Should I Buy a House Because the Rates Are So Low?

Guest post by John Ulzheimer

Home values have plummeted across the country.  Mortgage interest rates continue to hover between 4 and 5%, a historical low.  Both seem to suggest it's a good time to buy a house.  So, is now the time to pull the trigger on a new mortgage?

There are a few things you should consider before you start looking for a house.  First, how comfortable would you be if you were to become "upside-down?"  That means you would owe more on the home than it's actually worth.

Property values continue to fall and there's really nothing to indicate they will stabilize anytime soon.  Point being, you might be buying on the way down rather that at the bottom or even on the way up.  Today some 28% of homeowners are in that same position and trust me, most of them wish they weren't.

Second, don't buy a house simply because the rates are low.  Too many people are focusing just on the interest rates and that's a bad idea.  Remember, when you borrow $250,000 to finance a home, you still owe someone $250,000.  Just because the loan has a very low interest rate doesn't make you any less in debt than someone who has a horribly high interest rate.

If you're going to buy a house then do so because you want the home, you love the neighborhood, the school district is good, or you're tired of renting. Don't do it just because the rates are low.  Think of the low rate as being the cherry on top, not the ice cream on the bottom.

Just because you're hearing advertisements for incredibly low interest rates it certainly doesn't mean that you'll actually qualify for those rates.  You better have killer FICO credit scores and you better have them at all three of the credit reporting agencies.  Remember, mortgage lenders pull all three of your credit reports and all three of your FICO scores and then use the middle of your three scores on which to base their decision.

And finally, you may have to pony up a 20% down payment to get those really low rates. The world of mortgage lending has changed dramatically since the end of 2007.  There are no more "liar loans" (when you would tell someone how much you made and nobody verified the accuracy).  There are no more "110 LTVs" (loan that were 110% of the appraised value of the home).  Sanity has worked it's way back into the mortgage lending environment, which means better credit is required and income has to be, well, real income.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.

If You Want to Improve Your FICO Scores…Paying Off Credit Debt Reigns Supreme

Guest article by John Ulzheimer of SmartCredit.com

When it comes to boosting your FICO credit scores there are a variety of strategies that will yield varying amounts of improvement.  Many people believe that getting negative information removed from your credit reports is the number one way to increase your scores.  This is correct but only if the consumer is successful at getting most, if not all, of the negative information removed.  Getting one of your twelve collections removed isn't going to do anything for your scores.

A much more actionable (and realistic) way to increase your scores is to pay off debt.  Not only is this a proven way to earn better scores but also it's practically immediate. Paying down debt can result in a better score in less than 30 days, which is lightening fast in the slow moving credit-reporting environment.

But before you crack open your checkbook you'll want to consider WHICH debt you're going to eliminate.  Why?  Because when it comes to improving your credit scores not all "debt elimination" is created equal.  In fact, paying some huge debts will yield little to no score improvement while paying smaller debts can result in meaningful score boost.

Using a scoring tool built by FICO, I recently simulated the following "pay off" scenarios and measured their impact to a FICO score of 630, which is clearly one that you'd like to improve.  Nothing other than the following actions changed on the credit report.

1) Paying off a $250,000 mortgage

2) Paying off a $35,000 auto loan

3) Paying off a $5,000 credit card

The results are as follows…

Paying off a mortgage loan of $250,000 improved FICO 630 to FICO 635

I've been telling people for many years that installment debt, even in large amounts, doesn't have much of an impact to your scores.  This is the quantification of that advice.  And while this is just a simulation, in 2010 I sold a house and eliminated a $249,000 mortgage and my FICO scores went up four points.

Paying off an auto loan of $35,000 improved FICO 630 to FICO 635

An auto loan is an installment loan (like a mortgage) and the effect of paying it off is equally unimpressive from a scoring perspective.  Don't get me wrong; it's nice not having a monthly car payment.  And, it'll save you big bucks not paying interest on a $35,000 loan any longer.

Paying off a credit card balance of $5,000 improved FICO 630 to FICO 665

Eliminating the credit card debt resulted in the largest improvement to the credit score, and really it wasn't even a close race.  Credit card debt is scientifically proven to be a riskier type of credit for lenders to extend, which means even smaller amounts like what was used in the simulation can have a significant impact to your FICO scores.  It also means if you can pay it off your scores will improve a lot, and very quickly.  And even if you can't pay off your credit cards 100%, your scores will still improve by paying it down as much as possible.

Now, where's my checkbook?

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.