Overdraft Law (6/30/2010)

In November 2009, a new law regulating overdrafts was passed that will take effect on July 1, 2010. The law indicates that banks and credit unions can no longer charge customers an overdraft fee for debit card or ATM transactions (Reg. E transactions) that will result in an overdraft.

There are positive and negative ramifications that will result from this new law. And while the law applies to all banks and credit unions, policy changes vary between institutions as they prepare for the change.

How did we get to this point?
Since the debit card revolution began in the mid 1990s and free checking became the norm, banks created a new revenue stream called overdraft fees. Sure there were overdraft fees prior to this period, but the figures have exploded in recent years. According to the FDIC and the National Credit Union Administration, banks and credit unions charged approximately $46.3 billion in overdraft fees in 2008 compared to $10.3 billion in 2004. According to the Bureau of Labor Statistics, the average household spends more on overdraft fees than on vegetables annually.

Congress has referred to this law as the $40 latte law since several consumers complained of being charged a $35 overdraft fee for a $5 latte purchase. Until now, banks have justified these fees by offering overdraft protection options.

How will this impact you?
If you never overdraw your account, this law won't impact you. If you have a tendency to overdraw your account, this law will have an impact on you. Because your bank will NOT be able to charge an overdraft fee for Reg. E transactions resulting in an overdraft, they will simply deny your transaction. In the last decade or so, banks have adopted a "courtesy" overdraft to many of their customers. This means that the bank processed your transaction to avoid a denial, but charged you an overdraft fee for this service. As of July 1, banks can no longer offer this "courtesy" unless you "Opt In".

What is Opt In?
The law allows for banks to obtain your permission to allow Reg. E transactions to clear and accept the overdraft fee. This permission is called Opt In. If you do not Opt In, the bank will deny any Reg. E transaction that will overdraw your account. Most banks will provide their customers with the opportunity to Opt In. While the law allows banks to offer this Opt In feature, not all banks are exercising this option. Be sure to check with your bank if you're interested in Opting In. Either way, as of July 1, everyone is automatically considered Opt Out unless they've otherwise communicated to their bank.

Positives
This will greatly reduce the amount of overdraft fees charges to the consumer. The FDIC indicates that over 60% of all overdraft charges come from debit card purchases. This law does not pertain to transactions other than Reg. E transactions. That means all automatic debits and checks will still be processed as they are now. Depending on your bank's individual overdraft policy, you won't have to worry about your mortgage or car payment bouncing as a result of the new legislation.

Negatives
If you have not Opted In, and you try to make a purchase using your debit card that can't be covered by funds in your account, the transaction will be denied. Most consumers don't want overdraft fees. At the same time, most consumers don't want their transaction denied, especially if they're buying medicine for a sick child at Walgreens at 2 a.m. Since you can't have it both ways, you need to choose carefully whether of not you want to Opt In or not, assuming your bank gives you the option.

Another negative aspect of the legislation is the lost revenue for banks. Banks will try to find alternative sources of revenue. Many industry analysts predict that this could be the beginning of the end of free checking accounts. Many banks have already begun adding minimum balance requirements to accounts that aren't considered profitable.

What should you do?
First, determine if this legislation will have an impact on your day-to-day banking. If it will, see if your bank gives you the option of Opting In. Then, determine if Opting In is something you want to do. Inquire about obtaining overdraft protection while you're at it.

New Credit Card Bill (7/17/2009)

On May 19, President Obama signed the “Credit Card Accountability, Responsibility, and Disclosure Act”. This legislation has also been referred to as The Card Act of 2009 or The Credit Card Bill and will take effect on February 22, 2010. Everyone who has a credit card will be impacted in some way, positively or negatively.

Right now, approximately 60% of Americans carry a balance on a credit card. These cardholders have the most to gain from this legislation. Here are a few components of the bill:

Limited interest rate hikes: It will be much tougher for a credit card company to raise your interest rate. Certain conditions must be met and you must receive at least 45 days notice of the rate hike.

Universal default outlawed: This was the practice by which one card company can charge a higher rate because you made a late payment to another card.

Payment due dates: Credit card companies must give you at least 21 days to make a payment after the statement is mailed to you. “Cut-off times” are illegal as well. In the past, credit card companies would indicate that they need your payment by 5 p.m. on the due date or they would charge a late fee. This arbitrary cut-off time is no longer legal.

Highest interest rate balances paid first: Depending on your card’s terms, certain balances may have a different interest rate. For example, your rate for balances on purchases may be 9% while your rate for balance transfers or cash advances is 15%. In the past, credit card companies would apply any partial payment to the balances that had the lowest interest rate. The new law requires that any partial payments be applied to the higher interest rate balances first.

Over limit fees: If you go over your credit limit, most card companies will authorize the transaction and charge you an “over the limit” fee rather than denying the transaction. The new bill indicates that you must “opt in” in order to allow transactions to exceed your credit limit and therefore, incur an “over the limit” fee. If you “opt out” of this fee, all transactions that exceed your credit limit will be denied and no charge will be assessed.

Age requirements: In past, you could obtain a credit card at age 18. The new law requires individuals 18-20 years old to have a parent or guardian as a joint cardholder.

Minimum payments: Credit card companies will be required to disclose the consequences of making only the minimum payment, in particular, the amount of time it would take you to pay off the entire balance if you continued to make the minimum payment. Credit card issuers must also tell you how much you would need to pay each month if you wanted to payoff the entire balance in 12, 24, and 36 months.

These components of the new legislation are designed to help consumers who are having financial trouble and to help curb abusive credit card company practices. Much of the legislation will result in lower profits for the credit card companies. Many industry experts predict the credit card companies will respond to this legislation by doing the following:

First, since credit card companies will have a harder time raising your rate while you’re a cardholder, look for low introductory rates to disappear and for interest rates to be higher when the card is initially opened.

Second, the availability of credit overall will be reduced. Over the past several years, credit card companies have issued credit cards without caution. I see bank clients daily whose available credit is greater than their annual salary (and in some cases, the outstanding balances are greater than their annual salary). According to the New York Times, if the unemployment rate hits 10% (as of July 1 it was 9.6%) credit card losses in the U.S. are expected to top $186 billion in 2009. Like any other organization that loans money, credit card companies are implementing more stringent underwriting policies.

Third, since this new law doesn’t go into effect until February 22, 2010, a number of credit card companies are taking advantage of this grace period to respond by analyzing their current credit card portfolio. Here are a couple of things you can expect to see:

1. They are identifying “high risk” cardholders. “High risk” cardholders are defined differently by every credit card company. They are generally people that use their card for cash advances or have transactions at casinos and liquor stores. Once they identify these people, they will reduce credit lines, raise the interest rate, or increase minimum payments. These are all legal practices, so long as the credit card company discloses these changes in terms within 30 days.
2. If you have a high credit limit relative to your balance, a credit card issuer can reduce their risk exposure by lowering your credit limit. This is very common right now.

Lastly, since credit card losses are going up and profits are going down, “reward” cardholders will see some changes. If you currently have a card that gives you “points”, “cash back”, or any other perk for using the card, expect those benefits to be scaled back. For example, if you’re not paying an annual fee now, they may start charging one. If you currently pay an annual fee, expect it to go up. Also, your points, miles, or cash back rewards may not be worth as much as they have been in the past.

My advice as it relates to this legislation.
1. Review your current credit card situation. If one of your credit card providers implements some unfavorable terms as a result of the pending legislation, you should explore other options. However, before you close a credit card account, make sure you have a back up or a new card to replace it. You don’t want to get stuck without one. As I indicated, obtaining a new credit card isn’t as easy as it used to be.

2. The credit card industry is still very competitive, but instead of competing for everyone, they are only competing for the “good” customers. If you have good credit scores and stable income, you should shop around for a new card if the benefits of your current card have been reduced to your dissatisfaction.

3. If offered, try to obtain a credit card from your primary bank. Banks always view customers more favorably if they have a checking account with them. Having a card from your bank is more convenient. In many cases, a credit card from your primary bank can be tied to your checking account for ATM transactions or overdraft protection. They typically have a number of options when it comes to paying the bill, such as direct transfer via online banking or automated telephone service.

In summary, this legislation will have some sort of impact on most credit card holders. In the coming months, please pay particular attention to the mail you receive from your current credit card provider as some of these changes may apply to you.

As always, e-mail me with any questions.

Understanding Credit Scores (6/29/2009)

I work for a trust company in St. Louis and we publish a quarterly newsletter that highlights a specific topic our clients will hopefully find timely and relevant. In May, I was asked to write an article on credit scores. Of course, the finished newsletter was much prettier, but you get the benefit of the substance below.
_______________________________
In today’s market conditions, obtaining credit has become more difficult for consumers. The mortgage crisis has put a crunch on capital in the financial services industry and as the supply of capital remains low, lenders have been forced to tighten credit standards.

Tighter credit standards have meant a much greater emphasis on your credit score when obtaining financing than in the past. Not only can your credit score determine your credit worthiness to a lender, but it can also determine how much you’ll pay when you borrow money. Many lenders practice credit-based pricing on many financing options, meaning those consumers with higher credit scores can obtain better borrowing terms, including a lower interest rate.

Lenders aren’t the only people checking your credit score. Insurance companies routinely use your credit score to determine premium rates. Landlords often check the credit scores of prospective tenants prior to renting an apartment. According to the Society of Human Resource Management, 35% of employers check the credit of prospective employees to help determine their degree of responsibility. Even cell phone carriers will routinely check your credit score.

To understand your credit score, you need to know where it comes from. There are three major credit reporting agencies in the U.S. – Experian, Equifax, and Trans Union. All three of these agencies use slight variations of computer software developed by the Fair Isaac Corporation. This is why your credit score is commonly referred to as your FICO score. All three of these entities collect data from creditors independently, therefore your score will vary because the data collected is not consistent among each agency and neither are the formulations used to compute your score. When applying for credit, some lenders will obtain all three credit scores and some will use one credit reporting agency exclusively.

Scores can range from 300-800. The median credit score according to the Fair Isaac Corporation is 723. It’s tough to determine exactly what a “good” score is because every lender has different cut off points where they will lend at the best rates or lend at all. Here are general ranges:

800+ Excellent
750-799 Very Good
700-749 Good
650-699 Average
600-649 Below Average
550-599 Poor
<550 Very Poor

Below are the five characteristics that go into determining your score and how they are weighted according to the Fair Isaac Corporation:
35% = Payment history
30% = Amounts owed
15% = Length of credit history
10% = New credit obtained
10% = Types of credit used

There are several things you can do to improve your credit score. 1.) Always pay your bills on time. This is the highest weighted characteristic that makes up your credit score. 2.) Keep your credit card balances low relative to your credit limit. It’s important to have a high credit limit relative to your outstanding balances, but having too much credit availability will make you a high risk borrower to a prospective lender. Therefore, you should never have open credit you don’t need. 3.) Since credit history is a significant portion of your overall credit score, it’s important to begin obtaining credit at an early age. 4.) Pay down your debt rather than moving it around between different credit facilities. Transferring balances to new credit cards could lower your FICO score. Because so many variables go into determining your score, it is not considered an exact science. The bottom line: Obtain credit, pay your bills on time, and minimize outstanding debt. If you follow these rules, it will reflect in a positive credit score.

VantageScore
While each credit bureau has traditionally used their own version of the FICO formula to compute your credit score, they have recently introduced their own version called VantageScore. VantageScore is a new formula created by the three credit bureaus to improve the consistency of your credit score. Even though the VantageScore formula used by each credit bureau is the same, the score will still differ slightly because the data used by each credit bureau is still not consistent. In addition, VantageScore has a different scale, similar to an educational grading scale. The scores range from 501-990 as follows:

A = 901-990
B = 801-900
C = 701-800
D = 601-700
F = 501-600

VantageScore also weighs credit characteristics slightly different from that of the FICO model. Here’s the VantageScore breakdown:

32% = Payment history
23% = Credit utilization (debt to credit ratio)
15% = Amounts owed
13% = Length of credit history
10% = New credit obtained
7% = Available credit

You can obtain your VantageScore from each one of the three credit bureaus. Because VantageScore is not yet widely accepted by financial institutions, it’s unclear how your VantageScore compares to your FICO score. However, if your FICO score is high, it should also reflect in a high VantageScore. Even though VantageScore was created three years ago, FICO continues to be used by the vast majority of financial institutions.

How to obtain your credit report
The Fair Credit Reporting Act of 2003 allows each U.S. resident to obtain a free copy of their credit report annually. The only government-sanctioned website available to obtain your credit report is http://www.annualcreditreport.com/ or you can call 1-877-322-8228. This website requires you to choose which credit reporting agency to use when obtaining your credit report. While the credit report is free, it will not contain your specific credit score. You have the option of paying a fee to get your score.

Under normal circumstances, most experts will recommend getting a copy of your credit report annually. If you plan to finance a large purchase in the near future, you should prevent any surprises by obtaining a copy of your credit report for review prior to applying for a loan. If you have any reason to suspect any errors in your credit history, you should obtain a copy to be sure. Staying on top of your credit is even more important during these uncertain economic times.

What to do about errors on your credit report
If you find what you believe to be an error on your credit report, you should write to both the credit bureau and the specific creditor, immediately. Mistakes or inaccuracies will affect your credit score and even your ability to obtain future credit. Your letter should include your name and address, a description of the specific item(s) you’re disputing, and why you’re disputing it. If you’re not sure what information to include, you can find sample letters on the Federal Trade Commission’s website, www.ftc.gov/credit. Be sure to send copies (not originals) of any supporting documentation of your claim. As an additional measure, you should send your letter via certified mail and request a return receipt. The address for the creditor and the credit bureau furnishing the report will be on your credit report.

Both parties will take typically 30 days to research the claim. Although don’t be surprised for the process to take several months, especially if you’re dealing with multiple inaccuracies. Be sure to include as much information as possible to help expedite the correction. In most states, you’re eligible to receive an updated copy of your credit report to ensure the error was rectified.

Alert: New Credit Card Scam (7/10/2009)

There's a new credit card scam that's making headlines today. It's been verified by Snopes.com. Below is an excerpt from an e-mail I received from our security department. It includes an explanation of how the scam works.

This scam is pretty slick since they provide YOU with all the information, except the one piece they want... Note, the callers do not ask for your card number; they already have it.

The scam works like this:
Person calling says, 'This is (name), and I'm calling from the Security & Fraud Department at VISA. My Badge number is 12460, Your card has been flagged for an unusual purchase pattern, and I'm calling to verify.

This would be on your VISA card which was issued by (name of bank). Did you purchase an Anti-Telemarketing Device for $497.99 from a marketing company based in Arizona ?' When you say 'No', the caller continues with, 'Then we will be issuing a credit to your account. This is a company we have been watching and the charges range from $297 to $497, just under the $500 purchase pattern that flags most cards. Before your next statement, the credit will be sent to (gives you your address), is that correct?' You say 'yes'.

The caller continues - 'I will be starting a Fraud Investigation. If you have any questions, you should call the 1- 800 number listed on the back of your card (1-800-VISA) and ask for Security. You will need to refer to this Control Number. The caller then gives you a 6 digit number. 'Do you need me to read it again?'

Here's the IMPORTANT part on how the scam works:
The caller then says, 'I need to verify you are in possession of your card'. He'll ask you to 'turn your card over and look for some numbers'. There are 7 numbers; the first 4 are part of your card number, the last 3 are the Security Numbers that verify you are the possessor of the card..
These are the numbers you sometimes use to make Internet purchases to prove you have the card. The caller will ask you to read the last 3 numbers to him. After you tell the caller the 3 numbers, he'll say, 'That is correct, I just needed to verify that the card has not been lost or stolen, and that you still have your card. Do you have any other questions?'

After you say no, the caller then thanks you and states, 'Don't hesitate to call back if you do', and hangs up.. You actually say very little, and they never ask for or tell you the card number. Once they have the 3-digit security code, they will make several new purchases to your card, in any amount.

Fraud investigators are not sure exactly how the scammers are getting your visa number. Obviously, a number of people see your card everyday, from restaurant servers to check-out employees at stores. The simple solution to protect yourself is to never give ANY information on your credit card to anyone you don't know or trust.

Mortgage refinancing tips for 2009 (1/2/2009)

When the Federal Reserve Bank lowered the Fed Funds rate on December 16, it caused the mortgage rates in the U.S. to drop to levels we saw during the housing boom of 2002-2006. In January of 2008, the typical 30-year fixed rate mortgage was approximately 6.125%. Today, the rate for that same loan is now 5.125%. For a typical $200,000, that a monthly savings of over $150 per month.

As you can imagine, this has caused a spike in applications for mortgage refinancing. Therefore, I thought this would be a good time to let you know how the downturn in the economy has changed the credit market. The “credit crunch” has created additional obstacles in the loan underwriting process that weren’t previously there. Here are some things to look out for if you plan to refinance your mortgage in 2009.

1. Credit based pricing. This is a practice that was typically reserved for car loans only. This is when a lender will offer you a higher rate if your credit score falls below a specified threshold. Now, most lenders are practicing credit based pricing on mortgage loans. For example, if your credit score is between 700-725, they will add .25% to your rate. If it falls between 675-699, they will add .50% to your rate. And so on. This is just an example and every lender’s tiered pricing is different. In addition to credit based pricing, the minimum credit score for approval is also higher. In other words, no more subprime loans. If you’re not sure what your credit score is, go to www.annualcreditreport.com to get a copy of your credit report and your credit score prior to applying for a loan.

2. Loan-to-value pricing. This is the practice of adding “rate adjusters” to the mortgage rate if the loan-to-value is higher than 80%. If the mortgage you’re obtaining is higher than 80% of the value of your home, it’s considered a high risk loan to the bank. So, to compensate for the higher risk, they will offer a higher rate. See example in #3 below.

3. Declining property values. As we all know, property values have dropped over the last 18 months. If you purchased a home in the last five years and put down 20%, refinancing isn’t a slam dunk. The value of your home may have declined to the point where you now have less than the original 20% worth of equity in your home. This could happen despite the fact that you’ve been paying down your mortgage. Now, your loan-to-value is higher than 80% and this may cause the lender to add rate adjusters. Here’s an example: In July 2006, Bob purchased a home for $250,000 and put down $50,000 (20%) and borrowed $200,000 (80%). Today, Bob wants to refinance, but the value of his home has fallen to $230,000 and his mortgage balance would be $193,000. His loan-to-value went from 80% at the time he purchased the home to 84% now. Because the loan-to-value is greater than 80%, the lender may add a rate adjuster. So instead of getting a rate of 5%, he may be offered a rate of 5.25%. In addition to getting hit with a higher rate, Bob will be required to pay Private Mortgage Insurance (PMI) since the loan-to-value is greater than 80%. PMI is typically ½% per year, so his mortgage payment would be increased by $80 per month.

4. 100% financing. No matter how great your credit score may be or how stable your financial situation is, the odds of you obtaining 100% financing is almost non-existent today. The handful of banks that will offer this are charging a premium rate for the additional risk. This includes the popular 80/20 deals as well. While the 80% mortgage will avoid PMI costs, the 20% 2nd mortgage will be met with some tight restrictions that weren’t in place previously, such as property requirements, rate adjusters, and credit score minimums. 100% financing is still available, just not as easily or abundantly.

5. Floors. I’ll try not to get too technical on this item. As you may have heard, the Prime Rate fell to 3.25% on December 17. In December 2007, the Prime Rate was 7.25%. If you plan to get a home equity line tied to the Prime Rate, expect to have a “floor” for this loan. A floor is the lowest the rate will go no matter how low the index goes. For example, if the rate offered for your home equity line is Prime + 1%, your rate would be 4.25% today. However, if a floor of 5% existed, your rate would never go below 5%. Technical part: The cost of credit to a bank does not always reflect the competitive environment, therefore, the bank has to set a floor in order to guarantee a margin of return for the loan. Without a floor, indices could drop a rate below the cost of funds creating a loss for the bank. There are also floors on credit cards as well.

If you plan to refinance in 2009, just be aware that you’re up against more obstacles than you were in the past. Be sure to do your home work. As always, feel free to e-mail or call me with any specific questions.

FDIC Insurance Coverage (Sept. 26, 2008)

Ok, I know this is long overdue. As you can imagine, it’s been busy working in the financial services industry. Thankfully, I’m with an organization that hasn’t been involved in the mess you’re seeing in the media. However, since we’re essentially guilty by association, I receive phone calls and e-mails daily from nervous customers.

Before I get into FDIC insurance, I’d be remised if I didn’t address the current financial situation. I’ve read enough about this “financial crisis” to understand most of what’s going on and how it all happened. However, I don’t think I’m really qualified to explain (I’m not a market analyst, economist, etc). Besides, any explanation I give of the current situation will likely include my opinion unintentionally which I try to avoid in my blog. The link below is to a story I read last week that I think helps explain today’s financial situation in plain English.

Glenn Beck’s article: How did we get into this mess?
http://www.cnn.com/2008/POLITICS/09/17/beck.wallstreet/

There are other stories on the internet if you want to learn more about Mortgage-Backed Securities, Collateralized Debt Obligations, and Credit Default Swaps. To understand today’s economic crisis, you must understand these terms and how they interacted to create some of this mess. For the cartoon version, click on the cartoon link on the March 17 blog post.

Now, I’m not going to spend a lot of time on FDIC insurance. Most of my target audience for this blog doesn’t have $100,000 on deposit at a bank. But this has been the hot topic as I receive a number of questions regarding FDIC and the financial strength of banks in general.

First off, the FDIC stands for the Federal Deposit Insurance Corporation. It was created after the great depression to create more consumer confidence in banks by insuring your money would be safe in the event that your bank failed. Just like any insurance policy, there’s a premium banks must pay to insure their customers’ deposits. The current premium is $0.06 for every $1 on deposit.

Do not get confused between a deposit account held at a bank and funds held on deposit at a brokerage firm. FDIC only covers Bank deposit accounts. FDIC does not insure your money market funds held at Edward Jones or Morgan Stanley. If you're not sure you're covered, call your bank or brokerage firm to clarify.

So far in 2008, 13 banks have failed, including Washington Mutual (WaMu), the largest bank to fail in US History. When a bank fails, the FDIC sends a team of officials in to run the organization until all of its assets can be liquidated or written off. If you have a bank account at a bank that has been taken over by the FDIC, a check will be issued to you within a specified time period if your balance is under $100,000. If your balance is over $100,000, they will typically give you a check for the insured amount until all assets of the bank have been liquidated. Once all assets have been liquidated, you could receive the rest of your uninsured money if there’s enough cash left over.

To find out how much of your bank deposits are insured, you can go to the following website: http://www.fdic.gov/edie/calculator.html Depending on account titling, you could be insured for more than $100,000. Coverage is typically for $100,000 per person, per bank. If you have more than $100,000 on deposit at a bank, I urge you to use this estimator to determine exactly how much of your deposits are insured.

Now, even though your deposits may be insured, dealing with a bank that fails is very inconvenient. You can help avoid dealing with this situation by keeping your bank accounts at an institution that is financially strong. There are several factors that go into determining if a bank is financially sound. You can use the link below to determine if your bank is “safe & sound”. Read their rating system explanation before you try to find your bank using their search tool. Most of the financial information used for the current rating is as of the end of the second quarter (June 30, 2008).

http://www.bankrate.com/brm/safesound/ss_home.asp

The FDIC is required to keep on hand approximately 1.25% of insured bank deposits. The 13 bank failures so far this year have depleted the FDIC to approximately 1.01%. According to the ABA (American Bankers Association), the FDIC will most likely raise premiums to $0.07 to $0.08 per $1 on deposit in the near future.

Now, what happens if the FDIC runs out of money? No worry, the US Treasury will step in to fund insured deposits.

Animated Subprime Explanation (3/17/2008)

The following link was forwarded to me. I have no idea where it originated, but it is a great explanation of how the subprime mortgage debacle was created. It's an entertaining slide show as well. Beware of a little profanity.

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1

When is a good time to refinance? (2/20/2008)

One of the questions I’ve been asked the most over the last couple of months is “when is a good time to refinance my mortgage?”. As most of you know, we’re in a decreasing rate environment and mortgage brokers are beginning to come out of the woodwork again. It wasn’t long ago that rates were historically low and they seem to be headed that way again.

This is a very tough question to answer because the answer may be different for everyone. The answer to this question is going to depend on the following points:
1. What’s your current rate?
2. What type of mortgage do you have now (Fixed rate or ARM)?
3. How much longer do you plan to stay in your current home?
4. Who’s your lender and what options can they offer?
5. Can you modify vs. refinance

Before I address these points, all of which you can control, I need to mention a very important part of this topic that none of us can control. TIMING! It’s like buying stock. Ideally, you’d like to buy stock at its lowest price and sell at its highest. Unfortunately, you never know when these price points are going to occur. So, ideally you would want to refinance when rates are at their lowest. Unfortunately, you never know exactly when that will be.

Most economists feel that interest rates are going to decrease 1st and 2nd quarter of 2008. As most of you know, the Federal Reserve Chairman lowered the Fed Funds rate 75 basis points on January 22 and another 50 basis points on January 30. The Fed Funds rate is considered a key short term rate which affects the Prime Rate. The Prime Rate is what banks charge for floating credit facilities such as home equity lines of credit and credit cards. In June 2007, the Prime Rate was 8.25%. Today, the Prime rate is 6%.

Mortgage rates are considered long term rates and typically “follow” short term rates. (Opinion alert!!) Short term rates have been going down since September 2007 and with the recent drop last month, I expect mortgage rates to continue to drop well into next month and possibly beyond.

Now, back to the points above…
What is your current rate?
Most people that ask me “when is a good time to refinance?” have no idea what their current mortgage rate is or what type of mortgage product they have. If you got your mortgage between 2002 and 2005, the odds are pretty good that rates haven’t dropped to those levels yet. If current rates are better today than when you got your mortgage, consider refinancing or modifying your mortgage (I’ll talk about the difference below).

What type of mortgage do you have?
Do you have a fixed rate mortgage or an ARM (adjustable rate mortgage)? Fixed rate mortgages have less flexibility and may require a complete refinance to lower the rate. ARMs can typically be modified by your current lender with much less paperwork and cost less than a full refinance. Your mortgage company may have already sent you a brochure or letter outlining this option (I've received three so far). If you have this option, you should consider it. A modification will lower your rate without having to go through the process of refinancing with another lender and the rate is typically very competitive.

If you have a fixed rate mortgage, you should contact your lender to see if they can modify it or refinance it without having to go through the underwriting and documentation process again. Either way, you should check the rates at other institutions to see how your mortgage company measures up.

How long to you plan to stay in your current house?
If you plan on moving soon, it probably isn’t worth the time or money to refinance. However, you can look into modifying since this is a cheaper and more efficient option.

Refinance Tools
There are several tools you can use to see if you should refinance. First, I like to use Bankrate.com (http://www.bankrate.com/brm/ratehm.asp). This website can give you the interest rates of various banks and mortgage brokers in your area. I’ve checked several rates on this site and find it to be very accurate. Don’t forget to factor in the costs of your refinance. According to law, a mortgage broker or banker must provide you with a Good Faith Estimate of costs within three days of receiving your application. These are very easy to furnish so don’t hesitate to ask for a GFE. If you have any questions regarding the figures, feel free to call or e-mail me and I can review it with you.

Another tool is a mortgage calculator. There are several of these on the internet. After you shop around for rates, use a mortgage calculator to determine your monthly payment. Don’t forget to add monthly escrows for real estate taxes and homeowner’s insurance if you want to include these in your monthly payment.

If you still aren't sure what to do, I'd be happy to go over your situation with you and provide some advice. Give me a call or e-mail me with any questions.