7 Ways To Protect Your Credit Score For Better Mortgage Rates

As mortgage lenders tighten approval standards in Pennsylvania and nationwide, the importance of a good credit score is rising. Credit scores not only make the difference between a mortgage approval and mortgage turn-down, but they also play a large role in determining your actual mortgage note rate.

In the 3-minute piece, the NBC Today Show talks about 7 ways that homebuyers ruin their credit -- often by accident. Some of the highlighted mistakes include:

• Closing open credit cards
• Making appliance buys on credit prior to closing
• Asking creditors to lower credit balances prior to closing

In general, a 740 FICO will insulate a borrower from the higher costs and/or rates associated with low credit scores. Below 740, though, every 20 points adds to the damage. Watch the video and apply what you can to your own situation. The more you know, the more you can save.

Real Estate Definitions: Amortization

In the widest definition possible, amortization (pronounced: am-ohr-tih-ZAY-shun) is the scheduled process by which a loan's principal balance pays down to $0.

The opposite of an amortizing loan is an interest only loan for which there is no scheduled principal repayment schedule.

With respect to mortgages, amortization is what determines how much of a monthly payment goes to principal, and how much goes to interest. Amortization schedules are the same for all fixed rate, non-interest only home loans including 15- and 30-year fixed rate mortgages, as well as all non-interest only ARMs.

Monthly principal and interest payments on a mortgage are based on the mathematical formula above, where:

• P = principal
• A = payment
• r = monthly interest rate
• n = number of payments

Now, if you've ever paid on an amortizing home loan, you don't need to use the formula to know that mortgage amortization schedules are dramatically front-loaded with interest.

In other words, in the early years of loan, the interest due on a mortgage is relatively high versus the principal due. And, if you've ever heard someone say, "You don't pay down much of a loan in the first few years," now you know -- mathematically -- why that is.

This interest-heavy mortgage repayment schedule helps banks to collect as much loan interest as possible up-front, offsetting potential loan losses.

But, just because the bank sets an amortization schedule doesn't mean that a homeowner can't change it. In any given month, a borrower can prepay extra principal to the lender, thereby changing the formula and accelerated the loan payoff date.

There are calculators online that do the prepayment math for you, but before making extra payments, talk with your loan officer or financial advisor first. Prepaying your mortgage could trigger a stiff penalty from your lender, or put your liquid assets at risk. Prepayment is not a bad plan, but it may be a bad plan for some.

(Image courtesy: Mortgage News Daily)

Mortgage Insurance Makes Small Down Payments Cost More

Private Mortgage Insurance (PMI) is a mortgage lender's insurance policy against highly-leveraged homeowners. It's typically required when homeowner equity is less than 20 percent at the time of closing.

With PMI defaults up 40 percent over last year, though, private mortgage insurers are taking big losses.

They're also taking outsized steps to prevent additional claims going forward and that is bad news for low-equity homeowners and home buyers.

The first PMI change new, higher insurance rates.

Like home insurers that adjust premiums after a worse-than-expected storm season, PMI insurers are raising mortgage insurance rates for all homeowners, regardless of credit history. The higher premiums are meant to offset the higher losses.

And, the second change is that some PMI firms are discontinuing coverage for "high-risk" transaction types. This includes purchases of non-owner occupied properties, and cash out refinances above 85 percent loan-to-value.

Both changes, however, point to similar conclusion about home loans: Home equity is increasingly important for today's homeowner.

PMI rates are higher than they were six months ago and the rising default rates makes it likely that rates will rise again soon. As PMI rates increase, so does the cost of homeownership for people whose lenders require it.

FHA Becomes More Affordable Tomorrow!

Earlier this year -- and for the first time in its history -- the FHA changed its funding fees and mortgage insurance structure.

Effective October 1, 2008, it's repealing those changes.

Partly to keep FHA home loans affordable, and partly to comply with new laws, the FHA is rolling back its up-front fees and ongoing mortgage insurance requirements and replacing them with new ones.

The new up-front FHA fees are as follows:

• 1.750% : All purchase and "standard" refinances
• 1.500% : All "streamline" refinances
• 3.000% : All FHASecure programs for delinquent mortgagors

These fees are paid as a one-time cost at closing, and are calculated by multiplying the loan size by the fee. A $200,000 FHA purchase, for example, now carries a $3,500 one-time charge.

Ongoing mortgage insurance requirements have changed, too. These changes are based on the loan type and the amount of equity in the home.

• 15-year fixed with 90% borrowed or less: 0.000% annually
• 15-year fixed with more than 90% borrowed: 0.250% annually
• 30-year fixed with 95% borrowed or less: 0.500% annually
• 30-year fixed with more than 95% borrowed: 0.550% annually

Mortgage insurance premiums are calculated by multiplying the initial loan size by the annual premium. The same $200,000 FHA purchase outlined above, using a 95% 30-year fixed mortgage, would require a monthly mortgage payment add-on of $83.33 until the loan is paid in full.

FHA-insured mortgages have grown in popularity this year because, while the guidelines of other mortgage products have tightened, FHA guidelines have remained relatively loose. FHA allows 3.500 percent downpayments on purchases, for example, and allows "cash out" refinances to 95 percent.

Fannie Mae and Freddie Mac do not.