Home buyers save a lot of money by focusing on their credit scores.

When people start the process of buying a home, there are a lot of things to focus on: which neighborhood they want to live in, finding the perfect house, getting approved for a mortgage at a great interest rate, and then the all-consuming process of packing and moving. But before any of that happens, there is one more item that should lead off their checklist: taking care of their credit score.

While a significant portion of homebuyers still pay cash for their homes (a reported 4 out of 10 buyers paid cash in 2014!), but the majority of buyers still need to take out a mortgage loan. So keeping your credit score iup to par has some very tangible benefits during the home buying process:

• Lower interest rates,
• A greater variety of loan programs available,
• Qualify for loans with less money down,
• Your offer on a house will be seen as more favorable if you have a high credit score, giving you more leverage. During multiple offer situations and bidding wars, the seller sometimes requests additional documentation like proof of the buyer’s credit score and funds.
• But, of course, saving money when you make your mortgage payment every month is the real benefit. Even a credit score increase of a few points may help you qualify for a lower interest rate, adding up to tens of thousands of dollars in savings over the life of your loan.

Consider these three scenarios, where three consumers who are buying a $400,000 home, with a $320,000 mortgage, qualify for interest rates of 4%, 4.5%, and 5%, respectively. Please note this is just an illustration for educational purposes.

Interest Rate: 4%
Monthly Payment: $1,527
Total of 360 Payments: $549,982.42
Total Interest Paid: $229,982.42

Interest Rate: 4.5%
Monthly Payment: $1,621
Total of 360 Payments: $583,701.48
Total Interest Paid: $263,701.48

Interest Rate: 5%
Monthly Payment: $1,717
Total of 360 Payments: $618,418.51
Total Interest Paid: $298,418.51

That means if your credit score was top notch and you qualified for a 4% interest rate (hypothetically), you’d save $190 a month compared to the 5%, and $94 compared to the 4.5% loan. That sounds nice, but doesn’t seem like big money, right?

But when you compare the long-term savings, the person with the 4% loan saves $68,418 in total payments over the life of the loan compared to the 5% loan, and $33,719 compared to the 4.5%

That’s some HUGE savings for just a very small interest rate difference. So how do you make sure your credit score is ready for the home buying process?

First off, it’s important to understand that the scoring system used by FICO (the Fair Isaac Corporation) is the most popular credit reporting metric, acceppted by almost all mortgage lenders. FICO scores range from 300-850, with a 680 considered good and above 720 an excellent credit score.

So what credit score should you aim for? In fact, 32.8 million people have FICO scores between 700 and 749 but approximately 70 million consumers with FICO scores above 760. But that’s just base camp on the credit score mountain because roughly 36.4 million people have scores between 750 and 799 and 38.6 million are in the 800-to-850 range. Only about 1% of people with FICO scores, around 2 million individuals, ever reach the summit with a score of 800-850.

Your score is calculated based on these factors:

30% Credit utilization (Ratio of debt versus available credit.)
35% Payment history.
10% Mix of credit.
10% New credit.
15% Length of credit history.

So here are some tips to make sure your credit score will be as high as possible when you’re ready to buy a home:

1. Always pay on time.
According to FICO, 96% of people with a FICO score of 785 or greater have no late payments on their credit reports, so be one of those people who have a spotless payment history if you want the perfect FICO. Since payment history is 35% of FICO’s scoring model, paying on time is crucial.

2. Check your credit report periodically.
It's important to make sure that there are no errors on your credit file and everything is in order. These days, you also need to make sure that your identity hasn't been stolen or compromised, which effects up to 1 in 8 Americans every year.

3. Spend less and pay down your balances.
FICO calculates a significant portion of your score by your credit utilization ratio – how much debt you keep to how much your total available balances are. A survey of those who had the top scores revealed their average credit card balances relative to their limits was just 7%.

FICO calculates 30% of their scoring model by the overall money you owe and how close you are to the limits on your credit cards and revolving debt, so low balances and healthy ratios are the key to a top score.

4. Keep a good mix of credit.
Consumers with FICO scores above 760 have, on average, six accounts that are currently “paid as agreed” and an average of 3 accounts with a balance.

5. Keep well-seasoned accounts.
Most super scorers also have, on average, an oldest account that’s 19 years old. The average age of their accounts is between 6 and 12 years old and they opened their most recent account 27 months ago or more. 15% of FICO’s scoring is calculated by the credit history.

6. Start early.
Don’t wait until your ready to start looking at houses or apply for a mortgage to start working on your credit. Get a copy of your credit report for a detailed look both 6 months and then 3 months before you’re ready to apply for a mortgage. That will give you plenty of time to pay down debt, close unwanted accounts, or dispute errors and inaccuracies in order to maximize your score.

7. Do’s and Dont’s during the home buying process.
It’s important not to make big changes during the mortgage process, as it may trigger a red flag for lenders, who are trying to make decisions based on a static snapshot of your finances. Avoid big purchases on credit, moving large sums of money to and from bank accounts, and applying for any new credit or closing existing accounts.

8. Consider getting help.
Whether you sit down with a mortgage professional, bank representative, non-profit counseling center, or a good, trusted credit repair organization, it will help to get advice about improving your credit score from a pro.

Does it make sense to pay extra toward your mortgage?

Does it make sense to pay extra toward your mortgage?

The easy answer to that question is, “yes,” as it is factual you’ll save a lot of money on interest by making extra payments to your mortgage.  However, does the savings pack as much punch as you think, and under what circumstances is it not beneficial?  If you’re going to accelerate your mortgage payoff, is there a right way to do it? 

Why you should pay down your mortgage faster.

The mortgage payments you make are front-loaded with interest.  If you look at a schedule of your total payoff to $0 over 30 years (called amortization,) you’ll notice that the first payments are almost all interest to the bank.  Half of your payment won’t be going to pay off principal until around year 10 for most mortgage holders! 

Assuming you’ve got a $300,000 loan amount set at 4.5% on a 30-year fixed mortgage, even an extra $100 payment would save you $34,086 over the full loan term and shorten your mortgage by 3 years, 7 months.

How about if you could swing an extra $500 every month?  You’d be saving a whopping $107,912 and shorten your mortgage by 11 years and 10 months!

Why extra payments early on will save you so much

If you’re like most people when it comes to paying off your mortgage, you run counterintuitive.  You make normal payments for 10 years and then open their bill one day and see the principal edging down, and that’s when you get excited and start paying more aggressively.  Instead, you should pay more in the beginning to make the greatest financial impact.  Why? 

Don’t forget that interest on a mortgage is compounded monthly.  That means every month you’ll be charged interest not only on your existing principal balance but also on the previous interest that’s accrued.  So if you begin with a $100,000 mortgage at 5 percent annual interest, after one month, you will be charged 5 percent/12, or just under 0.42 percent, each month.  Therefore the longer you let interest accrue before paying down your loan, the more interest payments you’ll make. 

That accrued interest may not seem like a whole lot of money, but that same $1,000 plus interest will cost $1,004.17 after the first month, but will cost $4,467.74 over the lifetime of a 30-year mortgage.  An extra $1,000 paid in the first month will save you nearly $4,500 in the last.  You’re effectively paying down the principal amount that the bank can charge interest on, and also bypassing their amortization schedule that’s so front-loaded with interest. 

How can you calculate how much you’ll save with extra payments?

There are two ways to do this – the smart way and the smarter way.

The smart way is this:

To determine how much you'll save from an additional payment by dividing your annual interest rate by 12, adding 1, then multiplying it by itself for every month left in your mortgage: (1 + R/12)^M where R is your annual rate, and M is the number of months left in your mortgage. "^" means "to the power of," and is shorthand for "multiplied by itself this many times."

The smarter way is this:

Go to this calculator and plug in the numbers and get an answer.

How can you can pay extra?

Bi-monthly payments.

Instead of making one mortgage payment a month, you can set up your account to make a payment every two weeks.  That sounds like the same thing, right?  But because there are 52 weeks in the year, you’ll be making 26 bi-weekly payments, or one more full payment compared to a monthly schedule.  For most people, bi-monthly payments will shave 4-8 years off the life of the loan and save tens of thousands of dollars!

Write a bigger check every month.

Homeowners can also write a bigger check every month, with the extra amount going toward principal.  Some people just round up a few hundred dollars, while some add an extra 1/12 of the amount to each check, resulting in an extra payment every year, achieving the same outcome as bi-monthly payments.

Make a one-time yearly payment.

Some people prefer to write on bigger check to their mortgage company once a year when they get a tax refund, bonus at work, investment dividends, etc.  This can be effective but be careful – everyone starts out good intentioned, but discipline tends to fade when it’s tempting to use that month for a vacation, new televisions, or to pay off other obligations.  But if that’s the only way you can swing an extra payment, it’s better than nothing!

Who shouldn’t pay down their mortgage faster?

Paying a mortgage off quicker isn’t for everyone.  There are some situations that warrant a different course of action to achieve your financial goals.  Always check with your trusted financials advisors like your financial planner, tax professional, and insurance agent, before you finalize your plan. 

If you have credit card debt.

Keeping high credit card balances will cost you much more than the low interest rate on your home, which also may have tax benefits.  A lot of credit cards charge 20% interest or higher and come with hidden fees, so consider becoming credit card debt free before you start allocating extra money toward your mortgage.  However other debt like low-interest student loans may take a back seat to your mortgage.

If you have an upcoming tax bill.

It makes no sense to pay extra to your mortgage but then have a shortage come April 15, so make sure your income tax picture is in order, first.

If you don’t have enough savings.

It makes sense to amass a big safety net in savings before paying down your mortgage.  Experts recommend you put aside 6-12 months worth of expenses before funding investments or paying extra to your mortgage.

If you have investments that pay better.

If your mortgage is charging 5% with tax benefits, (called the effective rate) but you have some sort of investment that’s paying 10% return, for example, it may be wise to fund the investments, first.  Basically, you’ll be making more than the mortgage will cost you.  Utilize the principle of arbitrage by borrowing money at a low rate and investing it to earn a higher rate, or in this case, not throwing it at your mortgage.

If you’re employment is unstable or commission based.

If you have a job that yields peaks and valleys of income, you may want to fund savings more and pad your safety net before throwing more money at your mortgage to adequately prepare for the lean times.

If you plan on selling.

Here’s the kicker – if you plan on selling your home within the next 10 years, it may not make sense to pay down your mortgage faster.  Your money won’t necessarily be wasted, but assuming you go out and buy another home once yours is sold, you’ll be starting the amortization schedule of paying heavy interest from the beginning again, so those extra payments may be better allocated elsewhere.

If you are going to refinance.

Here’s the big one that people forget about; even if you plan on staying in the home forever, the average person refinances every 5 years or so.  That means a new loan with a new amortization schedule starting from scratch so just like selling, you may want to consider using the money for other beneficial financial instruments. 

Here are some other things to consider:

Pay early and often.

Like we pointed out, extra payments are most beneficial in the beginning of the mortgage. Why?  As we learned, interest compounds monthly and is heavily front-loaded, so the sooner you chip away at the principal amount, the less you’ll pay over the life of the loan.  

For instance, let’s say you have a 30-year mortgage at 5% on a $250,000 loan and pay $100 extra every month.  If you started making extra payments in year six of your 30-year mortgage, you’d save $15,095.21, and take 78 months off your mortgage.  But if you took only one year to start paying $100 extra every month, your total savings would increase to $20,989.55, and 96 months would come off your mortgage term.

Keep one eye on the tax man.

There are changes to the mortgage interest deduction laws, so consult your tax professional before setting your plan.

When life throws you a curve ball.

The other factor not highlighted here is flexibility.  If you pay extra into your mortgage and you then lose your job or have a divorce or medical disability and need the money, you can’t get it back.  However, if you keep the same dollars in some sort of interest-earning account that gives you flexibility to access it, you’ll be able to take out that money when you need it most.  That’s a huge factor in your overall financial picture that shouldn't be ignored.  

10 Marketing tips for loan officers and mortgage professionals. Part 1 of 2.

Loan officers and mortgage lenders have to compete more than ever to get business, and increased regulations leave less fat on the bone for commissions. Therefore, it’s of primary importance that each independent loan officer has a marketing campaign that’s dynamic and efficient yet still personal.  Traditional methods (like cold calling or billboards) are becoming dinosaurs, and marketing needs to have more depth and offer more value than just setting up a Facebook page or sending out emails.  So here are 10 innovative marketing strategies for mortgage professionals, guaranteed to differentiate you from the herd and bring in business IF you utilize them consistently.

Loan officers and mortgage lenders have to compete more than ever to get business, and increased regulations leave less fat on the bone for commissions.

These are 10 of our favorite 20 marketing ideas.  Next week look for the next 10!

1. Blogging.

As the saying goes, “If you’re not talking to your clients, someone else is,” and the #1 way to engage and interact with your clients on a regular basis is to writing a regular blog.  It fills up the search engines with your name and keywords and will build trust and credibility with your target market.  But remember that a good blog isn’t a glorified sales pitch - it should be more about the issues, questions, and lifestyle topics your audience is interested in and less about you, other than trying to help! 

2. Social Media.

To be clear, there is content and there is platform.  Content is what you produce, and platform is how you disseminate them.  Think of this as the vehicle and the roads.  A social media campaign is fundamental to any marketing campaign these days, as consumers “hang out” more online and conduct most of their information gathering and decision-making based on online information.  But it’s not enough to push around and share other peoples’ links on Facebook, Twitter, etc. – you need your own fresh, dynamic content!

3. YouTube video channel.

Video is an amazing marketing tool and easy to set up, yet so underutilized.  Set up your own business YouTube channel and start simply – by turning on the camera in a nice setting and answering one question or talking about one topic at a time.  Edit these, add your contact information, upload them to your new channel, and share them all over social media or via email with your clients.  Video will convey our personality, expertise, and better demonstrate the 95% of communication that’s nonverbal. 

4. Charity.

Get involved with local charities as a way to help the communities you do business in, meet great people, and spread awareness for you business.  Sponsor a team for walks and volunteer to do can goods or coat drives at your office during the holidays.  It’s all about doing well and doing good!

5. Q & A.

Write down every question you get from clients and even the professionals you work with.  Write out answers and share these via your blog, social media, videos, etc. as a Q & A series.  Keep them simple and brief.  You’ll be able to handle client questions (and objections) proactively and with professionalism that impresses.  Also, most people type questions into the search engines like Google, so your online relevance will quickly grow.

6. Image testimonials.

Take each written testimonial you get from clients or business partners and incorporate them into images, or memes.  Combine them with photos of houses, you with clients, first time buyers signing loan paperwork and getting their keys, etc.  Text that is also visual is opened, read, and shared at an exponentially higher rate online and you’ll be able to utilize Pinterest and Instagram, as well.  A picture is worth a thousand words! 

7. eNewsletter.

Set up a monthly or weekly newsletter and email it your database.  Remember to include short, interesting articles that add value – not just push around generic content devoid of your personality.  There are ways to do this with plenty of images, videos, and links to your website.

8. Money-saving tips.

EVERYONE likes to save money, and if you have a once-a-week money saving tip column, you’ll be a popular person!  The key is consistently and predictability – it may start out slow, but pretty soon people will be anticipating your money saving tips and sharing them like wildfire!

9. Best Of Awards.

Set up your own Best Of Awards for your city.  Why not?  What’s your favorite restaurant?  Park?  Place to spend a Saturday with your family?  Where’s your favorite car wash, farmers’ market, and winery?  Give out plenty of awards in unique and creative categories to include as many of your referral partners and favorite businesses as possible.  People LOVE these!  And then next year, do it all again!

10. Golf shirts.

Get nice golf shirts made up with your personal logo.  Wear these during hot summer work days, when you’re out doing errands, or at community events.  Give them to clients once you close their loans as a gift.  Keep them classy without turning them into a billboard – don’t include a phone number.  Don’t skimp on these or no one will wear them – get really nice Nike dry fit shirts, black and dark blue for me, pink or purple for women – so your clients will actually wear them.    

Must-have real estate and mortgage apps for home buyers.

Wikihood:

If buying real estate is all about location then this neighborhood information app should be your best friend.  It allows you to take a mini tour of almost any neighborhood I the world and learn its history, culture, demographics, and what companies operate there.  Free.

Suburb Scout:

Another indispensible app to investigate your potential new neighborhood is Suburb Scout.  But this one will tell you the bad news that’s hard to find out until your first night – like if there’s an airplane flying low overhead, a landfill or sewage treatment plant down the block, or a prison in your backyard.  $1.99.

Dictionary of Real Estate Terms:

If you’re buying or selling a home for the first time, you might become confused by all of the technical real estate terms – and a little reluctant to stop and ask all the time.  So the Dictionary of Real Estate Terms app will be your favorite resource.  $1.99

Mortgage Calculator:

So you talked to a loan officer and got preapproved, but now as you see home after home with your realtor, all at different prices, you have a tough time calculating your future monthly payment.  If scribbling math on a napkin isn’t a sophisticated enough method and your loan officer is too busy to die along all day, try this app to easily compute interest rates, monthly payments, and even price per square foot and amortization.  99 cents.

Home Buying Power:

This great app goes further than your average loan calculator, allowing you to input different variables like your desired payment, down payment, percentage of your income, and loan term to figure out what price you can really afford.  $1.99.

Magic Plan:

This app allows you to create and manipulate custom floor plans just by moving your phone around and taking photos.  This smart technology assembles and maps the floor plan just by assembling the contents of those photos – pretty neat!  $2.99.

Photo Measures:

Will your massive sofa set fit in this home’s small living room?  This app lets you take a picture of a room and then save the measurements of the room’s dimensions on the photo.  Measure door widths, window placement, cabinet layout, or anything else you’d like and store them right on a photo of the room for easy recall when you’re back at your home.  Free.

Safe Neighborhood:

An unfortunate reality of buying a home is the potential that you live near a registered sex offender.  This app gives you access to the National Sex Offender Registry to research if any live in your neighborhood, and even pill up names and photos so you can be vigilant.  Free.

Crime Stats:

Sometimes looks can be deceiving or the thieves come out at night in an otherwise seemingly safe neighborhood you only toured during the day.  So Crime Stats will give you raw data on violent crimes, arrests, and property crimes nationwide, and allow you to compare against national averages and other cities.  99 cents.

Around Me:

This fun app let’s you know the distance your new home is from important amenities like banks, ATM’s, stores, the post office, restaurants, and coffee shops.  Free.

Houzz:

As you’re shopping for homes you might want some inspiration what remodeling you can do to spruce it up, and Houzz will let you flip through a million photos of redesigned properties with exterior and interior design ideas.  Free. 

Color Smart:

So you love the home but you just can’t get past visualizing the puke green and burn orange 1970’s colors in the living room?  Behr Paint’s ColorSmart app lets you take a photo of a room and then change the wall color to any Behr Paint sample right on your phone!  So cool!  Free.