Why You Shouldn’t Rent Any Longer
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Over the past 20 years, I’ve bought three homes, but took out over a dozen mortgages.
That’s right, I took out far more mortgages than one per home because early on I used second mortgages to avoid having to pay private mortgage insurance (PMI), and on many occasions I was able to reduce my costs by refinancing loans as interest rates dropped.
During that entire two-decade period, I worked with one specific mortgage guy because he always provides outstanding service, saves me money, and makes sure there are never any hiccups at closing. I’ve even followed him from lender to lender as his career progressed. My loyalty is to him, not a specific bank.
Here’s one insider tip he gave me, which I’ve used several times to score the best possible mortgage interest rate.
Unless you’ve been living under a financial rock forever (or have just recently graduated from school), you know that a good credit score lets you access loans with lower interest rates. It’s easy to understand why this is so. A good score tells lenders you’re less likely to default on a loan, so they don’t need to charge you as much of a risk premium.
As explained by MyFICO, your credit score is determined using five main criteria:
From the above list, it’s clear that the best thing you can do for your credit score is to never miss a(nother) payment. However, this isn’t a quick fix. If you missed a payment last month, that’ll ding your score significantly for the next couple of years.
Over time, your credit history length will naturally increase, but this too won’t happen overnight or even over a year.
You can certainly open new credit lines of types you’ve not had before, but while that might help your “mix of credit accounts” factor, it’ll hurt your “number of accounts opened recently” factor for the next couple of years. Again, not a quick fix.
This brings us to the last option – reducing your credit utilization ratio. Luckily, if you have enough cash on hand, this is one place where you can boost your score quickly.
In a piece on the high cost of credit card debt, I show a graphic of how quickly and severely you hurt your credit score by having balances on your credit cards. Conventional wisdom tells you to keep your ratio under 30%, but that’s highly misleading. Borrow as little as 8% of your available credit and your score drops by about 40 points! Borrow 26%, lose over 70 points!
Worse, when a lender pulls your credit, they don’t care if you pay all those balances off in full whenever you get your statement.
The flip side of this is that if you’re one of those who use credit cards responsibly, you can boost your credit score almost instantly when needed, by paying off your credit card balances right away instead of waiting for the statements to come in.
When you apply to refinance your mortgage, the lender will pull your credit from all three major bureaus, and will most likely use the middle of the three resulting scores.
Depending on the details of the loan they’re arranging for you, they may be able to offer you a significantly better rate if your score is even a single point above a threshold. This threshold might be a score of 720, 740, 770, or even 800.
Say you’re targeting a score of 770, but you know you’re floating around 735, what to do?
Here’s a step-by-step guide, assuming you have enough cash on hand to pay off your credit card balances in full right away, and still have enough left over that your lender isn’t concerned about your liquidity.
Say you have a total credit limit of $100,000, and you use your cards to pay on average $15,000 a month, paying that balance off in full when the statements arrive. If your total current balance is say $10,000, paying that off in full should give you a 40-point bump in your score, moving you to 775.
Using credit cards responsibly can boost your credit score over the long run. It can also score you some nice rewards (e.g., 2% cashback on Citi’s Double Cash card, redeemable by check if you want, 5% reward on all Amazon purchases using Amazon Prime Visa, redeemable toward future Amazon purchases, etc.).
However, even if you pay off all your cards in full each month, your credit score drops even when you have a current balance that’s less than 10% of your total credit limit. The above shows you how to use this to quickly boost your credit score, if and when you need that to get the best mortgage refi rate possible.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.