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MBA’s current president and CEO Bob Broeksmit said in a statement that the real estate finance community was mourning the loss of one of its “great leaders and fiercest advocates.” “Dave Stevens grew up in the mortgage business before serving the industry and its customers both as FHA commissioner during and immediately after the 2008 … [Read more…]
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Introduction to 16 Common Myths about Getting Out of Debt
[0:00] Hey, you’re back with the Get Out of Debt Guy show. I’m the old Get Out of Debt Guy, Steve Rode, and with me is the new Get Out of Debt Guy, Damon Day.
Hey, Damon. Hey, Steve.
Today, we’re going to be talking about the 16 common myths about getting out of debt.
Now, Damon has not seen this list, and it’s going to be rapid fire, so this is even not an exhaustive list.
I could have come up with probably 100 common myths because people have so many misperceptions about dealing with debt.
I think my biggest problem, Damon, is that through those misperceptions and myths that people believe, it leaves them feeling depressed and sad and inadequate and feeling like failures and everything else.
And once you understand reality you will understand why people may have those emotions but they’re just not it’s not based in reality it’s not how life really works we all internalize this stuff and damon i’ve always said that you know when i used to host debt seminars and we would invite people to come it was like pulling teeth nobody wanted to come and it didn’t take take that long for me to realize that people showing up to learn how to do better with dealing with their debt was like, sign me up for a herpes conference.
Overcoming the stigma of debt and financial struggles
[1:27] Nobody wants to go to the free herpes meeting. So people suffer in silence when it comes to their debt.
Damon, I’m going to start without any delay.
So common myth number one, I’m a loser or failure for having too much debt.
What’s your opinion? Well, you know, I look at that like social media, right?
You’re not alone. Debt is a lot more common than you think.
And it’s just, you know, it’s part of the culture that we have.
Would it be better if you didn’t have debt?
Yes, it would be. But the nice thing is there’s a way you can fix it.
What’s your famous saying, Steve? Just do better moving forward.
Yeah. That’s it. You can’t repair the past. Let’s do better moving forward. Yeah.
So it is what it is. I know you look at the social media and it’s like, everybody’s life is perfect and my life sucks.
Well, that’s pretty much everybody’s life has problems in it.
They just don’t show you the herpes, right?
That’s right. Well, I mean, one of the things that I learned was I really avoid social media because it creates too much pressure and expectations.
[2:38] And if you’re looking at what your friends are doing and they’re all having these fabulous less vacations and stuff.
You see that they’re going fantastical places, but what you don’t see is their credit card bills.
Yeah. So they could be proudly going way in debt and it doesn’t, you’re not a loser or a failure for having too much debt.
It just is what it is. We can do better moving forward.
Yeah. All right, Damon, common myth number two, my credit will never recover from my debt problems? Oh, the biggest one. Oh my gosh.
Your credit will always recover. Why? Because banks want to loan you money.
That’s how they make money. Do you think they want you to be a leper and a pariah and, oh, we’re never going to loan you money again?
You know, when I filed bankruptcy, what was that? See, 2012, 2011, 2012.
[3:24] Remember, I tell this story all the time because I couldn’t even believe it myself. But when I got my discharge papers in the mail, like, hey, chapter seven’s done.
These debts are wiped out in the mailbox the very same day.
And it sounds like I’m making it up, but I, I swear I’m not.
I got my discharge papers from the court and in that mailbox the same day was capital one going, Hey, here’s our new fresh start program card. Congratulations.
And here’s a thousand dollars and no interest for a year and make your payments on time. And we’ll up your credit limit in six months.
I literally had a brand new credit card the same day I got a couple hundred thousand dollars discharged in a bankruptcy court.
It does not ruin your life and ruin your credit for 10 years.
That is the biggest myth.
Yeah. I like it when people say, well, what’s my bank going to think about me?
Nothing. Nothing. They don’t think anything about you. They don’t care about you.
[4:15] You’re a number on a spreadsheet. That’s all you are.
I remember years ago, Damon, I was sitting with the national collection manager of the nation’s largest credit card company at the time and her phone would ring and she would pick it up and she would go file bankruptcy and hang up the phone and this went on and i was like what what are you doing i mean.
[4:35] There’s help for these people. We can put them on a payment plan.
And she goes, look, Steve, I don’t care.
She goes, each month I have to go in front of my boss and justify my department’s performance.
[4:45] And if somebody files bankruptcy, it doesn’t count against me.
So they should all file bankruptcy. I don’t want to deal with them.
Yeah, it’s not my fault. They filed bankruptcy. Nothing I could have done.
Yeah, not a damn thing. It’s all a game, you know. Don’t hate the player. Hate the game. Dang.
I forgot to mention at the top of this podcast that if you have any sort of debt concerns, you need advice, you want to talk to somebody, you can reach Damon Day at d-a-m-o-n-d-a-y.com or you can visit the getoutofdebt.org website. You’ll see links there for Damon.
And he is doing personal consultations. You can reach out to him and there’s nothing that you can can say to Damon that he or I have never heard before.
[5:31] And I certainly don’t think any less about somebody that has debt problems.
I’ve had so many family members that have come to me in confidence and told me about their situation. Damon, here’s a good one.
I remember once I was doing a research on writing an article about farm debt.
You know, poor American farmers, they struggle with a lot of debt.
And so I contacted a farming association, the nation’s largest pork farmers association for some reason and they put me in touch with this farmer who’s doing it right everything’s going right and i interviewed him and at the end of the interview i said is there anything else i should ask you or do you have a question for me and he goes this this is off the record steve right now yeah yeah he goes oh i’m so screwed.
Debt and Credit Score: Debunking Common Myths
[6:20] So nobody’s a loser because they have debt and your credit can recover from your debt problems.
All right. Common myth number three, I must pay off my debt so my credit score will be okay in the future.
[6:35] Okay. I mean, you can pay off your debt and your credit score will probably improve, but you also have to ask yourself, what’s the value of that credit score?
People get so fixated on that score itself. self, sometimes it clouds all the time.
It clouds their judgment on what they should be doing and what the priorities are.
Sometimes that is the right path. Pay off the debt, work harder, tiny feature way out of that sucker.
Sometimes that’s the right answer. Sometimes just filing bankruptcy and doing better moving forward is the right answer.
And sometimes something in between those two things is the right answer. It just really depends.
But the most important thing is take a step back, take the emotion out of it and research those different options and say, say, how would my life play out going down this path, this path, or this path, right?
Don’t make bad decisions because you’re worried about a credit score.
That’s how they trap you. That’s why there’s a credit score in the first place.
People think that credit score means it’s like a report card on how smart you are about personal finance.
It’s almost the exact opposite. Your credit score is not designed as a report card about how you’re doing.
Ultimately, it’s designed as a numerical number. so lenders can make quick decisions about your level of risk.
If you have an 800 credit score, you’re more likely to get access to credit, not because you’re brilliant at personal finance, but because the way your finances are set up and being reported makes you less risk of default. Yeah.
[8:02] So it’s not about how smart you are. It’s again, it’s a game.
Myth number four. It’s a game. Myth number four.
[8:09] Bankruptcy will ruin my financial life. No.
And again, every situation is different. It depends, right?
But every client I’ve ever had and ever talked to have a perception of bankruptcy that is usually off.
Well, once in a while they might, they understand it. But most of the time they think, oh my gosh, I’m going to be a leper.
I’m a pariah. my credit’s going to suck for 10 years. I won’t be able to buy a house. I won’t be able to buy a car.
No, all those things are not true. The best advice I can give is just look at that as an option.
Doesn’t mean you have to do it. Looking at it is free to look at, right?
And consider, if you see something that you don’t like, then you don’t have to do it, but don’t not explore it. Does that make sense? Don’t not explore it.
Don’t not explore it just because because you are afraid of X.
Just get the information first, get educated, and then you can decide, is that a good path for me or not?
Maybe it is, but maybe it’s not. That’s okay too.
We’re not, Steve and I aren’t sitting here saying everybody that has debt needs to file bankruptcy.
Far from it. We’re saying everybody that has debt needs to look at every option to make sure before they go down a specific path, it makes the most sense.
Yeah, without misperceptions. Yeah.
[9:23] Bankruptcy. The other thing too is you talk about getting out of debt.
That, you mentioned it in the beginning, but a mistake that drives me out of my mind is when people live on beans and rice and do the baby step thing, and they spend the next five years trying to dig their way out of debt, and they’re in their 40s or early 50s.
And instead of tackling the debt right now, instantly, and doing better moving forward.
If you do the beans and rice, you’re going to spend the next five years digging yourself out.
You’re essentially pissing away more than a million dollars in retirement money that you could have had by dealing with your debt today, learning from it, and moving forward and starting to save again for retirement.
Because the one thing that you can never recover by working harder or anything else is that lost time.
So don’t believe every myth. Don’t believe the one that we just said bankruptcy will ruin my finances for life.
That is not true. Myth number five, Damon.
Beware of Conflicting Advice: Credit Counselors vs. Debt Settlement Advisors
[10:28] A credit counselor or debt settlement advisor puts my interests first. No.
[10:35] Okay. I mean, I can elaborate, but it’s very simple. No, they don’t.
They’re making a commission.
They’re there to sell you something. Look, call a debt settlement company.
Call five debt settlement companies. Call five bankruptcy attorneys.
Call five credit counseling companies. Call five, quote unquote, Dave Ramsey certified financial advisors.
Whatever it is, I don’t care. every single time the five debt settlement companies will all five to a t say oh debt settlement our program is best program we should do here’s why five credit counseling companies oh our program is best program we should do here’s why settlement is a scam bankruptcy is going to ruin your life for 10 years bankruptcy attorneys oh no no no debt settlement’s a scam credit counseling is going to cost too much best way to do is just file a chapter seven and wipe this debt out to the person they’re all going to tell you the best thing you should do is just Just happens to be the thing that they’re there to sell.
That’s what they do. They’re not advisors.
[11:29] Well, that’s why I feel very strongly all these years that people should contact you and discuss their individual situation because there’s no one broad brush that you can use to paint a solution that fits everybody.
Everybody’s situation is unique and different. For some people, it might be bankruptcy makes the most sense, and here’s why.
Some people, settling your debt might make sense, and here’s why.
So there is no one-size-fits-all solution. And a big part of that, Steve, doesn’t even have anything to do with the money, the debt, the finances itself. It has to do with how they feel.
That person, specific person, feels about the money, the debt, the credit score. I can have two clients that on the surface look like they’re in the exact same situation.
And one client jumps headfirst into bankruptcy and loves it.
And the other client does the beans and rice in the tiny feet and loves that.
Right. That’s because that’s what they want to do. That’s what they’re comfortable.
So it’s not just about, well, let me look at the numbers. Oh, you have to do this.
It’s a big part of that is what does that person prefer to do? It’s their life.
It’s their money. It’s their credit. It’s their decision.
My job is just to help paint that picture, say, okay, here’s your options and here’s what your life will look like based on the different options you choose.
And it’s up to the client to decide what are they comfortable doing? It’s their choice.
[12:52] Yeah, I’ve never felt like if somebody listened to my advice and they went and did something else that they were, you know, broken or a loser or a failure or something.
And I know that you don’t feel that way because ultimately all I can do as an advisor and all you can do is present the information, be there to answer all the questions and let the client decide, knowing all of that, what is the best course of action?
Yeah. There’s no right or wrong answer. It’s not set in stone.
Like I might tell the client, Hey, look, based on all this stuff, I really think you should file a chapter seven and here’s why, blah, blah, blah, blah, blah.
And I’ve had clients come back to me saying, you know what? I hear what you’re saying. I just don’t want to.
[13:33] Okay. Okay. Okay. Well, if you don’t want to, let me explain to you what we’re going to have. What’s the next best thing that you could probably do. And let’s explore that.
And then, Hey, maybe we set up a strategy where if you really don’t want to do the bankruptcy, even though you’ve, you looked at it, you understand that you just don’t feel, and that’s fine.
I mean, I just don’t have a good feeling about it. I don’t want to do it. Okay. No problem. Okay.
Here’s what we have to do. Well, we can try that strategy.
It’s like, it’s going to be a lot harder. It’s not impossible.
Nothing’s impossible. It’s just going to be harder.
Okay. We can see if we can do that. Well, maybe we try that for three months.
Maybe we try that for six months.
Maybe it works out great and it’s fine, or maybe it’s not working out.
And that client has a different perspective six months later.
And they go, Oh, you know what? I’ve been trying this.
I know you said bankruptcy made more sense, but I feel like I’ve been spinning my wheels for the last six months.
I really didn’t want to do it, but I think I’m ready to go down that path. Right?
So some of it’s also just about timing, but it’s never about, no, I said you have to go bankrupt. So you have to go bankrupt or you’re making the wrong choice.
It’s not like that. Well, here’s a classic situation.
We both had clients like this. But as I remember you telling me a story about a guy whose wife just kept spending on luxury items.
Oh, I remember this one. Yeah. And he was like, I can’t go bankrupt because she’s going to hate me or leave me or something like that.
She was spending thousands of dollars on handbags.
A $10,000 Purchase Raises Eyebrows
[14:50] Yeah. Well, that one was one where after we decided we needed to settle the debt, because he couldn’t go bankrupt for other reasons.
But when he sent me over his credit card statements to review, to kind of see where we’re at and come up with a plan, I noticed, I don’t know if it was Nordstrom’s or Macy’s or something, but there’s like a $10,000 purchase.
Like recently, like after we’d been talking and made a decision that we were going to need to try to negotiate these debts.
And I had called him up and I said, what’s this $10,000 purchase on this Macy’s card or Norton or whatever it was.
And he goes, oh, my wife bought a purse.
And I was stunned, actually. I was like, what?
And I’m like, well, he had legitimate hardship. He couldn’t afford any of this stuff.
And he’s like, yeah, because she knew we were going to be losing these cards because we were going to settle them.
I’m like, you realize I need to negotiate with this creditor and tell them about the hardships that you’re having. And they can see this charge on the card.
This wasn’t like, you know, I had to go to Walmart and get food.
This is a, I said, this is a $10,000 purse.
And he goes, well, she got a bag too. Like that, oh.
[16:00] That makes it better. So we got two things. Oh, okay, yeah, no problem.
But I told him, I said, look, And I’d never spoken to the wife up to that point, even though he’d been a client for a month or two. She always, I tried, but she’d always refused to get on the phone. She didn’t like what I had to say, I guess.
And I said, look, one of two things, either you need to return that purse or I can’t help you with that account.
There’s, I can’t, you know, I’m not going to say, I’m not going to go negotiate a debt that you had.
He didn’t do it, but your wife knowingly went out and purchased a $10,000 purse, knowing that she probably wasn’t going to have to pay a lot of it back.
I’m like, I’m not doing that. Right.
And so what ended up happening was a few days later, he’s like, yeah, I talked to my wife and you know, we really appreciate your advice, but yeah, we’re just not going to move forward with you. Oh, all right.
[16:48] Best of luck. And I never heard from him again. So I don’t know how it worked out. My guess is not great.
I had a client once and he told me, Steve, I’ve been dating this girl for seven years and she’s given me an ultimatum.
We’ve been engaged for seven years, and she gave me an ultimatum and she said unless we go through with this marriage and we get married i’m leaving you and he said to me the only reason i can’t get married is because i’m embarrassed about my credit report and you can guess what the ending of that was uh she left him yeah she never he never told her about the credit report and they could have worked through it it It wasn’t major issues, but he lost the love of his life because he was embarrassed about his credit. That really sucks.
Personal Finance Myths: TV Experts Don’t Always Know Best
[17:35] Myth number six, popular personal finance people on TV always tell me what is best for me. Denied.
[17:45] Declined. Declined. You are denied.
Can’t afford it. Yeah, personal finance people on TV are saying what, you know, basically what demographics and audience testing are resonating well so that they can keep doing their show and keep selling ads.
And I have heard some of the, the largest names out there.
I’m not going to mention any names, just say the most ridiculous stuff that makes no mathematical sense at all, because that’s their shtick.
[18:25] Yeah and and you know there’s lots of good advice out there i’m not you know we’re not saying yeah that some of these guys don’t have a lot of good advice it just it goes back to the absolutes this is my way this is the way i teach this is the way you have to do it if you don’t do it this way you’re not doing it right that’s the part i always hate and i i know we’re trying to keep this kind of short but i’m going to tell the story because it it still really chaps my hide to this day and this was this was 10 years ago i was listening on the radio that’s how long ago it was it was actual radio.
[18:55] I’m listening to the show and I’m going to try to keep it brief.
But this gentleman had called in, they had a couple of kids and he was just very distraught over this debt that he had.
The only asset he had was his house. There was equity in his house.
And the radio host basically told him that after going through his stuff, his only option, only option was to sell his house.
And the guy was devastated by this news.
And he was telling the host that this house is our whole world.
The kids were born here. They’re growing up here.
It would just devastate my family to have to move. And he was like, basically, well, you need to man up and you need to do what you got to do and you got to sell the house. And I’m listening to the guy’s situation.
And I’m like, no, there are other strategies that he can use to resolve this debt.
Not mainstream, not something they’ve talked about on a radio show, but if he’s going to follow some certain method, he’d have to sell his house.
And the guy was literally in tears by the time the call was over and left that call with, well, you know, this person knows what he’s talking about.
And he says, the only way out is we’re going to sell our house.
And it just made me so damn mad.
[19:59] That this poor, and I hope he didn’t sell his house, but the fact that it was like, my way is the right way.
And I’m going to tell you that. And there’s no other option.
And you have to listen to me because I’m the guy or the gal or whatever.
And I, I was just so, I was screaming at the radio, like, that’s not his only option. You son of a bitch.
I swear. I was like, and then I was like, how can I get this guy’s number?
I need to call this guy. I’d be like, dude, you don’t have to sell your house.
There’s other options. Screw that guy.
[20:26] Or it’s like if you hear on the radio or watch a video or somebody who’s a financial planner, it always drives me crazy when they say the only way to deal with your debt is you have to make a budget and stick to it like not everybody is good at that i’m not good at sticking to a budget i suck i hate budget oh my god i have a hard time just making one and then i look at it and i go oh that’s cool all right let’s go do something yeah i mean i honestly i honestly don’t think that i’ve done a budget 20 years 97 of us don’t think that way they don’t live that way and what a right what a crappy life to live having to carry a budget in your pocket remember the cash in the envelope system that some guys who’s gonna live like this like hold on let me get my walmart envelope out all right here we got 50 bucks i mean and i know it works for some people but But most, that’s the problem. Nothing works for everybody.
Budgeting and Housing: Not One-Size-Fits-All Solutions
[21:20] Right. Oh, it’s like when they say, you shouldn’t spend more than 27% on your housing.
What if you live in LA? Yeah. Just spend less than something else.
Well, just sell your house. It’s the only way, Steve. Yeah. You have to sell your house. Okay, myth number seven.
I had a friend that did debt settlement and is happy about it.
So that should be a good move for me in my situation.
Okay. Maybe it is. Maybe it’s not.
[21:46] It’s worth investigating, get all the answers. Everything you have to investigate because you hear both sides.
Oh, I had a friend that tried debt settlement and it was horrible, so that’s not going to be good for me. Or I had a friend that filed bankruptcy and they said that ruined their life.
Well, Dave Ramsey also said bankruptcy ruined his life and it was the worst thing he ever did.
I don’t know. Dave’s doing pretty good. I think it’s all right.
Well, and you mentioned your bankruptcy and I filed bankruptcy in 1990, I think. Yeah. Yeah.
[22:14] And living through that experience gave me a great perspective on helping people.
And I’ve helped so many, I don’t know, a hundred thousand plus people over the years that, Hey, it was a great benefit for me.
Sometimes shit happens and it’s better to, like you say, do better moving forward.
Sometimes trying to spend time and resources, repairing the mistakes of the past, don’t make financial sense, especially the older you get, The opportunity cost of the dollars that you’re earning right now are much higher than if I’m talking to a 60-year-old client that’s going to retire in five years.
That is a very different scenario than if I’m talking to a 25-year-old that’s got some debt and they’re not sure what to do with it.
The 60-year-old has a much higher opportunity cost of those dollars than the 25-year-old does. The 25-year-old has a little bit more time to recover from things.
You’ve got to be cognizant of that. You know, you don’t want to be, and I have so many clients are like, I don’t want to be a burden on my children.
You know, they’re paying their parent plus loans and all this stuff.
And it’s like, well, if you don’t change things, you’re going to be a burden on your children.
It’s just not going to be right now. You’re just shifting the timeline of when you’re going to be a burden because you’re spending all your money on this debt and these things and not saving for retirement. So what happens when you don’t have your income anymore, but you still haven’t resolved all these debts?
Now you’re then going to end up being a burden on your children, even if you don’t want to be, assuming you have kids that love you and don’t want you, you know, living in, I don’t know, squalor and eating dog food or whatever.
[23:44] Well, I’m always amazed where people feel so bad about their debt that they think, what are people going to think about me?
[23:51] So Damon, what drives me crazy is when people feel so bad about their debt and they feel like a failure because something you mentioned, you know, life happens.
So if you’re a farmer and you plant your crop and it doesn’t rain that year and you’ve run up that debt for that crop, how, we don’t perceive that farmer to be a failure because it didn’t rain.
[24:12] So how are you a failure if you were working hard and lost your job unexpectedly and now you’re, it’s not raining money for you either.
You’re not a failure don’t worry about that you know the way this system is set up it’s actually set up for people to take a big swing take a chance take some risk that’s what it’s designed for yes i mean it’s the embodiment of the you know american dream right it’s like take a swing for the fences and try to hit a home run and that’s what bankruptcy is for right hey look i did everything i could i tried i you know i tried to do everything right i took this investment for of this business and I gave everything I had to it.
It just, for whatever reason, didn’t work out or whatever the scenario is, we have a system set up to encourage people to take risks.
That’s how America has gone from where we were 200 years ago to where we are today.
It’s because we have this system that’s set up not to say, hey, you need to just sit there and stay on the farm and work your plot of land and that’s it.
No, it’s like, hey, let’s take some risks. Let’s try to be great. Let’s go for it.
And if it doesn’t work out, we got some checks and balances in place in the system to give you a reset.
And guess what? I mean, how many people have, you know, gone out, had a business opportunity, whatever, filed bankruptcy and then came back bigger, better, faster, stronger and succeeded?
[25:28] That’s what the system is designed for, is to encourage people to take some risks and dare to do something great.
Yeah. Not dare to do something really stupid, but dare to do something that’s great.
All right, Damon, myth number eight, I need to pay off all my debt before I start saving money for emergencies. Yes, that is a myth.
Importance of Saving While Paying Off Debt
[25:48] Because that… I think that people should, if they’re going to try to spend their way out of debt, that they should also start saving at the same time.
You don’t have to… It’s not all or nothing, right?
You got to have some emergency money there in case the tires or like I was talking to somebody yesterday, all of a sudden the truck breaks down.
Yeah. Because the, the, the, the myth about that and the problem with that is the math makes sense, right? You think, why would I save money?
If I’m paying 20%, I should take that a hundred dollars and pay it on a credit card. So I’m not paying 20% on that a hundred dollars anymore.
That is logical. And that makes sense. The problem is if you don’t make some major changes while you’re doing that, In a vacuum, that would make a lot of sense.
But unless you’ve cut up all those cards and you’re not using them anymore, then that money tends to get spent again and spent again.
And what a lot of people try to do is say, well, I’ll save as soon as I get out of this debt.
But five years later, they’re still paying the debt. It’s still kind of circling around.
It’s just not going down. They’re paying all the debt and they’re not saving anything.
So you almost have to get yourself off that treadmill, have a certain amount of money that you’re going to set aside no matter what.
And then you’re going to go out and make some extra money. Go over our Penny Stupid podcast. Those little shameless plug for that.
Learn how to make some side hustle money, and then you can use that money to start paying down debt at a more rapid pace.
[27:06] Yep. You, if you have a lot on your credit card and you don’t have anything in an emergency fund, you’re just putting all the money towards the credit card and the engine goes, or you need something unexpected.
[27:19] Where’s that expense going to go? It’s going to go right back on the 20% credit card.
And that’s another myth that people have where they say, oh, I have to have a credit card. So in case there’s an emergency, you know, when we talk about something like a bankruptcy or a debt settlement or something like that, and those cards are going to get closed and they freak out and like, oh my, I have to have a credit card.
Well, no, you don’t. Wouldn’t you rather have $5,000 cash in a bank versus credit available on a $5,000 card?
Because guess what? If your credit score starts to drop and drop and drop, because your utilization ratio starts getting pretty high because you’re having trouble, that $5,000 you have available on a card for emergencies could get taken away from you with a simple letter that says, ah, yeah, we’ve reevaluated your life choices here and we’ve decided to lower your credit limit.
So now you have no emergency fund. That credit card that you’ve been working so hard to keep open and save and have available is now gone versus if you have five grand in the bank, the bank’s not going to write you a letter and say, yeah, we’ve taken that away from you. It’s there in your bank.
That bank letter should say, it’s not us, it’s you.
We quit you.
College: Not Always a Smart Financial Move
[28:22] Myth number nine.
Going to college is a smart financial move. Sometimes.
Again, you notice a pattern, Steve, a theme? There’s nothing that’s absolute.
It’s always good for everybody.
That’s the problem. Nothing is always good for everybody.
College is a great option for some people depending on what you really want to do.
But you have to look at it as, what am I investing in terms of time and money and resources?
And what am I hoping to get from it? And what am I likely to get from it?
You have to evaluate it like you would any other investment.
What was the statistic we saw recently? It was like 50% of Fortune 500 companies are no longer requiring someone to have a bachelor’s degree.
Dude, I was ahead of the curve on that. You go back years in some of our podcasts.
Didn’t we do a podcast where I kind of floated the idea of, do you really need a degree? Or can you just tell the employer you have a degree?
And as long as you’re competent, you’ll be fine. i swear i said that on a podcast like 10 years ago well so here’s the head of the curve bro ahead of the curve that drive me you’re the curve i set the curve to.
The Reality of College Debt
[29:37] You’re one of those curves where people just go off the road in the middle of the night hold on baby hold on for the ride hold my beer it’s gonna be a ride it’s gonna be a ride, So, two facts that people never consider about the whole college thing is it’s like a merry-go-round where you win a prize on the ride if you get the brass ring.
Because you don’t get the benefit of all that money for college unless you actually graduate.
Three-quarters of people with college debt never graduate.
They have the debt. They don’t have the benefit of it.
It so if you’re going to go to school and you think that’s the smart thing to do start at your community college where it’s cheaper and you can see if you really like it see if you like this major or whatever you want to go study get your two-year degree and then go to a four-year school.
[30:33] Don’t spend 150 000 on an english degree because you went to the best party school that makes no no sense in your trash and your life.
Yeah. And I know it’s easy to say, but ideally know what you want to do before you go to college.
Or like Steve said, go to, if you’re not sure you’re 18, you’re at that stage, you know, you’re finding yourself or whatever it is.
Like Steve said, go to a community college where you can like have a part-time job and just pay for your school.
You’re not taking out monster student loans, even if they don’t seem like that much in the beginning.
And even if they don’t seem like that bad of an interest rate, oh my gosh, if I have so many many clients that are working jobs under 50 grand a year with a hundred, $200,000 in student loan debt.
And to the person, if you ask them, would you go to college again? No way in hell.
[31:22] Like they feel a lot. I have so many clients that college ruined my life and they feel like they’re trapped and they’re slaves to this debt now.
And they’re having a hard time getting ahead. And college is no guarantee of a great paying job.
No, I feel bad for the, the, the high school senior, they’re getting a lot of pressure from their peers.
You need to go to college. Which college are you going to? From their parents.
It always makes them feel like, well, you’re no good if you don’t go to college.
It’s like, well, wait a minute. Right.
You need to do better than we did. You need to go to college or you need to go where I went. The high school counselor focused on you applying for college.
Everything is focused on you going to college except logic. Yeah.
It’s like everybody assumes, well, you’re graduating high school, then you just go to college. That’s what you do. Yeah. When did we get stuck there?
[32:10] Hey, my generation, we could pay for college and not have all this debt.
We didn’t have the debt, but okay. Let’s go on to myth number 11.
Credit Cards as Financial Instruments, not Evil
[32:17] Credit cards are evil.
I like the points.
[32:23] I love the points. Steve flies all over the country on the points. Yeah. The.
I get the benefit of it. You know, you don’t have to go deep in debt to get all sorts of points.
In fact, I just got a new point card yesterday. I mean, here’s the thing.
Credit cards are evil like cars are evil. It’s just an object. It’s a tool.
And can they be misused? Yes. Can you get yourself in trouble? Absolutely.
Are these banks using these cards to try to hopefully get people hooked and paying them interest for the rest of their lives? Yes. Yeah? Yes, they are.
[32:56] It’s just like anything else, you can use it for your benefit or it could be to your detriment. It’s just in how you use the tool.
But make no mistake, yeah, they want you to pay interest for eternity. Absolutely.
[33:08] Yeah. It’s like these 0% balance transfers. They want you to transfer all your debt there so that when the interest rate goes up to what it’s going to be, you can’t afford to pay it. You’re just paying minimum interest. Yeah.
Credit cards are not evil. Like you said, Damon, it’s just a financial instrument.
That’s all it is i always am amazed when somebody goes i can’t have a credit card because you know i’m gonna go deep in debt and i always say do you own sharp kitchen knives you know how many people have you killed with them well and what about let’s say you know somebody uses credit cards to start a business right and they use that money and they didn’t have any other access to money no friends or family anything like that and they they use ten thousand dollars on a credit card at very high interest, at 25% interest rate or whatever, but that’s the only access to money they could get.
The credit card gave them that opportunity and they go on and they grow a successful business and now they’re millionaires.
Was that credit card evil, right?
Or what about the person that does the same thing, but the business is not a success.
Maybe they have 50,000, $100,000 in credit card debt and that business, they gave it their all for four or five years, but they use $100,000 in credit card debt. Now they’re upside down. There’s no way they can pay it.
They’re able to file a chapter seven bankruptcy and wipe that out and start fresh again.
They didn’t lose $100,000 of their money.
[34:28] They lost $100,000 of the bank’s money. They never paid anywhere near $100,000 back.
They got that free, not free swing, but they got to have a chance to take that swing for the fences.
It didn’t work out. They filed bankers. They wiped it out. How does that make the credit card evil?
It provided an opportunity that the individual otherwise wouldn’t have had.
And in the worst case scenario, they totally struck out and they got a fresh start. And these same banks were like, hey, we’ll give you another chance.
You know, give us a year, give us two years. here’s another chance try again that’s not that evil to me how many people i wonder how many people at the bank feel stupid because they took a risk on somebody and it didn’t work out you know are they like losing sleep what are they going to think of me for giving them a card they’re not yeah well it’s not even it’s not even an individual i think i’ve told this story before right when when i was younger in my younger days probably 22 23 and i needed a loan for something i don’t remember what it was but i had my local bank and i got dressed i’m 23 years old i got got dressed up pretty nice.
I went down to the bank and this would have had to been in the very early two thousands.
Right. So like 20 years ago and went to the bank, went up to the teller, you know, and they had back then they still had the offices where people sit in the offices.
[35:39] And I was like, Hey, who do I speak to about getting a loan?
Right. And I was all, I was ready, dude. I had my plan. Here’s what I need the money for. I’m ready to go.
And the teller just looked over and pointed to the telephone on the wall and said, go over there, pick up the the phone so i was like oh so i did that and i could have done it at home but it was just an automated thing put in your social put in this put in that and i was denied.
Appearance Denied: A Game of Automated Systems
[36:08] But you look good how am i denied i have a freaking tie on bro and i’m denied look at this tie, And my breath is really flat. Oh, man. I got my hair combed.
Whatever. But yeah, at that point, I realized it wasn’t about you anymore.
It’s just an automated system. It’s just a game. It’s a game.
Play the game. Hey, I’m going to say it again. If you need some sort of debt help, debt advice, and you’d like to talk to Damon and talk about your specific financial situation, go to DamonDay, D-A-M-O-N-D-A-Y.com or getoutofdebt.org.
And you can find a way to get in touch with him and he will talk your head off.
Damon, myth number 12. Advice is suspect, but the jokes are on point. Yeah.
Interest Rate vs. Rewards: What Matters More in Credit Cards?
[36:56] When selecting a credit card, I should always go for the lowest interest rate. Sure, why not?
Yeah, why not? My answer to that is absolutely not.
That sounds counterintuitive, but hey, don’t overextend yourself.
Shelf, if you’re going to get a credit card and you have the ability to pay it off every month, the interest rate is the least important consideration for that credit card because you’re not going to be paying interest anyway.
So you want to look for something that’s going to give you maximum rewards.
And those reward points can really add up to really beneficial things.
You should never go into debt that you can’t afford to repay just to get points.
But you You just used that example of somebody starting a business.
[37:46] We’ve been doing this side hustle thing over on our YouTube channel, the Penny’s Stupid Project.
You’ve been driving, and I’ve been doing Amazon FBA, and I started from scratch a year ago.
All of my purchases have been on credit cards.
I’ve paid them off every month. but last year we got two new iphone 15 pro maxes using reward points free hotel stays free air travel just for using the credit card and paying it off every month just looking for the reward program that makes the most sense to you now damon you’ve like you have a reward program i think with with one of your cards, American Express, maybe, where you get these great gift cards.
Yeah, I do Home Depot. And we get several hundred dollars, usually every month, every other month, in Home Depot gift cards.
It’s free money.
[38:46] And it’s funny because you mentioned when we talked about that myth of credit cards are evil, that we didn’t bring up this point.
The protections that you get when you buy something with a credit card, that’s often overlooked. You know, and…
[39:00] I never, ever, ever use a debit card for anything.
Credit Cards vs. Debit Cards: The Benefits of Using Credit Cards
[39:05] I know Ramsey just clutched his chest, but I don’t ever use a debit card.
I use usually my American Express card because they make it super easy.
And then I just pay the American Express.
It’s one of those unlimited cards, but you have to pay off every month.
So there’s no interest on it. You don’t carry a balance on that card.
You just use it to buy everything. everything and it’s so easy if there’s ever a fraudulent charge or i’m having an issue with the merchant and they’re like well we’re not going to ref or whatever it is i go online to my amex and i’m like yeah i dispute that charge and every single time now i don’t abuse it or anything it’s got to be legitimate but every time i’ve ever had to do that amex is like boom credit your account immediately and then they always resolve it in my favor every freaking time you have a debit card that you buy something with good luck getting your money back yeah yeah this is one of those those personal finance myths that we were talking about earlier on, when personal finance people say, you know, a debit card is the only thing that you should use.
That is the worst possible. I don’t even carry a debit card in my wallet. Don’t even carry one.
No, neither do I. Neither do I. Because here’s this argument.
I have to use a debit card so I don’t run up debt because it comes out of my bank account.
All right, well, Well, use a credit card, go home, send a check.
[40:24] You know, go online, schedule a payment. You don’t have to do that.
If you’re at a merchant and there’s a problem with it, with a debit card, you’re hoping that your bank is going to intervene.
But in the meantime, you might have things bouncing.
[40:40] Here’s an actual example. I had a client once who went through a Burger King drive-thru, and it was supposed to be $20.
But whoever put it in didn’t hit the decimal point or whatever and they hit his bank account for two thousand dollars that’s a whopper yeah that was jokes are on point jokes are on point, you’re the king hey welcome to the club, so in the meantime well he said well my bank’s gonna take care of it everything was bouncing all over the place. He was getting bounce check fees.
It just, it wasn’t worth it. Use a credit card.
If there’s ever a problem with a merchant, the banks in between you, they’re running interference between you and your bank.
A debit card is nothing more than an electronic check, direct access into your checking account, which seems really risky. I mean, would you walk around giving people blank checks?
You know, no, that would be stupid. So why do banks always push debit cards?
And the answer is because they get a percentage out of every transaction that card’s used for. That’s it.
All right. Myth number 13, a payday loan is always better than falling behind on my bill. Oh, contraire, mon frere. No, no, no.
The dangers of payday loans and better alternatives
[42:08] No. Yeah. No. If you’re down to payday loans. A payday loan is never a good idea.
Honestly, it’d be better if you were faced, it depends on the bill, but let’s say, I don’t know, even your car payment or even your mortgage.
Before you get a payday loan, a payday loan is just that trap because then how are you going to make up for it, right? right? It’s all of a sudden interest starts accruing.
Once you get into those, it’s like you can never catch up and get out of that.
You’d be much better off calling your bank, lender on your car, whatever, especially a lot of cars, even banks now, especially with COVID.
[42:39] You call, ask for a payment forbearance.
A lot of banks will give it to you, even a month, right?
Getting a payment forbearance where, hey, you could skip your mortgage payment for one month. They tack it onto the end of the loan.
That frees up a thousand dollars this month. That’s a hell of a lot better than going and getting a payday loan to try to stay on top of your bank, even if you miss a payment, let’s say you have to miss a payment, it’s not going to hit your credit report until you’re 30 days late.
You have to miss your second payment on that credit card or on that car payment or whatever it is before it’s even going to hit your credit report.
So if you’re 10 days late on a credit card, you’re going to get hit with the late fee.
Yeah, you’re going to pay 39 bucks, but you can make it up in 10 days and everybody’s fine again, right?
It’s going to cost you a lot more than that credit card late fee if you go get a payday loan trying trying to pay that bill on time when you can maybe just wait, come up with the money in 10 days and then catch it back up.
But if you’re struggling, first thing you should do is just call some of those bigger bills and ask if they can give you, some of them call it a payment holiday.
Some of them call it a payment forbearance, but just ask, Hey, struggle a little bit right now, but you know, turn in the corner next year or whatever with Christmas.
Hey, can I skip a payment this month? You’d be surprised. A lot of times we’ll say, yeah, you’ll qualify for that. No problem.
Yeah. I would say the percentage of people I’ve always talked to over the years, Damon, never had one payday loan, right?
It was always a series of payday loans. Yeah. Cause they had to get another payday loan to keep up with the first payday loan.
[44:05] Yeah. It’s just like drowning in quicksand. Like never, never, don’t ever, ever.
There’s never a scenario ever that going to a payday loan place or even, you know, these days do it online.
[44:17] There’s, there’s never a scenario where that makes more sense. It is not.
Myth number 14. Talk about absolutes. I can only afford to make.
There’s one of the absolutes. It never makes sense. That is an absolute. Yeah.
I can only afford to make the minimum payments on my debt. I’ll never get ahead.
Well. So here’s where I was going with that one. That might be a little obtuse.
Yes, if you can only afford to make the minimum payments on your debt, you might not get ahead.
But making minimum payments alone is not your only option.
Yeah if you do you want to make minimum payments or do you want to get ahead.
[44:57] There’s other ways of attacking the problem. If right now you only have enough money to make minimum payments, well, maybe we can make some additional money.
Or maybe we need to look at something a little bit more aggressive to dealing with these cards because you don’t have the ability to make any more money.
You’ve already looked at your budget and got it down as low as you can.
And that’s all the money you have every month to put towards that.
And now it’s just a matter of time before you run up against something unexpected where the whole thing’s going to fall off the rails anyway.
So maybe it’s time to be proactive with that and say, maybe we need to look at something more aggressive, like a bankruptcy or a debt settlement, or even a credit counseling program or whatever to get you off this track that you’re on.
Because if you’re just barely making it every month and just paying the minimums, you’re not going to be able to do that for the next 20 years.
I know the banks want you to do that for the next 20 years, but unless something’s about to change on the income side increasing or the expense side decreasing, you’re going to have to proactively do something different because just treading water with minimum payments, it’s not going to work out.
You know, when you get laser focused on one thing, like only minimum payments, I always think about soldiers at war.
Like the only thing that we can do is storm the line and just get as many people slaughtered as possible.
Why don’t we come up with a strategy that may has the best chance of success?
Yeah. When you watch those movies, that’s what we’re talking about.
Like from the civil war and stuff.
And you watch those movies, you’re like, oh yeah, the revolutionary war, just line them up. Why did they just line up like that and walk towards each other? Who thought of this?
[46:26] Like, what are we doing? The same people that thought minimum payments only were the only way to get out of debt.
Ready? March! Like, wait, no, that’s not a good idea.
[46:38] They’re shooting at us, bro! Can we run around the side?
We can only fight in line. Yeah, let’s flank them! No, no, that’s too avant-garde.
No, it’s not. It would not be noble, right?
Finding strategies beyond minimum payments for debt management
[46:53] Oh, that’s true. Let’s walk into the face of the debt.
Myth number 15, there is no way I can think about saving for the future or retirement as long as I’m trying to pay off my old debt.
Well, I guess we kind of covered that already. Yeah.
That, like you said, don’t spend the next five years digging yourself out of your financial past.
Think about doing better moving forward. Okay. Myth number 16, Damon, you’re going to love this one.
Do I really owe taxes on my debt if it’s forgiven?
Big question. I get it all the time. If you have debt forgiven in a bankruptcy, absolutely no. You do not owe the taxes on that.
If you have debt forgiven in like a settlement, you could owe taxes on that depending on your situation.
You know, it’s always strange to me why it seems like debt settlement people don’t make that fact apparent.
If you’re not insolvent and you have debt forgiven, you may owe income tax on that. Wait, wait, wait, wait, wait, wait.
That’s strange to you that they don’t make it apparent.
I know you’re just saying that for the show, but Steve, why would they not want to make it apparent that you might owe taxes on the forgiven debt? I don’t know.
[48:05] Want to make a sale. They want to give you the rosy version of what they’re selling you. They don’t want to sit down and say, okay, let’s look at all the facts.
Let’s crunch all the numbers. Hey, you’re in a situation where you are solvent.
So you may owe taxes on any debt that we have forgiven.
So we have to factor that into the equation so you can make a decision about whether the risk that you’re about to take on by falling behind on payments and settling this debt is worth the amount of money that you’re potentially going to save. It’s all a risk reward analysis.
That’s That’s all it is. And if somebody is going to save $5,000 and they have to fall behind on all their payments and they’re going to drag this out for a couple of years and they’re going to go through all this hassle and at the end, they’re going to save $5,000, they might say, yeah, you know what?
For only five grand, I don’t think the hassle is worth it.
Well, if they’re going to save 50 grand or 100 grand, well, maybe that hassle is worth it.
But unless you know exactly what you’re going to be able to save and what the actual hassle hassle is, you’re not in a position to make that decision about whether or not that’s a good path.
So the sales guys, either A, and I’m fully convinced that most of the time, they just don’t even understand what the hell they’re selling, which is why they don’t explain it to you.
And B, the ones that did understand it, don’t proactively explain it because it would make their solution look like you would save overall less money if you did it, which makes it harder for the commission.
[49:26] Yeah. Over the years, Damon, we’ve both been attacked by debt relief salespeople of every sort of flavor.
You guys don’t know what you’re talking about. Well, actually. Yeah.
[49:37] I could give you the form 982 and file on your 1040. Look at that.
Dude, I’ve even had, I can’t even tell you how many times where I’ve had a client and I was like, look, you’re going to have to get 982 when you go, because I don’t do taxes. I’m not a tax guy.
You go to your CPA. CPA, I’ve had clients come back to me and say, my CPA doesn’t know what that is. And I’m like, what?
And I have to give them the form. I’m take the form to yours.
And then I’m like, yeah. And while you’re at it, find a new CPA.
Understanding IRS Form for Debt Forgiveness
[50:08] Yeah. It’s an IRS form. I’m like, what do you mean? They don’t know what that is.
You know, it’s like, yeah, if you’re insolvent, if your liabilities are more than your assets and you have debt forgiven, you don’t have to pay tax on it. Yeah.
You have to file the form with the 1040 when you get the 1099s that show, oh, you had 5,000 forgiven from this creditor and 6,000 forgiven for this creditor.
You have to file those as if you had a, just like if you had a side hustle and you made $5,000 in extra income, you would get a 1099.
It’s the same kind of concept. You’d get a 1099 for that.
That debt was forgiven. You didn’t have to pay it back. So therefore it’s technically income because you borrowed the money, but never ever paid it back.
So the loan, which was not taxable, turned into income.
Now, the IRS has a waiver that if you have debt forgiven, but you’re insolvent at the time the debt was forgiven, which means if you add up all of your assets and all of your liabilities at that time, if that number is negative, you can request a waiver of any taxes due on that forgiven debt, but you have to ask.
You have to file that form, the 982 form, to ask for the waiver.
And the way our tax system works, you’re going to get the waiver. You get it.
Now, if you lie about it or you’re ill-informed about it or you put the wrong information in and you get audited, then you could get in trouble if the information is not correct.
But you put in the waiver form, you get it. They give you the waiver and then they’ll audit you later.
[51:35] If they audit you later and they find out it was wrong, then you’ll owe the tax and the penalties or whatever.
But all you have to do is file that form with the the 1099 and get the waiver, just make sure you have a competent CPA that knows what they’re doing and can actually look at your net worth at the time the debt was forgiven.
That’s also important too. You got to take a snapshot in time of what your financial life was looking like, what your house was worth, what you owed on it, any assets that you have, what was the balance in your 401k, all that stuff needs to be written down on there so you can see if you’re positive or negative.
Get it yeah if you fill out the form and you send it in the irs is going to go okay yeah no no taxes on all right damon hey we reached the end of our 16 and if anybody has heard what uh we’ve said and wants to know more about preconceptions and myth then how do they get you damon damonday.com or you can google me my name’s not that common so you find me in google too Yep.
Where to Find More Information on Preconceptions and Myths
[52:39] Yep. All right. Google me, Steve. Google me.
I don’t know. That might be kind of scary.
But it’s been a pleasure helping you. And Damon, we will be back for the next podcast.
If you haven’t subscribed to the podcast, you liked anything that you heard, be sure to subscribe.
And I will see you next time, Damon. See ya. Peace.
Source: getoutofdebt.org
Apache is functioning normally
The residential mortgage as we know it today is less than a century old. In fact, until the Federal Housing Administration (FHA) was founded in 1934, only one in 10 Americans even owned a home: It was a luxury available only for cash or with a very short-term loan. That all changed with the development of the 30-year fixed-rate mortgage during the Great Depression, and the perfection of it after World War II. Essentially a way to buy a house on the installment plan, it made homeownership possible for millions, and solidified homeownership as a key part of the American Dream.
With the development of the 30-year mortgage came another great American pastime: the watching of mortgage interest rates. When shopping for a home loan, it can be helpful to understand the history of mortgage rate trends in America. Here we’ll break down the past 50-plus years of mortgage trends.
Current and historical mortgage rates
1970s mortgage rate trends
The 30-year fixed-rate mortgage — now the most popular type of home loan — started off the decade at about 7.3 percent in 1971, according to Freddie Mac’s survey. By the end of 1979, the 30-year rate was at 12.9 percent. During this decade, the Federal Reserve’s expansionary policy and other factors helped drive inflation and borrowing costs way up.
1980s mortgage rate trends
At the beginning of 1980, homes in the U.S. cost a median $63,700, according to the Department of Housing and Urban Development (HUD). By 1990, that median had risen to $123,900. Spurred by the Great Inflation, the 30-year fixed mortgage rate reached a pinnacle of 18.4 percent in October 1981, according to Freddie Mac. Once the Fed reined in inflation, the 30-year rate seesawed down to the 9 percent range, closing the decade at 9.78 percent.
1990s mortgage rate trends
The 1990s saw a dramatic shift in the 30-year rate, which plunged to an average of 6.91 percent in 1998, according to Bankrate data. This drop was brought on by the dot-com bubble, an era when investors rushed to buy stocks from technology companies that were overvalued. When these stocks plummeted, investors turned their focus to fixed-income investments, such as bonds. As bond prices rose and yields fell, mortgage rates, which follow the 10-year Treasury’s yield, also declined.
2000s mortgage rate trends
The 30-year rate took another tumble in the latter half of the 2000s when the housing market crashed due to the prevalence of subprime loans. The average 30-year fixed mortgage rate dropped from about 8 percent at the start of the decade down to 5.4 percent by 2009, according to Bankrate data. At this time, the Federal Reserve implemented quantitative easing measures, buying mortgage bonds in bulk to drive down interest rates and usher in an economic recovery.
2010s mortgage rate trends
In the 2010s, the 30-year mortgage rate continued to trend downward, beginning in the 4 percent range, dipping under the 4 percent mark and then ending the decade back in that range, according to Bankrate data. These rates were brought on in part by the Federal Reserve’s pull-back on bond-buying.
2020s mortgage rate trends
2020 saw new lows for mortgage rates, with the 30-year fixed rate diving to just under 3 percent, according to Bankrate data, and averaging 3.38 percent for the year. Amid the pandemic, fearful investors were attracted to safer products such as Treasury and mortgage bonds, pushing yields — and rates — lower.
Rates began to creep back up in 2021, but the ongoing pandemic ultimately tempered their rise.
Then came 2022 and 2023. Determined to curb rampant inflation, the Federal Reserve began raising its benchmark interest rate, and mortgage rates followed suit. In October 2022, the 30-year rate breached 7 percent, but settled back into the 6 percent range for the first half of 2023. In July 2023, rates reversed course. The 30-year peaked above 8 percent on October 25, before drifting back down to 7.21 percent on December 13.
Will mortgage rates continue dropping?
While we can try to guess based on historical data, no one knows for certain what will happen to mortgage rates — whether they’ll change at all, or when. The economy and housing market are cyclical, experiencing ups and downs, at times unpredictably.
That said, we regularly ask economists and other experts to weigh in. For week-to-week predictions, check out our mortgage rate poll. For a monthly look-ahead, read our latest mortgage rate forecast.
Summary: Historical mortgage rates over time
Over the last 50 years, mortgage rates have reached both peaks and valleys, from the high of 18 percent in the 1980s to today’s relatively moderate, but somewhat volatile figures. You can view and follow current 30-year mortgage rates on Bankrate.
Below is a summary of the average 30-year fixed mortgage rate by year. From the mid-1980s on, the numbers reflect Bankrate’s calculation of the effective mortgage rate, which takes into account the average number of points borrowers pay. The data from the 1970s to the early 1980s is based on Freddie Mac’s reporting.
Year | 30-year fixed-rate average |
---|---|
Sources: Bankrate, Freddie Mac | |
2023 | 7.00% |
2022 | 5.53% |
2021 | 3.15% |
2020 | 3.38% |
2019 | 4.13% |
2018 | 4.70% |
2017 | 4.14% |
2016 | 3.79% |
2015 | 3.99% |
2014 | 4.31% |
2013 | 4.16% |
2012 | 3.88% |
2011 | 4.65% |
2010 | 4.86% |
2009 | 5.38% |
2008 | 6.23% |
2007 | 6.40% |
2006 | 6.47% |
2005 | 5.93% |
2004 | 5.88% |
2003 | 5.89% |
2002 | 6.57% |
2001 | 7.01% |
2000 | 8.08% |
1999 | 7.46% |
1998 | 6.91% |
1997 | 7.57% |
1996 | 7.76% |
1995 | 7.86% |
1994 | 8.28% |
1993 | 7.17% |
1992 | 8.27% |
1991 | 9.09% |
1990 | 9.97% |
1989 | 10.25% |
1988 | 10.38% |
1987 | 10.40% |
1986 | 10.39% |
1985 | 12.43% |
1984 | 13.88% |
1983 | 13.24% |
1982 | 16.04% |
1981 | 16.64% |
1980 | 13.74% |
1979 | 11.20% |
1978 | 9.64% |
1977 | 8.85% |
1976 | 8.87% |
1975 | 9.05% |
1974 | 9.19% |
1973 | 8.04% |
1972 | 7.38% |
How historical mortgage rates affect buying a home
Broadly speaking, lower mortgage rates fuel demand among homebuyers and can increase an individual’s buying power. A higher rate, on the other hand, means higher monthly mortgage payments, which can be a barrier for a buyer if the cost becomes unaffordable. In general, a borrower with a higher credit score, stable income and a sizable down payment qualifies for the lowest rates.
While you should keep an eye on mortgage rates, don’t try to time the market or predict what’ll happen. While a home is an investment, it’s also where you live. In general, it’s best to get a mortgage when the time is right for you.
How historical mortgage rates affect refinancing
When mortgage rates are on the upswing, it might make less financial sense to try to refinance. Generally, it’s best to refinance if you can shave off one-half to three-quarters of a percentage point from your current interest rate, and if you plan to stay in your home for a longer period of time. If you plan to sell your home soon, the cost to refinance might not be worth it.
Many homeowners, however, are sitting on higher levels of equity, so consider exploring a cash-out refinance. Shop around to find the lowest possible rate and fees based on your credit and finances, and be sure to lock your rate.
Source: bankrate.com
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CNN
—
The largest credit union in the US has the widest disparity in mortgage approval rates between White and Black borrowers of any major lender, a trend that reached new heights last year, a CNN analysis found.
Navy Federal Credit Union, which lends to military servicemembers and veterans, approved more than 75% of the White borrowers who applied for a new conventional home purchase mortgage in 2022, according to the most recent data available from the Consumer Financial Protection Bureau. But less than 50% of Black borrowers who applied for the same type of loan were approved.
While many banks also approved White applicants at higher rates than Black borrowers, the nearly 29-percentage-point gap in Navy Federal’s approval rates was the widest of any of the 50 lenders that originated the most mortgage loans last year.
The disparity remains even among White and Black applicants who had similar incomes and debt-to-income ratios. Notably, Navy Federal approved a slightly higher percentage of applications from White borrowers making less than $62,000 a year than it did of Black borrowers making $140,000 or more.
A deeper statistical analysis performed by CNN found that Black applicants to Navy Federal were more than twice as likely to be denied as White applicants even when more than a dozen different variables – including income, debt-to-income ratio, property value, downpayment percentage, and neighborhood characteristics – were the same.
The Virginia-based Navy Federal, which was originally founded in 1933 to serve Navy employees, is now open to all members of the armed forces, Department of Defense personnel, veterans, and their relatives. It has about 13 million members and more than $165 billion in assets.
Bob Otondi, a Black business owner in Texas who was denied a mortgage by Navy Federal in 2021 – and then approved by another lender in about two weeks – said the rejection “didn’t make any sense at all.”
“I thought it could have been racial discrimination,” he told CNN, “but I could never prove it.”
In total, the credit union rejected about 3,700 Black applicants for home purchase mortgages last year, potentially blocking them from homeownership just as interest rates spiked. And Navy Federal also approved Latino borrowers at significantly lower rates than White borrowers.
In a statement, Navy Federal spokesperson Bill Pearson defended the credit union’s lending practices.
“Navy Federal Credit Union is committed to equal and equitable lending practices and strict adherence to all fair lending laws,” Pearson said. “Employee training, fair lending statistical testing, third-party evaluations, and compliance reviews are embedded in our lending practices to ensure fairness across the board.”
Pearson said that CNN’s analysis “does not accurately reflect our practices” because it did not account for “major criteria required by any financial institution to approve a mortgage loan.” Those factors included “credit score, available cash deposits and relationship history with lender,” he said.
But that information is not available in the public mortgage data. Navy Federal declined to release additional data about its loans to CNN that included borrowers’ credit scores or other variables. In addition, most of the Navy Federal applications that were denied are listed as being rejected for reasons other than “credit history.”
By some measures, Navy Federal has been successful at lending to minority borrowers: A fourth of its conventional mortgage applicants are Black, and about 18% of the conventional loans it originated went to Black borrowers – a larger portion than almost any other large lender.
But because of the large racial disparity in Navy Federal’s approval rates, even though more Black borrowers are applying for conventional mortgage loans from the credit union, most of them are getting denied.
Experts in mortgage lending and advocates for fair housing said that the racial gaps in Navy Federal’s approval rates were surprisingly large and raised questions about the institution’s lending practices. Lisa Rice, the president and CEO of the National Fair Housing Alliance, an advocacy group, said the racial gaps in Navy Federal’s lending identified by CNN were “some of the largest I’ve seen.”
“That is a quite stark disparity,” Rice said. “It’s unusual for us to see instances where the lender denies more loans than it approves.”
Experts said that Navy Federal’s racial disparities appeared to be an especially extreme example of a larger national problem. The credit union’s gap between White and Black approval rates has jumped significantly in recent years – and among all lenders, the racial approval rate gap has also grown.
More broadly, the gap in homeownership rates between White and Black Americans is larger today than it was before the Civil Rights era – and it’s a key driver of wealth disparities between White and Black families.
Navy Federal member says rejection left him feeling shocked and hurt
When Bob Otondi went house hunting in the summer of 2021, he immediately knew when he found his “dream house.” The three-bedroom home in a lakeside neighborhood of a Dallas suburb had an open kitchen, an expansive backyard with a pool, and – most importantly – it was in a great school district where Otondi’s son had long aspired to attend high school.
Otondi was thrilled when his bid for the home was approved, and expected that his mortgage application with Navy Federal would be smooth sailing. The relative of Navy servicemembers, Otondi had been a Navy Federal customer for years. The credit union had pre-approved him, he said he’d successfully paid off several previous Navy Federal vehicle loans, and he had budgeted a downpayment of more than 20% of the home’s value.
But then, just weeks before he was scheduled to close on the purchase, Otondi got bad news: Navy Federal was denying his application. The credit union told him in a form letter that it had concluded his income was not high enough to account for his debts.
Otondi said the last-minute denial didn’t make sense. According to documents he provided to CNN, he was making more than $100,000 a year from his logistics business and had a credit score above 700. He said he didn’t have significant debts.
In the heat of the pandemic-era housing market, Otondi feared he would lose the home. “I was stunned, I was shocked, I was hurt,” he said. He had been driving by the house with his son and daughter every week, and the kids had already planned out decorations for their rooms. “To go back home and tell them, ‘guys, we lost the house?’ I mean, devastating,” Otondi said.
But Otondi’s realtor, Angela Crescini, connected him with another mortgage lender who approved him for a loan in about two weeks – and the purchase went through.
“There was no real reason he shouldn’t have gotten the loan” from Navy Federal, Crescini said. “How can one lender get a loan done within 15 days and this other one couldn’t at all? It didn’t ring right to me.”
Pearson, the Navy Federal spokesperson, declined to comment on Otondi’s denial, saying that “our members’ personal and account information are private and confidential.”
As he sat in the airy living room of the three-bedroom home last month, Otondi said he was still frustrated by the mortgage denial. He said he submitted complaints to the Consumer Financial Protection Bureau – the federal agency that oversees consumer lending – as well as a Texas state agency, both of which went nowhere.
Hearing about the larger racial disparities in Navy Federal’s mortgage approvals made him think the credit union was “inhibiting veterans and their families from just uplifting themselves,” Otondi said.
CNN’s analysis doesn’t prove that Navy Federal discriminated against any borrowers. But it does show significant disparities in the credit union’s approval rates for borrowers of different races – and that it has larger racial gaps than many other large financial institutions.
The analysis was based on data collected under the Home Mortgage Disclosure Act, which requires most financial institutions to report anonymized information on mortgage applications to the government, including applicants’ race. CNN’s analysis focused specifically on conventional home purchase mortgages for homes intended to be used for a primary residence, and not intended to be used for a business or commercial purpose. CNN only analyzed loan applications that were ultimately approved or denied by lenders, not those that were withdrawn by borrowers before a decision was made.
In 2022, according to the data, Navy Federal approved 77.1% of White applicants, 55.8% of Latino applicants, and 48.5% of Black applicants. The 28.6-percentage-point gap between Black and White applicants was by far the largest gap among the 50 financial institutions that originated the most conventional home purchase loans last year, which includes Navy Federal.
In comparison, Wells Fargo had a roughly 19.5-percentage-point gap between its Black and White approval rates, US Bank had a 10-point gap, and Bank of America had a 3.5-point gap. The second-largest credit union in the country, State Employees’ Credit Union, had a 5.4-point gap.
Navy Federal’s racial disparities remain even when comparing only applicants with the same incomes or debt-to-income ratios. The credit union approved 59.3% of applications from Black applicants making $140,000 or more – those in the top quarter of applicants by income – and 59.8% of White applicants making less than $62,000 – those in the bottom quarter.
CNN’s analysis found that Navy Federal had statistically significant racial disparities in its mortgage approval rates while holding constant more than a dozen different variables including the applicant’s income and debt-to-income ratio, the loan amount, the property value, and the neighborhood’s socioeconomic makeup. Even among applicants who were identical among all those variables, the analysis found, Black applicants were more than twice as likely to be denied as White applicants, and Latino applicants were roughly 85% more likely to be denied than White applicants.
The analysis did not take applicants’ credit scores into account because the public data released under the Home Mortgage Disclosure Act does not include credit scores due to privacy concerns. That means that at least part of the racial disparity could possibly be explained by differences in credit scores between White and minority borrowers. Black borrowers in particular tend to have lower credit scores, in part due to the impact of historical discrimination and a continuing lack of access to traditional financial institutions in Black neighborhoods, according to researchers.
The data does, however, include information on the reasons that applicants were denied. Of the Navy Federal applications from Black applicants that were rejected, less than a fourth were listed as being denied because of “credit history.”
Notably, the racial disparities in Navy Federal’s approval rates have increased over time. In 2018, the difference between the White and Black approval rates was only 11.5 percentage points – far smaller than the 28.6-percentage-point gap in 2022.
José Loya, a UCLA professor who has studied racial gaps in mortgage approvals and reviewed CNN’s analysis, called the disparities in Navy Federal’s lending “alarming.”
“It does surprise me that they’re doing significantly worse than other big lenders,” because of Navy Federal’s status as a credit union, he said.
What may be widening the gap
The decision to approve or deny a mortgage application is largely made by automated underwriting systems, and advocates have been pushing lenders like Navy Federal to improve those systems to reduce racial disparities.
In recent years, some banks have changed their underwriting systems to take into account additional data that can reduce those racial disparities – such as including an applicant’s history of paying rent in a calculation of their creditworthiness. Pearson, the Navy Federal spokesperson, said rental history was “incorporated” into the credit union’s underwriting process, but did not provide additional details.
Some experts pointed out that Navy Federal’s member base of servicemembers, veterans, and their families may have a different financial picture than the general public that large banks serve, which could explain some of the racial disparities.
In addition, unlike large banks, Navy Federal isn’t subject to the Community Reinvestment Act, which encourages lenders to make loans in low and middle-income neighborhoods. While federal regulators review banks’ lending under the act, they don’t do so for credit unions and other non-bank lenders.
Some advocates and banking groups have been calling for years for revisions to the law to require credit unions to follow the same rules. “Our legislators have given a huge pass to credit unions, on the assumption that they’re serving and meeting the needs of their members,” said Rice, the fair housing advocate.
In other cases, racial disparities in mortgage lending have been linked to loan officers helping White borrowers more than Black ones, said Sara Pratt, a lawyer at the law firm Relman Colfax who previously led the U.S. Department of Housing and Urban Development’s civil rights enforcement efforts.
“A particular loan officer might make exceptions or just work harder for some peoples’ loans,” such as telling applicants to pay down credit cards or increase their downpayment if they’re on the edge of getting approved, Pratt said. “Loan officers might give this advice to a White borrower, and with a Black borrower, they’re less likely to do that.”
She noted that she had no evidence that Navy Federal employees were doing that but said the disparities in Navy Federal’s approval rates should “require a lender to offer justifications for how the disparity occurred.”
According to federal law, lenders don’t have to be intentionally engaging in racism to break fair lending rules. A “disparate impact” on minorities can also lead to discrimination claims.
“It’s bad business to discriminate because if people are genuinely qualified – as in many cases they are – then lenders are missing the opportunity to make loans,” said Pratt. “Lenders who look more carefully at these issues can see they’re losing business that somebody else is getting.”
Pearson said that the credit union was proud of the large portion of its loans that went to Black borrowers, and that more than half of its branches in the US are located in “minority communities.”
“As a not for profit, member centric, membership organization, we are focused on expanding awareness and access to home ownership across the country,” he said. “Navy Federal is a trusted financial partner for all its members and advises each member based on their unique financial needs.”
‘I thought we were going to lose the house’
CNN’s analysis found that Navy Federal had larger racial disparities in its approval rates for conventional mortgages than for VA home loans, which each account for about half of the loans it originated last year. VA loans, which are backed by the federal government, are designed to allow veterans to get mortgages that they might not qualify for in the conventional market.
But racial disparities still existed among Navy Federal’s VA loan business. Last year, Navy Federal approved 84.2% of its white home purchase VA loan applicants, compared with 73.8% of Latino applicants and 71.6% of Black applicants. Its Black-White approval rate gap was larger than all but one of the 50 lenders that originated the most VA home purchase loans. Like in Navy Federal’s conventional business, the racial differences were statistically significant even when accounting for factors like income, property value, debt-to-income ratio, and downpayment percentage.
Ted Spencer, 42, applied for a Navy Federal mortgage in 2019 as he purchased a home in Raleigh, North Carolina. Spencer, who is Black, had been banking with Navy Federal since he joined the Navy two decades earlier and had good experiences with the credit union, so it was an obvious choice for a loan. He was preapproved for a VA loan with no downpayment.
On his first weekend house hunting, Spencer toured a four-bedroom home in North Raleigh with a woodsy yard big enough for his dog and space for the kids he and his girlfriend would later adopt. “We walked through the house, and we were both like, yeah, this was the one,” he said. Their offer was accepted right away.
After Spencer submitted his paperwork to Navy Federal, he ended up waiting weeks. He said he repeatedly emailed, called, and messaged his loan officer without any response. Then, finally, he heard back that the mortgage was denied, with a letter from the credit union that he showed CNN citing his credit history and debts.
“It was pretty much the 11th hour,” Spencer said. “I really thought we were going to lose the house.”
But like Otondi, Spencer found another mortgage lender who quickly approved him for a new loan, at a lower interest rate than Navy Federal was going to charge him – and he and his girlfriend were able to close on the loan only a week late.
Spencer said he never thought the denial had anything to do with his race, and that the data CNN showed him about racial disparities in the credit union’s lending practices “blew my mind.” He said it made him think about family stories he’d heard about his grandfather’s experience dealing with redlining as he tried to buy a home after returning from the Korean War.
Some realtors who specialize in serving minority and veteran homebuyers said that Spencer and Otondi’s experience of being denied by Navy Federal and then easily approved by another lender wasn’t uncommon.
“If a client calls and says ‘I was disapproved by Navy Federal,’ the first thing we say is ‘let’s get you in with another lender,’” said Anthony Reanue, a California-based realtor. “In the military community, many people know that Navy Federal is not the best when it comes to mortgages.”
The credit union has previously faced scrutiny over racial disparities. An analysis by the nonprofit news outlet The Markup using 2019 data found that Navy Federal was among the large lenders with the biggest racial gaps in approval rates – and CNN found that the gap has only grown since then. Navy Federal said at the time that The Markup’s analysis did not accurately reflect its practices.
Navy Federal has also faced legal action over allegations of aggressive lending practices and other banking violations. In 2016, it paid about $28.5 million in redress and fines after the federal government found it had falsely threatened borrowers over debt collection and froze them out of their accounts.
Some of the Black borrowers denied by Navy Federal said they saw homeownership not just as a financial accomplishment but as a larger life goal. As an immigrant from Kenya, Otondi said that buying his house felt like living “the American dream right here.”
But after his rejection from Navy Federal, he said he couldn’t help but think about other Black borrowers who weren’t able to get another loan.
“What about the ones who are denied? What about the ones who now can’t get their own dream house?” Otondi asked. “It’s something that’s going to affect generations, all the way down to their kids.”
HOW WE REPORTED THIS STORY
CNN analyzed data on millions of mortgage applications to evaluate racial disparities in lending at Navy Federal Credit Union and other lenders. The data was released by the Consumer Financial Protection Bureau under the Home Mortgage Disclosure Act, and CNN used the snapshot data for 2022 and prior years.
Reporters analyzed conventional, first lien, one-to-four-unit, conforming, home purchase loan applications. The review only included mortgages for homes intended to be used for a primary residence, and not intended to be used for a business or commercial purpose. Applications that were not fully submitted and acted upon were excluded.
CNN’s statistical analysis evaluated the likelihood of applicants of each racial and ethnic group being denied when more than a dozen other variables were held constant. The other variables, all of which are included in the HMDA dataset, were: the applicant’s income, the applicant’s debt-to-income ratio, the loan amount, the loan term, the loan-to-value ratio, the property value, the presence of a co-applicant, the applicant and co-applicant’s sex, the credit scoring model used to generate the applicant’s credit score, the primary applicant’s age, the minority population percentage of the property’s census tract, the median age of housing units in the property’s census tract, and the difference between the median income of the metro area and the median income of the property’s census tract.
The analysis classified applicants as Latino if they reported Latino ethnicity, no matter their race. Mixed-race applicants and applications from co-applicants of different races or ethnicities were excluded from the racial categories. Alternate methods of defining race and ethnicity – such as looking only at the demographics of the primary applicant and not any co-applicants – did not substantially change the results.
Source: cnn.com
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The Bush Administration has failed to implement a sweeping plan to tackle the ongoing mortgage crisis, according to governors who are in Washington for the annual National Governors Association Winter Meeting.
The group said in a release that the two mortgage aid plans currently extended to struggling borrowers fall short because they are confusing, exclude a large number of homeowners, and don’t have “any reporting system to monitor participation and efficacy.”
“Homeownership is a cornerstone of the American Dream and serves as a basic foundation for our local, state and national economies,” said New York Governor Spitzer. “The federal government has failed to offer a solution that is broad enough and swift enough to aggressively stop this crisis from escalating.”
They noted that the Fed’s aid plans don’t have straightforward guidelines for the types of loan modifications or workouts that would be offered to homeowners, stymieing efforts that would likely lead to a higher success rate.
“I urge the Office of the Comptroller of the Currency ( OCC ) to compel the national banks and servicers to work with state governors and regulators by providing detailed loan information about delinquencies and potential foreclosures so that states and local governments can accurately assess the foreclosure impact on citizens and their communities,” Arizona Governor Janet Napolitano said.
The governors also want the federal government to get involved with the individual efforts set forth by states across the nation to help solve the problem and create a safety net for the future.
“Maryland, like other states, is taking steps to preserve homeownership and protect its families from this national foreclosure crisis,” said Governor Martin O’Malley.
“But Maryland cannot go it alone. We need a strong partnership with our federal government, which includes passage of strong housing legislation, to help us keep our families in their homes and protect our middle class. The federal government has to work with our states to provide the tools necessary to overcome this national crisis.”
We all know that borrowers and mortgage lenders/servicers have a tough enough time connecting, so any added transparency would likely improve matters for everyone involved.
“The crisis in the sub-prime mortgage market has had a devastating impact on homeowners and entire communities across our country,” Illinois Governor Rod R. Blagojevich said. “In Illinois alone, it is possible that up to 70,000 homeowners will face foreclosure this year. A real solution will require lenders, consumers, advocates and public policy makers to all work together.”
Last week, Illinois unveiled the Homeowners’ Assistance Initiative, a program aimed at helping homeowners trapped in subprime adjustable-rate mortages refinance into fixed-rate mortgages by working directly with the lenders.
(photo: nictalopen)
Source: thetruthaboutmortgage.com
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Mortgage originators will pay more to access consumer credit reports in 2024, reigniting complaints from mortgage lenders and trade associations.
In 2024, Fair Isaac Corp. (FICO), the company that retains the rights to the market’s adopted methodology to measure consumer credit risk, will charge one price – higher than the current price – to all mortgage lenders, independent of their volumes. The change represents a departure from the tier-based pricing structure it implemented in early 2023.
FICO will also collect the same per score price for soft pulls and hard pulls next year, an initiative that started in 2023 despite significant differences in these products.
“FICO will collect approximately $10 total for all three scores out of a $50 (or more) tri-merge report and score bundle, which continues to constitute a low percentage (approximately 20% or less) of the overall cost of a tri-merge report,” a spokesperson for FICO wrote in a statement to HousingWire.
For 2023, FICO said it would collect approximately $2 to $8 for all three score tiers out of a $40 to $50 (or more) tri-merge report and score bundle and out of an average $3,800 in closing costs. Compared to 2022, mortgage lenders in 2023 saw a price increase between 10% and 400%, mortgage trade groups and other stakeholders said.
For 2024, two mortgage executives who spoke on the condition of anonymity for fear of retaliation, told HousingWire that they expect prices to increase by more than double in some cases. Ultimately, the sources added that lenders will charge more to their borrowers, who are already facing affordability challenges.
“It seems like only yesterday you could pull a single borrower tri-merge for $15 and a joint for $30,” Greg Sher, Managing Director of NFM Lending, wrote in a LinkedIn post that went viral in the mortgage industry. “Now those prices will be in the neighborhood of $50 and $100 respectively — one well-known, widely used credit reporting agency plans on charging $75/$150. For clarification purposes, every IMB uses 3rd party vendors (also known as credit reporting agencies).”
Scott Olson, executive director at the Community Home Lenders of America (CHLA), said that increasing prices in this difficult economic environment will “only make it difficult for borrowers to participate in the American dream.”
Soft and hard pulls
Another change for 2024 is related to the pricing structure of soft pulls, which are performed to provide pre-approval letters, only visible to the borrower and without impacts on credit scores. Its prices will come closer to those applied to hard pulls, which are recorded on the borrower’s credit report, visible to anyone and can trigger leads.
“Last year, we implemented a tier-based pricing structure for mortgage originations, and FICO collected the same per score wholesale price for most soft pulls as hard pulls, but some lenders qualified for a lower price in certain cases for some soft pulls,” the spokesperson for FICO told HousingWire.
Brendan McKay, president of advocacy at the mortgage broker group Association of Independent Mortgage Experts (AIME), complained FICO doubled the cost of hard pulls at the beginning of 2023.
“Now they are charging the same amount for a soft credit pull, an inherently inferior product that provides less actionable information than a hard credit pull. There has been no justification given for the increased expense.”
According to McKay, the cost burden will be passed directly onto consumers, and those from underserved communities will feel it most.
“Despite being a private institution, FICO is currently a critical component in the mortgage process. As an industry, we owe it to future homeowners to bring attention to the misuse of power,” McKay said.
Fannie Mae and Freddie Mac are moving away from the current Classic FICO credit score model, requiring lenders to use two credit scores generated by the FICO Score 10 T and the VantageScore 4.0 models, which are considered more inclusive than their predecessor.
Price to originators
A FICO representative said the company does not set the retail price for end users.
Ultimately, “Anything above these wholesale prices, charged as part of a tri-merge score and report bundle, is collected and retained by others who sell and distribute the scores,” the spokesperson said.
Credit bureaus, which work with the FICO model, may pass the FICO price increases to their clients.
TransUnion and Experian did not reply to a request for comments.
Meanwhile, a spokesperson for Equifax wrote to HousingWire that beginning in January 2024, it will have a price adjustment to “reflect cost increases from third-party providers of credit reports and credit scores.”
However, the spokesperson added, “Equifax is sensitive to the impact these third-party cost increases may have on customers, especially given current market conditions. With this in mind, Equifax is not increasing the costs related to the Equifax credit file component of the tri-merge credit report for 2024.”
The Mortgage Bankers Association (MBA) president and CEO Bob Broeksmit said that, “In light of these media reports about another round of unexplained sharp price increases, we reiterate our concerns about the lack of transparency into the factors that are driving these pricing changes.”
“Given the unique market structure and limited options for obtaining credit reports and credit scores, MBA urges policymakers to examine the drivers of these cost increases to ensure transparency and to protect consumers from paying higher costs in connection with their home mortgages,” Broeksmit said.
Editor’s note: This story was updated after publication to include comments from the Mortgage Bankers Association.
Related
Source: housingwire.com
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Renting a house or apartment comes with several perks, like minimal commitment to live in one place. After a certain point, however, most people want to put down roots and purchase their own home.
Owning your own home is the American Dream. Plus, you won’t have a landlord breathing down your neck about what you can and can’t do. But what kind of credit score is needed to buy a house?
We’ve got the answers, plus some extra tips on how to seal the deal, no matter what kind of credit score you have.
How does your credit score affect buying a home?
Your credit score influences your ability to buy a home as a major factor in whether you’re approved for a mortgage. That’s because your credit score is a reflection of how likely you may be to default on your loan.
Weighing all the items on your credit reports, such as payment history and amounts owed, a complex calculation then creates your FICO score. FICO scores are the credit scores that 90% of lenders use. They give mortgage lenders a better idea of how you handle your finances.
Even after you’re approved for a loan, your FICO score also affects the interest rate on your mortgage. Why is that a big deal? Well, depending on how expensive your loan is, you’ll likely end up paying tens of thousands of dollars (if not more) in interest. That’s on top of your principal loan amount.
An interest rate of even just ¼ percent less can save you a lot of money over the course of a 30-year loan. So, it’s clear that your credit history is an important factor not just for getting approved, but also for getting the best interest rates to lower your monthly payments.
Ready to Raise Your Credit Score?
Learn how credit repair professionals can assist you in disputing inaccuracies on your credit report.
What credit score do you need to buy a house?
The minimum credit score needed to buy a house can vary based on the economy and the housing market. However, there are some basic guidelines you can go by to determine how likely you are to be approved for a home loan. First, the minimum credit score depends on the type of mortgage you’re getting.
Conventional Loans
For conventional loans, which come with the strictest lending standards, the credit score needed to buy a house is 620. With a conventional loan, the minimum down payment is 5%, but could also increase based on your credit scores.
FHA Loans
FHA loans are insured by the Federal Housing Administration. For an FHA loan, the minimum credit score requirement is just 580 with a down payment of 3.5%. It’s possible to qualify for an FHA loan with a FICO score as low as 500, but you’ll need a 10% down payment.
Different mortgage lenders have different credit score requirements depending on how much risk they’re willing to take on a loan. Furthermore, you may be required to pay private mortgage insurance for the life of the loan, depending on the size of your down payment.
VA Loans
For VA loans, the U.S. Department of Veterans Affairs has no minimum credit score requirements. However, most VA loan lenders require a minimum credit score of 620. However, some will allow a credit score as low as 580.
USDA Loans
For qualified buyers purchasing a home in designated rural areas, there is no set minimum credit score from the USDA. However, a credit score of at least 640 is recommended.
What factors determine your credit score?
It’s crucial to know what factors affect credit scores so you can plan the most effective way to build or protect your credit.
- Payment history: This is perhaps the most important factor, as it accounts for 35% of your overall credit score. Payment history includes whether you have paid your bills on time in the past and any negative marks, such as late payments, collections, or bankruptcies.
- Credit utilization: This accounts for 30% of your credit score and refers to how much of your available credit you are using. A high credit utilization ratio could hurt your credit score, while a low one can help.
- Length of credit history: This factor accounts for 15% of your credit score and is a measure of how long you have been using credit. Generally, the longer your credit history, the better your credit score will be.
- Credit mix: This factor accounts for 10% of your credit score and refers to the types of credit you are using. A good credit mix includes a variety of different types of credit, such as credit cards, student loans, mortgages, etc.
- New credit: This factor accounts for the remaining 10% of your credit score and refers to how often you are applying for new credit. Applying for too much new credit in a short period of time can hurt your credit score.
See also: Does Buying a House Hurt Your Credit?
Average Credit Score
The average credit score for buying a home is 680-739. However, those who have a “good” credit score of 740 and higher will be offered the best mortgage rates.
It’s important to check your credit score to know where you stand. However, your credit score alone doesn’t determine whether you’ll be approved. Mortgage lenders also look at your employment history, how much debt you have, and your down payment amount.
For example, buyers with higher credit scores could be eligible to put down as little as 3.5% of the mortgage loan amount with an FHA loan.
However, those with a lower credit score, may be required to pay as much as 10% since mortgage lenders consider them to be more at-risk for defaulting on the loan.
See also: Which Credit Scores Do Mortgage Lenders Use?
More Options for First-Time Homebuyers & Low-Income Borrowers
You can also explore newer mortgage programs available for homebuyers with low to moderate-income. The Freddie Mac Home Possible mortgage, for example, allows you to purchase a home with a down payment of just 3%. Fannie Mae also offers a 3% down payment option with the HomeReady loan, as long as you have a credit score of at least 620.
What else do you need to get approved?
In addition to your credit scores, your mortgage lender looks at a few other factors to approve your home loan. They’ll review your employment situation to make sure you have a steady income to make your monthly mortgage payments.
You’ll most likely need to submit pay stubs, bank statements, W-2s, and sometimes even a verification of employment form. If you’re serious about purchasing a home, start setting these documents aside in a safe place so you have them ready to give to your lender when the time comes.
Not only does the lender look at your debt-to-income ratio and other financials, but they’ll also check out the actual home you’re purchasing. Some types of home loans require the house to be in a certain condition, which can take rehabilitation projects off the table.
Before making an offer, check with your lender on what types of properties you can consider. That allows you to avoid making an offer you can’t follow through on. The property’s appraisal also needs to come in at or above the amount of the loan because a lender cannot loan more than the appraisal value.
Can you get a mortgage with bad credit?
You can still get a mortgage even if you have bad credit, although you’re likely to pay a much higher interest rate to compensate for the increased risk to the lender.
Government-backed loans, like FHA loans, specifically cater to borrowers with lower credit scores. But even if you’re not certain that you’ll qualify, it’s worth offering some extra security to your lender.
For example, you might give a larger down payment or set aside extra cash reserves to show the lender you have the money to repay the mortgage loan. Or you might give proof that you’ve consistently paid your rent on time for an extended period.
Check Out Our Top Picks for 2023:
Best Mortgage Loans for Bad Credit
You could also try writing a letter to explain your credit situation. This can be done, especially if it’s due to an extenuating circumstance like emergency medical bills. Be upfront in asking your lender what you can do to qualify for a loan, even if you might not meet the usual underwriting standards right away.
If you’ve had a bankruptcy or foreclosure in your past, there are a few rules that you simply can’t get around. The exact specifics depend on your loan type.
However, in general, you have to wait for a predetermined “seasoning period” after the bankruptcy or foreclosure has been discharged before you can get approved for a home loan.
For bankruptcies, the seasoning period is typically between two and four years. For foreclosures, you’ll need to wait between three and seven years.
Can a cosigner help you qualify for a mortgage?
Home buyers with a low credit score may want to consider getting a cosigner to help with their mortgage application.
If you can get someone who has a good credit score (such as a family member) to sign the loan with you, it will strengthen your loan application. Just remember that your cosigner is equally accountable as you are for repaying the loan.
If you fail to make loan payments and your account goes into delinquency or even foreclosure, it will affect the cosigner’s credit.
If you decide to take on a cosigner to get approved, make sure that person understands the responsibility and risk that goes into the decision. It obviously takes a close relationship for this kind of situation to work out, so make sure you choose your cosigner wisely.
What if you don’t have any credit at all?
Building credit from scratch is challenging, but it can be done. Adding a cosigner to the mortgage loan application works for people with no credit as well as for those with poor credit. Another option is to start using a credit card responsibly.
Start with a secured card and make your monthly payment in full each month to build credit. Or ask a close relative if you can be added as an authorized user on one of their credit cards.
You can agree not to spend anything (or make quick payments if you do). This simple step will add that credit card’s entire length of use to your credit report.
You can also show your lender that you’ve regularly paid other bills on time, like your cell phone, utilities, or rent. Another method is to make a bigger down payment to compensate for your lack of credit. Talk to your lender to see what else you can provide to make the loan work.
How can you improve your credit to qualify for a mortgage?
There are several ways you can improve your credit score; just realize that it won’t happen overnight.
Order Copies of Your Credit Report
Get started by ordering copies of your credit report. This way, you can get an idea of everything a lender would see when reviewing your loan application.
First, check to make sure that all the information is 100% accurate. From there, look at where there are weaknesses on your report. Is the amount of debt you owe really high?
Lower Your Credit Utilization
Attempt to re-work your budget to pay off your credit card balances and other debt. This will lower your credit utilization ratio and ultimately increase your credit score.
Is your available line of credit minimal? Ask an existing creditor to extend your maximum amount on one of your current credit cards. This will also lower your credit utilization.
Get Negative Items Removed From Your Credit Report
If you have numerous negative marks on your report and feel overwhelmed, you might consider hiring a credit repair company.
Take a look at our list of top ranked credit repair companies in your area to find a reputable one to work with. They’ll take the lead in disputing negative accounts with the credit bureaus and getting them removed from your credit history. Once that happens, you’ll automatically see your credit score increase.
Even if you don’t have the bare minimum credit score to qualify for a mortgage, there are many ways to buy a house. From getting the right loan to improving your credit score, you’ll be able to quickly put yourself on the path to homeownership.
Source: crediful.com
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A typical 20% down payment on a home in a U.S. metropolitan area costs $80,250, based on the median price of a single-family home of $402,600 in the second quarter of 2023. However, for many first-time homebuyers, the hurdle of making a substantial down payment can seem insurmountable and many can only put down 3-5%, or $12,078 – $20,130.
This is where down payment assistance programs can come into play, offering a lifeline to those aspiring to become homeowners. But, what are they exactly and how can we help our clients utilize them?
What are down payment assistance programs?
Down payment assistance programs (DPAs) are initiatives designed to help first-time homebuyers bridge the gap between their savings and the down payment required to purchase a home. These programs are typically offered by government agencies, nonprofit organizations and occasionally private entities. DPAs can take various forms, such as grants, loans or second mortgages, and they are typically tailored to meet the specific needs of the target demographic.
There are four main types of down payment assistance:
- Grants: Gifted money that never has to be repaid.
- Loans: Second mortgages that are paid monthly along with your primary mortgage.
- Deferred loans: Second mortgages with deferred payments that only have to be paid when you move, sell or refinance.
- Forgivable loans: Second mortgages that are forgiven over a set number of years (often five, but maybe up to 15 or 20). These only need to be repaid if you move, sell or refinance too early.
Examples of down payment assistance programs
The FHA offers low down payment loans to first-time homebuyers. With an FHA loan, borrowers can put down as little as 3.5% of the home’s purchase price. This low barrier to entry makes homeownership more achievable for those with limited savings.
Many states in the U.S. also offer their own DPA programs to assist local homebuyers. These programs can provide grants, low-interest loans or second mortgages to cover a portion of the down payment and closing costs. The specific details vary from state to state, but they generally aim to make homeownership more accessible.
Some local housing authorities and city governments provide down payment assistance to residents. For instance, the city of Denver has its “metroDPA” assistance program, which is currently helping people throughout the Front Range become homeowners. If you make up to $188,250 a year and have a credit score above 640, metroDPA can help with a home loan and down payment assistance to help you buy a home.
Nonprofit organizations like Habitat for Humanity have been instrumental in promoting homeownership among low-income individuals and families. They offer sweat equity programs and interest-free loans to help prospective homeowners achieve their dreams.
We all know that one of the most significant barriers to homeownership for first-time buyers is the initial down payment. Many people are eager to learn ways they can afford it but feel lost as they try to navigate the landscape of what to do next.
This is where we as Realtors are ready to educate our buyers with information and help clients find the right path(s) to alleviate financial burdens by providing funds to cover a portion of the down payment.
Remind clients about demographics for DPAs
First, we educate clients that DPAs often target specific demographics, such as low-income families, veterans or those living in high-cost housing markets. By doing so, these programs broaden the pool of eligible homebuyers and ensure that homeownership is not solely reserved for the well-off. As a result, we should also set expectations for clients so they don’t assume they’ll have DPAs to rely on.
Explain the different assistance programs available
Another factor to guide clients on is that DPA programs provide assistance in the form of grants or forgivable loans, though these are harder to lock in. These funds do not need to be repaid if the homeowner stays in the property for a specified period, typically several years. This helps lower the overall cost of homeownership, making monthly mortgage payments more manageable. Be realistic with clients on whether this is a viable option for them and their current financial situation.
Suggest credit counseling services
Educate clients on where to turn to for credit consulting. For so many, one medical bill or missed payment can take a hammer on credit scores. Clue clients in on places they can turn to in order to help improve their credit scores.
Find a housing counselor
Housing counselors throughout the country can provide advice on buying a home, renting, defaults, forbearances, foreclosures and credit issues. The counseling agencies on this list are approved by the U.S. Department of Housing and Urban Development (HUD) and they can offer independent advice, often at little or no cost to the client.
Over time, homeowners build equity as they pay down their mortgages and as property values appreciate. DPAs set first-time homebuyers on the path to wealth accumulation, enabling them to build a financial foundation for the future.
The resurgence of down payment assistance programs represents a ray of hope for first-time homebuyers, particularly those facing financial constraints. These programs play a pivotal role in reviving the dream of homeownership by reducing the initial financial barrier and making it more attainable for a diverse range of individuals and families.
By offering assistance in various forms, from government-backed loans to nonprofit grants, DPAs allow first-time homebuyers to step onto the property ladder. This not only benefits the homeowners themselves but also strengthens communities and fosters financial stability.
As the popularity of DPAs continues to grow, they hold the promise of expanding homeownership opportunities for countless individuals, ensuring that the American dream remains within reach for all those who aspire to call a house their home and ultimately build generation wealth.
Jessica Reinhardt is the 2022-2023 chair of the Denver Metro Association of Realtors.
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Source: housingwire.com