PAGE 12 � S T A R S A N D S T R I P E S � Saturday, February 21, 2009
A report
card
on your
plastic
WASHINGTON -- On its face, deciding whether
it's worth it to refinance your mortgage seems simple
enough.
Shop for the lowest rate possible. Figure out what your
monthly payment would be at that new rate. Compare
it with what you're paying now and decide whether the
savings, if any, offset the closing costs of the loan quickly
enough.
But, as with most money matters, nothing is that sim-
ple. Refinance applications have soared in recent weeks
as interest rates hit record lows. The rush has slowed
somewhat as rates have leveled off, but it may pick up
againnowthattheFederalReservehasreneweditscom-
mitment to try to push down consumer interest rates.
While the gyrations in the credit market have made it
tough for many people to take out a loan for a new home,
it's less of a hassle to refinance, especially for owners
with good credit who have built up equity over time.
If you're contemplating joining in, think about what
you are trying to achieve by refinancing and how best
to do so.
"It's not a one-size-fits-all type of thing. It's barely a
one-size-fits-most," said Keith Gumbinger, a vice presi-
dent at mortgage research firm HSH Associates. "You
have to have a goal in mind."
Are you refinancing to save money by minimizing
the total interest expense during the life of the loan, or
are you trying to free up cash by lowering your monthly
payment?
Are you rushing to pay off your loan as quickly as pos-
sible? If so, are you short-changing your cash needs or
eating into your emergency fund?
Maybe you're eager to ditch an adjustable-rate mort-
gage before it resets, switching to a more predictable
fixed-rate loan, as many consumer advocates advise.
But have you considered that your loan may reset to a
lower rate if it is tied to a Treasury index? Can you stom-
ach holding on to it longer? Should you?
Answers to many of these questions are a function of
timing.
Let's assume you live in Maryland and took out a new
loan that saves you $50 a month. The average closing
costs in that state last year were $3,117 on a $200,000
loan, according to Bankrate.com, a personal finance
Web site. It would take a little more than five years to
break even on that loan. The goal is to get beyond the
break-even point.
"If you're planning to sell the house within that pe-
riod, it doesn't make sense to refinance," said Ric Edel-
man, a financial adviser in suburban Fairfax, Va. "But if
you're planning to stay for 10 more years, it does make
sense."
The same reasoning goes into deciding whether to pay
points, the upfront fees borrowers pay to reduce the rate
on the loan. A point is 1 percent of the loan amount.
There are other considerations for borrowers who pay
high closing costs when they refinance.
"What if you want to refinance in another year because
rates have dropped further?" Edelman said. "You will not
have recovered the cost of the first refinance by then."
For all those reasons, it is best to press your lender to
waive fees and bring down the closing costs as much as
possible, which some lenders are willing to do to win or
keep your business. They may fold the costs into the loan
so you can avoid paying cash upfront, if you have enough
equity. Even then, there may be some cash charges that
are tough to duck, including an application fee of several
hundred dollars.
--The Washington Post
Refinancing your home isn't always as easy as it appears
Getting annual
credit report
a vital practice
Nearly every financial expert recom-
mends that you check your credit report
at least once a year to make sure it's
accurate.
But how many of us do it? It's easy to
postpone, and some of us don't want to
bother with the hassle of asking credit
bureaus to make corrections.
A recent study conducted under a
contract with the Federal Trade Com-
mission found that there are enough
mistakes to make checking and correct-
ing reports worthwhile.
"We found that there was a fairly siz-
able amount of inaccurate information,"
said researcher Thomas H. Eyssell, as-
sociate dean and director of graduate
studies at University of Missouri-St.
Louis. About 12 percent of credit re-
ports they checked had material er-
rors such as wrong birthdates, ages or
addresses.
Eyssell said the errors included mix-
ing the information from a father and
son with the same or similar names.
That could be harmful to the one with a
good credit history if the other had prob-
lems paying bills, for example. Some er-
rors were related to timing issues. Some
lenders send reports to credit bureaus
on varying schedules, for example.
In most cases, it was impossible to de-
termine how the errors occurred, Eys-
sell said.
The good news is that it isn't all that
hard to
get the
errors
correct-
ed, he
said. You
have to do it in writing and follow di-
rections given by the bureaus. Go to the
bureaus' Web sites (www.experian.com,
www.equifax.com or www.transunion.
com) and look for a link to "disputes."
In the research project, errors on
study participants' reports were cor-
rected, and then researchers asked bu-
reaus to update the credit scores. The
scores increased by up to 40 points,
enough to help participants qualify for
better interest rates or loan terms, Eys-
sell said.
Higher credit scores can help you
with more than borrowing costs. Eys-
sell said scores are factors in hiring,
insurance underwriting and qualifying
for student loans. Credit scores gener-
ally range from 300 to 850, with scores
above 760 considered excellent.
Fair Isaac Corp., the company that
computes most credit scores, won't re-
veal the algorithm it uses to compute
scores. But it's pretty upfront about
what's important.
Barry Paperno, consumer operations
manager for Fair Isaac, said three things
are vital to maintaining a good score:
1. Paying bills on time.
2.Keeping balances as low as
possible.
3. Applying for new credit only when
you really need it.
On-time payment is the most impor-
tant factor in your score, accounting for
a hefty 35 percent, Paperno said.
"I'm not sure people realize the im-
portance of something that simple,"
Eyssell said.
The amount of money you owe in rela-
tion to your available credit is almost as
important, making up 30 percent of the
score.
For that reason, it may not always be
a good idea to close credit card accounts
you don't use, Eyssell said.
If you have five credit cards, each
with a $10,000 limit, you have the abil-
ity to run up $50,000 in debt. If you owe
$20,000, you're using 40 percent of your
debt capacity.
But if you eliminate one card, Eyssell
noted, you're down to $40,000 in debt
capacity, and you're using 50 percent of
your available credit. "Youneedtoweigh
that when you're considering closing ac-
counts," Eyssell said.
Rather than close accounts, Paperno
said it's a good idea to have some activi-
ty on older cards to maintain a lengthier
credit history, which counts for 15 per-
cent of the score.
People with a history of borrowing
and repaying their debt on time usually
score higher than those who have only
had credit for a few years or those who
borrow infrequently.
Good scores also reflect a mix of re-
volving credit like credit cards along
with loans paid in installments, such as
mortgages or car loans. Consumers who
have shown that they can handle both
types of credit are considered better
credit risks.
However, Paperno said the mix is the
least important factor, and he doesn't
recommend taking out a loan you don't
need just to improve the mix.
The number of new credit applica-
tions also is a factor, but mainly if you
are constantly applying for new cards
or you've had problems paying in the
past.
-- St. Louis Post-Dispatch

Page 1Page 2Page 3Page 4Page 5Page 6Page 7Page 8Page 9Page 10Page 11Page 12Page 13Page 14Page 15Page 16 Produced by PageSuite