, 7.5%, monthly P&I payment = $699.28
Month		1	2	. . .	23	24
7.5%	Interest	625.00	624.54		614.10	613.57
	Points	0
	Other Fees	1,000
	Cumulative Total	1,625.00	2,249.54		15,252.35	15,865.91

Loan: 30-year, fixed, $100,000, 7.0%, monthly P&I payment = $655.37
Month		1	2	. . .	23	24
7.0%	Interest	583.33	582.86		572.14	571.60
	Points	1,000
	Other Fees	1,000
	Cumulative Total	2,583.33	3,166.19		15,290.61	15,862.21

The cumulative total for each loan represents the total expense related to the loan at the end of a given month. Initially, the expense of the 8 percent loan is much lower compared to the others because the 8 percent loan is free of out-of-pocket closing costs. The 7.5 percent loan is a zero point, $1,000 closing costs loan. The 7 percent loan example requires the borrower to pay points and fees. Initially, the 7 percent loan is the most expensive. At the end of month twenty-three, the 8 percent loan is still the least expensive. At the end of month twenty-four, the 7 percent loan is the least expensive. If we were to carry out these examples, the 7 percent loan would continue to be the least expensive. This comparison suggests that you should take the 7 percent loan. You'll be in your home for three years, and beginning in the second year you start saving money with the 7 percent loan.

What are Closing Costs?

When refinancing your home loan, you'll probably have to pay closing costs. Don't be mislead by zero point, zero fee loans. Even though the lender might appear to pay your closing costs, you'll likely pay a higher interest rate to reimburse the lender. Closing costs can be separated into two types: recurring and non-recurring.

Non-recurring costs: These are fees directly resulting from the loan transaction. They can be paid by you from savings, sometimes financed by adding them onto the loan amount, or "paid" by the lender.
Recurring costs: These are costs that you have to pay whether you refinance or not. However, when you refinance, you may have to pay them sooner than you otherwise would. These costs include property insurance, property taxes and prepaid interest on your new loan. If your new lender requires an impound or escrow account for taxes or insurance, you pay to setup this account. If your previous lender required an impound or escrow account, the balance will be reimbursed.

Here is a hypothetical example of a closing costs statement. Your situation will likely be different. Ask your loan officer to provide you with a similar estimate when you apply for a loan.

HUD No.	Description	Amount
800	Items Payable in connection with the loan.
801	Loan Origination Fee (Points)	$2,000
802	Loan Discount Fee	$1,000
803	Appraisal Fee	$300
804	Credit Report	$50
809	Tax Related Service Fee	$79
810	Processing Fee	$300
811	Underwriting Fee	$250
812	Wire Transfer Fee	$50
900	Items Required by the Lender to be paid in advance
901	Interest for 15 days	$700
902	Mortgage Insurance Premium	$250
903	Hazard Insurance Premium	$500
1100	Title Charges
1101	Closing or Escrow Fee	$600
1105	Document Preparation Fee	$75
1107	Attorney Fees
1108	Title Insurance	$800
1200	Government Recording and Transfer Charges
1201	Recording Fees	$50
1202	City/County Tax/Stamps
1203	State Tax/Stamps
1300	Additional Settlement Charges
1302	Pest Inspection

You may be wondering why there are so many fees associated with getting a loan. There are several parties providing various services in a real estate loan transaction. Relatively few charges provide profit for the lender or mortgage broker. The majority of fees are associated with services designed to protect the lender. Appraisal, credit, tax service, underwriting, mortgage insurance, hazard insurance, title and escrow, recording, etc., are all services which in some way protect the lenders interest.

Here is a brief description of the functions of some of the service providers associated with obtaining a real estate loan.

Mortgage broker or loan officer. She helps you complete your loan application and is your main contact in the transaction. She collects supporting documents, orders all verifications (employment, deposits, etc.), and obtains your credit report. She should keep fully informed and should communicate with you regarding the status of the transaction. She may delegate many tasks to others while overseeing the entire process.
Loan processor. She may be an employee of the financial institution from which you're getting your loan, or of the broker with whom you're working. The processor's tasks include checking your credit, ordering an appraisal, verifying your financials and packaging your file in the correct format for submission.
Underwriter. She is usually an employee of the financial institution. She reviews your completed file, sees if it fits the lender's specifications, and issues your approval, conditional approval, or denial.
Appraiser. She examines the property being purchased or refinanced, and provides a professional opinion of its value. The appraisal report is included in your file when it is delivered to the lender's underwriter.
Escrow officer, title officer or attorney. Title and escrow are different services, but are usually offered by the same company. Title companies or attorneys receive all the funds involved in the transaction, account for them, make all payments to interested parties, and in the case of title companies, issue title insurance.

Are points tax deductible?

"Points" are considered prepaid, home mortgage interest by the Internal Revenue Service. In the loan industry, they are also referred to as discount points, origination fees, maximum loan charges or loan discount. They are usually fully tax deductible in the case of a home purchase, construction of a home, or home improvement. This article addresses the tax deductibility of points associated with a home purchase. For complete information about home mortgage interest, go to www.irs.gov, or contact your tax advisor.

In order to deduct home mortgage interest, these three conditions must apply to you:

You file Form 1040 and itemize your deductions on Schedule A.
You are legally obligated to repay the loan. If you make mortgage payments for a friend, and you're not legally required to make the payments, you can't deduct the interest.
The mortgage must be secured on your main or second home.

Generally, you must deduct points over the life of the loan. I.e., for a 30-year loan, you may deduct 1/30 of the points each year. In the event you still have a loan balance when you sell your home, you may deduct the balance of the points not previously deducted. If your mortgage ends, and the full amount of the points have not been deducted, you may deduct the balance of the points when the mortgage ends. If you refinance your loan with the same lender, you can't deduct the balance of the points in that year. Instead, you must deduct them over the life of the new loan.

For the tax year in which you purchased your home, you may deduct the full amount of the points you paid for a home purchase if all these conditions apply to you:

Your loan is a lien upon (secured by) the home you live in most of the time (main home).
Paying points is the norm for the area in which your loan was made.
The amount of points paid were not excessive for the area in which you obtained your loan.
You use the cash method of accounting (most people do).
The points were not paid in lieu of other fees, such as appraisal, title, attorney, etc.
The purpose of your loan was to buy the home you live in most of the time.
The points were based upon a percentage of the loan amount. For example, 1% loan fee.
The amount and type of charge is explicitly stated as points in your closing documents (Uniform Settlement Statement, Form HUD-1). Points are deductible on your tax return if the Seller pays them.
The total amount of money you paid to close the loan (not borrowed from the lender), including your down payment, title, escrow, closing agent fees, etc., must be at least as much as the points charged. These funds, however, do not have to have been applied to paying points.

The information contained herein is intended for general information purposes only. This information is not tax advice, nor should any actions or decisions be based upon any information contained herein. For tax advice, consult your tax advisor.

Cash Out Refinance

There are many good reasons to refinance your current mortgage, or get a second mortgage and pull equity out of your home. Here are just a few.

Structural additions or improvements to your home.
Obtaining funds for investment.
College tuition for your children.
Paying off other debt, such as credit cards, in order to reduce your total monthly outlay.

Improving your home can increase its value. Investing wisely can help create a larger net worth. Both could pay off in retirement benefits for you.

Arguably, item four can help create wealth by lowering your monthly outlay, but this item lends itself to a different discussion. In recent years, many have experienced the best of both worlds regarding consuming and borrowing. People have been able to refinance a high-interest loan, consolidate credit card debt into a new, low-interest loan, and end up with a larger mortgage with a lower monthly outgo. Don't count on these economic conditions being available when you want to borrow against your home.

It's easy to think of numerous reasons to borrow and spend. We're inundated daily with messages to consume--and most of us are pretty good at it. Certainly there are times when borrowing can't be avoided, such as when buying a home. Be very careful when you think of your home as a source of funds for consumption, however. If you find it hard to get rid of your credit card debt and think borrowing against your home is a good idea--think again. You might be better off calling a credit counselor for budgeting assistance, instead of calling a bank for a new first or second mortgage. Credit card debt won't cost you your home if you don't pay it back. A mortgage will cost you your home if you don't pay it back.

Pulling equity out of your home can provide important benefits. Be careful. Don't risk the security of your home on frivolous spending.

Switching to a 15 year loan

Question: How do you determine if you should "exchange" your current 30-year loan for a 15 year loan?

Assuming you want to save money, the question is usually easily answered. 1) Multiply the monthly payment on your current, 30-year loan by the remaining number of payments. 2) Multiply the monthly payment of a potential 15-year loan by 180. Compare the two totals. The answer should jump out at you--especially if your 30-year loan is relatively new. A 30-year loan is usually far more expensive compared to a 15 year loan. I.e., you'll pay much more in interest with a 30-year loan compared to a 15 year loan. If your budget allows for the relatively higher payment of a 15-year loan, "exchange" your current loan for the 15 year loan.

How you exchange your 30-year loan for a 15-year loan is the next question. There are many different and valid ways of answering it. You could compare loans based upon total interest paid, before- or after-tax figures, Internal Rate of Return (IRR), Net Present Value (NPV), etc. Different methods evaluate to different numbers, but any valid method will identify your best choice.

The examples below are evaluated using the Net Present Value (NPV) method of investment analysis (for a different method of comparing loans, see Should I pay points or closing costs? NPV is employed for several reasons. The function is easily accessible via a financial calculator or spreadsheet program. NPV accounts for the time-value of money, investment risk, and requires relatively few calculations. Amortization and calculation of interest are not necessary. An NPV exists even when the IRR is undefined. When using NPV, be sure to compare investments with equal lives.

Simply put, the NPV is a measure of wealth. When selecting among several investments, the investment with the largest NPV should be chosen. In our examples, the NPVs are negative. You still select the loan program with the largest NPV--the one which is the least negative.

The first step in calculating NPV is to determine the amount and "direction" of the cash flows. In our examples, the loan amount is a positive cash flow--the borrower receives it. The payments are negative cash flows--the borrower pays them. To make our job easier, we'll use 15 annual cash flows, not 180 monthly cash flows. For the first cash flow--the loan amount--you must account for any loan fee you might pay. For example, if you get a $95,000 loan and pay a 1 percent loan fee ($950) from savings, your first cash flow is $95,000 – $950 = $94,050.

Hypothetical Example

Five years ago you obtained a $100,000, 30-year, fixed, 8 percent loan with monthly payments of $733.76. The balance on your loan is approximately $95,070--call it $95,000. If you keep this loan, you'll pay approximately $220,129 over the next 25 years (300 x $733.67). A quick look at a new, $95,000, 15-year loan at 7.375 percent shows total principal and interest payments for 15 years totaling approximately $157,308. The difference definitely jumps out at you and you don't need to go any farther to correctly understand that a 15-year loan is going to save you money. The next question is, what is the best 15 year loan to select?

Four options are considered. 1) Refinance your current, 30-year loan for a 15 year loan and pay the closing costs from savings, 2) Refinance your current loan for a 15-year loan and finance the closing costs by including them in your new loan, 3) Refinance your current loan for a 15-year, zero point loan, 4) begin paying your current, 30-year loan as it if were a 15 year loan (rarely will you incur any penalty for doing this, but check with your lender first). The least expensive choice is example one--the choice with the largest (least negative) NPV. The interest rates and fees used for the examples reflect the market differences between a 30-year and 15-year loan as of the date of this writing.

Eg. 1. New 15 yr. loan, 7.375%, borrower pays 1 point loan fee from savings.
CF 0: Borrower's initial cash flow = $95,000 – $950	$94,050.00
CF 1 - 15: Borrower's annual payment: $873.93 x 12)	– $10,487.13
NPV	– $ 7,362

Eg. 2. New 15 yr. loan, 7.375%, borrower finances 1 point loan fee.
CF 0: Borrower's initial cash flow = $95,950 – $950	$95,000
CF 1 - 15: Borrower's annual payments: $882.67 x 12)	– $10,592.00
NPV	– $ 7,427

Eg. 3. New 15 yr. loan, 8%, 1 point rebate pays loan fee. Increased interest rate required to obtain 1 point rebate.
CF 0: Borrower's initial cash flow = $95,000	$95,000
CF 1 - 15: Borrower's annual payments: $907.87 x 12)	– $10,894.43
NPV	– $10,198

Eg. 4. Keep current, 8% loan, make payments based on 15 yr. amortization. This is the same as eg. 3.)
CF 0: Borrower's initial cash flow = $95,000	$95,000
CF 1 - 15: Borrower's annual payments: $907.87 x 12)	– $10,894.43
NPV	– $10,198

Top 10 Mistakes relocation mistakes

Moving is difficult enough when things go smoothly. Moving can be a nightmare when things go wrong. Fortunately, you have the opportunity to learn from others' mistakes, and avoid repeating them. Here are a few tips to make your moving experience a little easier.

Canceling your existing lease too soon.

In a perfect world, all real estate transactions close on time. In the world we live in, transactions are often delayed a week or more. Suppose you asked your landlord to terminate your lease the day your purchase transaction was scheduled to close. A day or two before your scheduled closing date, you discover your transaction is delayed a week. In a perfect world, no one is inconvenienced and your landlord is willing to work with you. More likely, however, your landlord is inconvenienced and angry. Will you be thrown out? Will you have to find interim housing for a week or more? The eviction process takes a little time, so the Sheriff won't immediately remove you, but more importantly, this type of stress-producing episode can be avoided. How? Terminate your lease one week after your real estate transaction is scheduled to close. That way, if there is a delay in closing your transaction, you have some leeway. This approach might cost a little more, then again, it might not.

Not researching what money can buy in your new city.

Don't assume to know anything about factors such as salary, cost of living, taxes, rents or home values at a potential, new location. Be sure to read Relocation Planning: Avoiding Unnecessary Stress.

Not researching the demographics, neighborhoods and schools

Before you buy, spend some time online and offline researching demographics, neighborhoods and schools. Also, contact the local chamber of commerce and your REALTOR^® for more information.

Not setting up cost effective interim housing between destinations.

When you first move to your new city, you may need to set up temporary housing arrangements until you can close and move into a new home. This may take from a few days to a few months. If you need interim housing for a few days, perhaps staying in a hotel the simplest solution. However, if you need housing for more than a month, you may want to consider corporate housing or an apartment with a short-term lease.

Not getting your loan pre-approved before you move.

Once you start the moving process, it may be difficult to locate documents that are required by your lender/broker--bank statements, pay stubs, etc. Also, if you are pre-approved you will have more negotiating power when you make an offer to buy a home.

Not having options if you cannot sell your home.

You need to be prepared in the event you can't sell your existing home before you buy your new home. In this event, you might consider getting a bridge loan on your existing home, or using a home equity loan on your home to pull cash out. Check with your loan officer to discuss a backup loan program in the event your home doesn't sell. Also, consider renting your home if you can't sell it.

Not using local, licensed professionals.

Every area is different. In some areas you have to be concerned about earthquakes, other areas about floods, and yet other areas about termites. It is very important to get good local appraisers, Realtors® and inspectors to advise you about things to watch out for. Before you buy a home, have it inspected thoroughly by a professional inspector, who is a member of the ASHI (American Society of Home Inspectors). Make sure that your inspector is bonded, licensed and insured.

Not using the right moving company.

Moving companies have a wide variety of costs and service levels. Some companies give you a fixed bid, while others leave the final costs open-ended. Make sure that your moving company can guarantee pickup and delivery dates. Also, make sure that the moving company has insurance to cover broken or damaged items.

Not understanding your childrens' concerns.

Many children are very reluctant to move. They may be concerned about making new friends and losing current friends. Spend some time acquainting your children with the new neighborhood. If possible, have them meet their new teachers and other children in their new school even before they move. Finally, try not to move in the middle of a school year.

Not reading your employer's relocation policies.

Employers have different policies for reimbursing employees' relocation expenses. Read your employer's relocation policies carefully. If you are not clear about which expenses are reimbursed, check with the human resource department of your new employer. Also, take time to understand the IRS policies for expense reimbursement. Money that your employer pays towards your relocation expenses may be taxable. The IRS allows you to deduct certain expenses. Finally, keep good records and copies of all your receipts associated with your move.

Relocation can be stressful

You may be considering relocating to a new residence. Moving can be stressful and has been recognized as one of life's major stressors (Holmes & Rahe, 1967). Additional stressors often accompany a move, such as marriage, divorce or retirement. A side-effect of high stress levels can be a temporary deterioration of objectivity or sound judgment. When considering relocating, careful planning and research are essential to maintaining restoring one's ability to make informed decisions. This article suggests economic questions which should be answered prior to move.

Financial Analysis

Benefits of a Financial Analysis:

This article emphasizes the importance of obtaining an individualized, accurate, after-tax (federal, state, local and Social Security taxes) financial analysis of the changes in your living situation resulting from a job-related move. The analysis should consider all family members--including children. Will your spouse need to find a job? Will your children require additional school- or activity-related expenditures? Only by obtaining an accurate analysis can you make the decision which is best for you. The analysis can also be a valuable tool when negotiating with your new employer. It can help the employer better understand what they're offering you.

Don't settle for superficial, before-tax financial analysis. Such an analysis will inaccurately represent your new situation, perhaps leaving you with an unacceptable living standard. Don't accept the argument, "Others in this area in this job earn this much. . ." If your new employer could find someone in the area, they wouldn't be offering you the job! If you settle for a cursory analysis and end up with less than what you're accustomed to, you could be unhappy, less productive, back in the job market, or relocating again. The following pointers help underscore these important concepts.

Cost of living and salary considerations:

A lower salary may be a blessing in disguise. If you're moving to an area with a lower cost-of-living, you may be able to increase your disposable income, providing more money for essentials and investments. If you're moving to a higher cost of living area, you'll want to be equitably paid, or at least have the potential to soon offset the increased cost of living. Your analysis should include changes in:

Recurring income and expenses:

Income from all sources: salary, wages or business income.
Automobile and transportation expenses: personal and commuting distances, insurance premiums, maintenance, employer reimbursements, depreciation, etc.
Benefits: medical, dental and life insurance, retirement, day care.
Housing:
- Compare your current home with a similar one in a similar neighborhood.
- Be aware of increased rent, mortgage payments, property taxes, insurance premiums, upkeep and maintenance, etc.

Non-recurring (one-time-only) income and expenses:

Capital gain and capital gain tax upon the sale of your current home if you purchase a lower-priced home.
Capital gains and capital gains taxes upon the sale of other assets. For example, you sell a rental home because you can't manage it from your new location.
Moving expenses: movers, hotels or temporary living quarters, travel expenses, telephone activation, etc.
Non-recurring fees associated with purchasing or leasing a new home.
Non-recurring fees associated with selling your current home.

Ideally, you'll be reimbursed for non-recurring expenses, and your new salary will provide you with at least a familiar standard of living

Conclusion

The importance of obtaining an individualized, accurate, after-tax analysis of the changes in your living situation can't be over-emphasized. The money invested in such an analysis will pay you dividends for years to come. By now you may be thinking that a financial analysis is a good idea. Where do you go to get one? The professional you chose is ultimately up to you. Before making your choice, you may want to visit these web sites for ideas. These web sites are included here for informational purposes only. The author does not recommend or endorse them.

Certified Financial Planner (CFP) Board of Standards home page. This is a resource for information about CFP licensees and the financial planning profession.

National Association of State Boards of Accountancy home page. NASBA serves as a forum for the nation's state boards of accountancy which administer the Uniform CPA Examination, license certified public accountants, and regulate the practice of public accountancy in the United States. This site includes information about CPAs in your area.

References

Homles, T.H. and Rahe, R.H. 1967. "The Social Readjustment Rating Scale"
The Journal of Psychosomatic Research, Vol. 11, Pergamon Press, Ltd.

Before you relocate

Most people don't move often enough to become well practiced at it. That's why this "To Do"-list is so important. Follow it and accomplish most of what you need to in preparing for your move.

Ninety days prior to moving
Preparing for your move this far in advance may seem unnecessary, but some things should be done as soon as possible. Here are a few:

If commercial transportation (plane, rental car, bus), hotel or temporary living quarters figure into your moving plans, make the reservations as soon as possible. Have you ever tried to make a plane reservation to a popular destination during peak season? Don't risk this happening to you and your family unless you want the experience of flying "stand-by." OK, if you're moving to Anchorage in February, you might not have to worry--but don't take the chance. Make important reservations early.
Will the family pooch sit on your lap during your move, or will you have to arrange transportation for him or her?
If you're going to use a commercial moving company, find one now and get a written estimate. You won't be pressed for time and you'll make your best deal.
Create a budget for the next three months and include the cost of moving.
If your just moving across town, or only need short-term rental of a truck, dolly, storage unit, etc., try to secure them now, or determine the earliest date you can reserve them. Note that date in your daybook.

Thirty days prior to moving

Remember those reservations you made sixty days ago? Confirm them.
Go to the post office and grab as many "Address Change Notification" cards as you think you'll need--then grab a few more. (Your taxes helped pay for them and you'll probably need extras.) Send one to everyone you know or with whom you do business. Here's a short list of possible recipients:
- Financial institutions: banks, brokerage companies, companies managing your retirement accounts created with previous employers, etc.
- Credit card companies
- Doctors, dentists, attorneys, insurance providers
- State and Federal agencies from which you receive income
- Internal Revenue Service (IRS)
- Companies you might pay annually, such as you Internet service provider (ISP), pager, etc.
- If you use a software program to compute your income taxes, it will contain the required, "Change of Address" form, so don't bother calling the IRS for one. If you pay a tax preparer, they'll have the form.
Go to your local "U-Drive" and purchase boxes, tape, marking pens, box-cutters, bubble-wrap, styrofoam peanuts, rope, etc. Ask U-Drive if you can return any unopened or unused materials--if you can, get more than you think you'll need. Keep your receipt and take good care of the supplies until you use them.
If you're driving, plan your driving route.
Purchase or have handy a briefcase or satchel to exclusively contain your moving-related paperwork. Items to keep in it include:
- All receipts associated with your move. Many expenses may be tax-deductible.
- Itinerary
- Travel route
- Maps of your new neighborhood
- Transportation tickets
- Hotel information and reservation confirmation numbers.
- Any documents you think you'll want handy.
- This list!

Two weeks prior to moving

Remember those reservations you made seventy-five days ago and confirmed two weeks ago? Confirm them again.
You may be using professional movers who will help pack your household items. Whatever the case, there are some things you'll want to pack yourself. Items to consider include:
- Irreplaceable items such as, jewelry, coin collection, heirlooms, high school yearbook, favorite coffee mug, etc.
- Computer
- Legal, medical, insurance, financial documents, etc.
Start packing all those boxes you have. Keep related items together and clearly mark the contents of all boxes. Identify boxes containing fragile items. Pack heavy items in small boxes; lighter items in larger boxes. Keep all boxes easily accessible. Don't tape them shut yet.
Contact utility, local and long-distance telephone, cable TV and trash companies and inform them of your move. Contact these types of companies at your new location and let them know when to activate them at your new address.
Recruit additional moving-day help if necessary.
Arrange to close or transfer your bank accounts if necessary.

One week prior to moving

Empty your safety deposit box.
You've been packing boxes for a week. Some boxes you go back to for things you need, some you haven't looked into since you packed them a week ago. Tape shut the boxes you haven't looked into since you packed them.

One day prior to moving

Go to the bank and get cash.
Today is the day to finish packing. Seal all boxes. Return to U-Drive all the unused packing materials and boxes.
Have a day-bag containing your toiletries, medications, first-aid kit, change of clothes, etc. This may be a good place to keep your purse or wallet, itinerary, travel tickets, extra glasses, book, etc. This will double as your carry-on bag if you're flying.
Conduct a maintenance inspection of your car. Check tire pressure, battery, radiator, oil and other fluids, fill the gas tank.
Pick up the rental truck.
Confirm casual help, movers, etc. you'll be using on moving day.
If you have children, pack a bag of games and extra batteries for their electronic games.
Congratulate yourself on a difficult job well done!

After you relocate

Within the first 3 days:

Get phone books and maps of the region. Consider purchasing a Thomas Guide (Thomas Brothers Maps^®) for each car. A Thomas Guide is a map which lists names, addresses, phone numbers and locations of public transportation, public works, airports and airlines, major commercial and public buildings, Chamber of Commerce, colleges and universities, golf courses, hospitals, hotels and motels, libraries, post offices, private and public schools, shopping centers, U.S. government offices, points of interest, parks, Zip Code areas and more. Large grocery or stationery stores usually carry Thomas Guides.

Clear the kitchen table, spread your street map and identify locations of services such as these nearest you:

Police and fire stations
Hospitals and medical clinics
Gas stations
Grocery, pharmacy, hardware and department stores
Bank, dry cleaners, veterinarian

Within the first 10 days:

Call the garbage company or Department of Sanitation. Find out when the garbage and recyclable material is picked up. Are special containers required for recycling plastic, paper, oil, etc?
Contact the Chamber of Commerce. They can provide a wealth of information about your community. Your local chamber may have informational packets designed especially for newcomers.
Call City Hall and find out where to register to vote.
Contact the Department of Motor Vehicles to change the address on your driver's license.
Identify and contact your new doctor and dentist. Contact your previous care providers and request your records be sent to them.
Contact your new insurance agent. He or she can help you transfer your existing insurance policies.
Realize that moving is one of the most stressful activities one can experience. Make extra efforts to be patient and tolerant during this difficult time.

	Rent	Buy
Tax Savings	You might receive a state income tax renter's credit, but nothing more.	Payments towards interest, taxes and points are tax deductible.
Equity Build-up	None, unless your rent payment is lower than the cost of owning a home, and you invest the difference in a CD, stock or mutual funds.	Even if your home value remains constant, your loan balance should decrease. This results in increasing equity in your property.<
Mobility	Most leases are less than 1 year in duration. It's easy to move at the end of a lease. Also, your landlord usually won't have to renew your lease, and you could be forced to move out at the end of your lease.	Selling a house can take time and may cost 6% to 8% of the sales price. If you have to sell quickly, it could cost even more. If you don't have to sell, yet must move, consider renting your house. You'll probably receive additional benefits by depreciating your home for income tax purposes. Remember, buying a home makes sense if you plan to hold it for several years.
Payments	Your rent payments generally increase every year. Rent increases are often tied to inflation.	Mortgage payments on a fixed-rate loan will not change. Adjustable-rate loan payments vary according to the terms of the note and economic conditions.
Timeframe	Renting makes sense if your time frame is less than 2 to 3 years.	The longer you plan to own your home, the more sense it makes to buy. Some buyers with plans to move relatively soon may buy if they expect the market to appreciate significantly.

Checking Accounts:	__________________
Savings Accounts:	__________________
CDs:	__________________
Stocks:	__________________
Bonds:	__________________
Mutual Funds:	__________________
Other Securities:	__________________
Retirement Funds (401K, IRA, etc):	__________________
Gifts from relatives:	__________________
Total Cash Available:	__________________

Down payment:	__________________
Closing costs including points:	__________________
Prepaid expenses (taxes, prepaid interest, insurance, pmi):	__________________
Cost of repairs, if any:	__________________
Total Cash Needed:	__________________

LTV	Front-Debt Ratio	Back-Debt Ratio
90.1%+	28%	36%
At or Below 90%	33%	38%

Property Address
Sing Fam/Condo
Price
Square Feet
Sq. Ft. Price
Lot Size
Age
No. of Bedrooms
No. of Bathrooms
Living room
Dining room
Family room
Modern kitchen
Basement
Air conditioning
Heating type
Wiring Type
Plumbing Type
Fireplace
Storage
Garage
Yard
Landscaping
Deck/patio
Swimming pool
Disability access
Condition
Room to add on
Quality schools
Nearby park(s)
Nearby shopping
Public trans.

Feature	Need	Want	Don't care	Don't want	Notes
Single Family
Condo/Townhome
Square Feet
No. of Bedrooms
No. of Bathrooms
Living room
Dining room
Family room
Modern kitchen
Full basement
Air conditioning
Modern heating
Modern wiring
Modern plumbing
Fireplace
Storage
Garage
Yard
Landscaping
Deck/patio
Swimming pool
Disability access
Move-in condition
Room to add on
Quality schools
Nearby park(s)
Nearby shopping
Public trans.
Resale value

LTV	30 year fixed	15 year fixed	30 year adjustable
95%	0.78%	0.72%	0.92%
90%	0.52%	0.46%	0.65%
85%	0.32%	0.26%	0.37%

Resources

Library

Why is an appraisal required?

Appraisal Methods

How much does an appraisal cost?

Reasons for an Appraisal

Who owns the appraisal?

What if I decide to use another mortgage company after the appraisal has been completed?

Can you increase the appraised value of a property?

Credit Reporting Agencies

Credit Repair

The Scam

The Warning Signs

The Truth

Reporting Negative Information

The Credit Repair Organizations Act

Have You Been Victimized?

For More Information

Types of Credit Reports

Credit and Your Consumer Rights

Your Credit Report

Your rights under the Fair Credit Reporting Act:

Your Credit Application

Your rights under the Equal Credit Opportunity Act:

Your Credit Billing and Electronic Fund Transfer Statements

Your Debts and Debt Collectors

Your rights under the Fair Debt Collection Practices Act:

Solving Your Credit Problems

For More Information

Credit and Divorce

Individual Account

Joint Account

Account "Users"

If You Divorce

For More Information

Fair Credit Reporting Act

For More Information

What is a FICO score?

Frequently Asked Questions (FAQs)

For More Information

How do I correct errors on my report?

Cosigning a Loan

Cosigners Often Pay

If You Do Cosign

For More Information

Types of Home Equity Loans

What is a Home Equity Line of Credit?

What is a home equity line of credit?

Shopping for a Home Equity Line

Is a home equity line what you need?

Carefully compare plans

Negative Amortization

Borrow Wisely

Costs Of Obtainings a Home Equity Line

Repaying Your Home Equity Line

Glossary

Home Equity Loan Checklist

Making the Buying Decision

How Much Money Should You Put Down?

How Much House Do You Qualify For?

Tips and Tricks

Get Preapproved

Start Looking for a Home

Advantages of using a real estate agent

Finding and keeping a good agent

Market Conditions

Architectural Styles

Suitability Standards

Visit Properties

Compare Properties

Home Features

How Much to Offer

Market considerations

Property-specific (internal or local) considerations

Make an Offer

Negotiate Terms

General principles

Inspect the Home

Get Final Loan Approval

Contingencies