Mortgage Rate News

One of the biggest hurdles to getting a home mortgage after bankruptcy is your credit score. A bankruptcy can significantly damage your credit score, since it implies that you are irresponsible with credit. And it shows that some of your debts may not have been paid. This means that it is important that you try and rebuild your credit as soon as you can after bankruptcy. And even though that bankruptcy can stay on your credit report for up to 10 years, you can build a good enough credit score for a home mortgage within a couple of years if you follow good credit practices.

A secured credit card can help you build your credit score

One way to help improve your credit score after bankruptcy is to use a secured credit card. These are cards that only allow you to have a limit equal to what is in your bank account. Often, you will find that a secured credit card will only come with a balance of $200 to $600. This may not seem like a lot, and it isn’t, but it is a good first step, and way to begin improving your credit score.

Here are some tips offered by MSN Money Central about selecting a secured credit card:

• No application fee and reasonable annual fee. Some secured cards tack huge upfront and annual charges onto their accounts; you don’t need to pay these to build your credit.
• Reports to the major credit bureaus. You’re not doing your credit score any good unless your payment history is being reported to the three major bureaus: Equifax, Experian and TransUnion. Call and ask if the card issuer regularly reports to all three before you apply.
• Converts to an unsecured card after 12-18 months of on-time payments. Good behavior should get you upgraded to a regular credit card within a year or two.

Remember that you are trying to improve your credit score. You should avoid maxing out your secured credit card, and you should try to pay the balance off each month. This will allow you to prove that you have turned a corner. And it will show that you are using credit responsibly, helping push your credit score higher, despite your bankruptcy.

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Every now and again, we get a reader question that can be answered on the mortgage loan blog. And we are always happy to oblige. Today’s mortgage loan blog reader question has to do with the interest-only home loan:

I have an interest only 15 year mortgage, need to build up equity,
please advise how much should I pay to build up my equity and get this
home paid off.

First of all, it is great that you recognize the importance of building equity and trying to get out from under the interest-only home loan. Right now, you are only paying interest on your loan, and this means that at some point you are going to have major payments when the principal is added in. So working on it now is a good start.

Since I don’t know the particulars of your home mortgage (amount, etc.) there are only a few rules of thumb I can offer you. First of all, a general rule of thumb is that your housing payment should be about 1/4 of your monthly income. So, you can figure your monthly income and divide it by four. That is the amount you should be spending on your housing payment. Let’s say you make $4,000 a month. Your housing payment should be $1,000. Say you are paying $450 in interest. Subtract the $450 from the $1,000 and you end up with $550. You should put this $550 toward the principal.

Do this by writing two separate checks. The first should be your regular interest-only loan payment. The second should be for the amount that goes to the principal. In the “memo” line of the check, write “for principal” or “apply to principal.” This gives clear instructions that your principal check should go toward what you owe on the home.

Some things to be aware of regarding your interest-only home loan

If you got an interest-only home loan and the interest is 1/4 of your income, you could be in trouble. Put whatever you can toward the principal. Additionally, if you are in debt heavily to other creditors, you could be in trouble as well. Pay your obligations (minimum payments) and then put what you can toward the principal. You need to get your home mortgage loan balance down.

Also, it is important to understand that some home mortgage loans have prepayment penalties. It might be expensive to pay off your loan before the end of the 15 years. But any amount you can reduce the principal by now will make things less difficult when the intro period is over and you are required to start paying on the principal.

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As payments for option ARMs and subprime loan interest rates increase, and the foreclosure rate goes up, the government is wondering what it can do to help the situation. Fed Chair Ben Bernanke suggested that creative methods, such as shared-appreciation second mortgage loans, might be used to help the lending industry. Boston.com expands upon the theory behind the shared-appreciation second mortgage:

Another way is to make refinancing at lower interest rates more attractive for lenders by encouraging shared-appreciation mortgages. These mortgages, which are relatively rare in the United States but more common in the United Kingdom, offer lower interest rates in exchange for some of the upside potential on the house. For example, a lender might offer a 6 percent interest rate instead of an 8 percent rate, in exchange for 50 percent of the increase in the value of the house at the time of eventual sale.

While this may not seem very appealing to homeowners right now, it could be more appealing to those who could lose their homes altogether. And the other problem comes in as many realize that it might not be possible to refinance with a second mortgage unless new programs and options are introduced.

All home mortgage loans are more difficult to get now, and a second mortgage, which requires better credit in most cases, and a higher interest rate than a first mortgage, is especially vulnerable to the currency credit market crunch. This means that many people will not be able to refinance to a second mortgage from the atrocious first home mortgage loans they are in. And that means foreclosure, and further problems for the lending industry.

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