O.M.G! INTEREST RATE HIKE!

We are a sound-bite society.  But it's not entirely our fault.

                We are bombarded daily with so much information from so very many sources that it is impossible to process it all.  So we lean on those little blurbs, the abbreviated headlines that we see on our phones or our televisions or on the internet, or…. God forbid, on Facebook.

                 But that's another subject.

                And yesterday, one of the top blurbs vying for your attention and mine was that the Feds have raised the interest rate.  That may be the sum total of what you heard or saw.  Just that one little phrase.  And a conversation similar to the following might have flitted through your head.

                "They've raised the interest rates!  I probably can't buy a house.  I knew I should have already done that.  My credit card payments will be a lot higher.  I'll never get out of debt and I'll have to drive this car, like, forever…"

                Let's face it.  The majority of us don't really understand the whole interest rate thing anyway.  We are not accountants and somehow that entire lesson about compound interest went entirely over our heads.  And like every other soundbite, blurb or Facebook headline you read, you really only want to know one thing.

                What does a rise in interest rates really mean to ME?

                I don't pretend to be a mortgage expert or a financial analyst.  (Good thing, too, because I am woefully unqualified to be either.)  However, after all these years in real estate, there is one thing I can help you understand -- with the help of my handy-dandy loan calculator app. 

                How does a change in interest rate really affect your ability to buy a home?

                The answer is… not that much.

                The following is a simplified example.  Remember, these figures are principal and interest only.  If you were actually looking at your potential payment on a home, it would include the cost of taxes and insurance as well which will vary depending on your area.

                So, here's the most basic example I can think of:

                You are purchasing a $100,000 home and are going to pay for it over thirty years.  The principal and interest portion of your payment at a 3.75% interest rate would be - $463.12

                At 4.0% (the Feds raised interest rates by .25%) your payment would be - $477.42. That's a difference of a whopping $14.30 per month. But let's assume they might raise it again.

                At 4.25% - $491.94

                At 4.5% - $506.69

                At 4.75% - $521.65

                And at 5%, that payment will be $536.82.

                If the interest rate goes up a whole percentage point in 2016, the difference in your principal and interest payment will still only be a little over $70 a month.

                Come on, admit it.  You spend that on fast food and pop at the convenience store.

                So, how does this interest rate hike affect your ability to get a mortgage?  

                Not much.

                Not much at all. 

                

FICO, SCHMIKO!  (Or, What in the world is a FICO score anyway?)

                I'm going to be honest with you. Understanding  your credit score can be like understanding a foreign language film without subtitles. The whole credit score world seems to speak a numerical language, and unless you're a computer, you don't speak numbers. Even their commercials are peppered with numbers: 720, 830, 640.  But what on earth do they mean and how do credit scores happen?

                So, let's start with the basics.  If a bank is going to loan you money, they want to know two things:

                Will you pay this money back?

                Will you pay on time?

                A FICO score is the lending world's attempt to keep score for you.  Imagine you're at a baseball game and you have one of those cool scorecards that lets you keep track inning by inning.  The Yankees score 2 runs in the first and you mark your card accordingly. The Braves scores 1 run and 1 error in the second.  Now imagine that there's only one team, and it's you and your spouse. Experian, Transunion and Equifax are the ones sitting in the bleachers, keeping the score cards. 

*Paid that credit card bill fifteen days late? -1!  

*Borrowed $5000 for a motorcycle? -10

*Paid off that credit card as agreed? +20  

                Those figures are arbitrary and mean absolutely nothing in the real world, but you get the idea.  Every credit reporting agency keeps a running tally on you.  And me. And the 300+ million people in the U.S.  Everything we do, whether we apply for a store credit card, buy a new car or get a cell phone is reported to these agencies.  The combination of activity in your credit life is what constitutes a FICO score.

                So, what makes it lower than it should be?  Obviously, unpaid bills or bills that are paid late, but a myriad of other things can affect your score negatively. If you have too much debt, or too many new credit cards.  Believe it or not, too little debt and too few credit reportings can also be detrimental.

                There are five things that contribute to your FICO score.  Types of credit in use, New Credit, Payment History, Length of Credit History and Amounts owed.

                In order to stay aware of your position in this confusing world, always request your credit report from all three agencies once a year.  Mistakes happen and it's possible there are things on your credit report that make you go, "Huh?"  That is the time to make a call and set things in motion to fix any items that are not yours.

                If everything on the report looks like it's yours, but your score still will not let you buy a house or car or tractor or whatever you want, follow these simple tips.

                Pay your bills on time.  From your water bill to your cell phone bill to your car loan, pay on time.  Every month. Period.

                Get current and stay current. If you've fallen behind, make the moves to get things up to date and then stay there.  It might take a while, but your efforts will cause that number to rise.

                If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.  This is not an instant fix, but managing your credit will allow your score to improve over time.

                Keep your balances low.  High outstanding debt can significantly lower your FICO score.

                Pay off debt.  Those offers from your credit card company allowing you to move your "high interest balances" to another card won't help your score.  Paying down the debt will.

               

                In short, manage your credit carefully.  Your future depends upon it.

Blast From the Past!

     Once upon a time in America, say around 1960, the average price of a home in this country was $16,500.
     Yes, you read that right.  Sixteen thousand Five Hundred Dollars.
     Of course, a dozen eggs cost 57 cents and a loaf of bread was a quarter.
     But I digress.
   
     In those bygone days, owning a home was the pinnacle of achievement.  It was "The American Dream".  Part of the reason it was a "dream", is that it was not easy to achieve.  When you owned a home, you had arrived.
      In those days, and frankly in the days when I first started Real Estate, people saved for a down payment, usually 20%.  On $16,500, that would be somewhere around $3300.  And the average house payment was $85.00. Remember,we're talking about a time when the average household yearly income was $5620.00. (Source: bls.gov/opub/uscs)
    It is true that everything was cheaper then.  Milk was 49 cents a gallon. Gas was 31 cents a gallon. A stamp was 4 cents.
    And the mail was delivered on time.

    But that's another subject.
    Saving for a down payment and buying a house were a benchmark of success -- much as they still are today.
    In comparison, buying a house in 2015 is actually much easier. The interest rate is incredibly low.  Compare today's rate to the interest rate in 1993 when I was first licensed to be a Realtor.  The rate in January of 1993 was around 8% for a 30 year Fixed Rate Mortgage. The rate in January of 1995 was 9.15%.
       At this writing, the 30 year rate is 3.76% (Source: Zillow), and that is a thirteen week high!
       Lenders and the government and the economy have all banded together to make owning a home more accessible to today's consumer than ever before.
       Does that make the American Dream less valuable?  Not at all.  It simply makes it more accessible.
       And there's nothing quite so satisfying as making a house your home.