Gohabsgo_IHB
New member
From Yahoo Finance:
<strong>"I'm preparing to purchase a house in February 2008. In preparation, I am saving every month, but I am not sure of the best use of those funds. I have four credit cards with balances equal to about 45 percent of their maximums, and applying my savings to the cards would reduce the balances to about 30 percent. This would raise my FICO score, which is currently 662. Alternatively, I could make the minimum payments on the cards and use my savings to increase the down payment from 3 percent to 5 percent. Which use of my savings would have the greater impact on my borrowing costs?"
The answer from Jack M. Guttentag:
</strong>
<p>"Your FICO score is hurt by having four cards with large balances, and paying down the balances would surely raise your score. That it would increase by enough over four months to affect your borrowing costs, however, is very doubtful. </p>
<p>Lenders price mortgages using notch points for many variables, including both FICO scores and down payments. A notch point is a critical point at which your borrowing cost changes. While practices do vary, common notch points for FICO scores are 660 and 720. </p>
<p>If the lender you shop uses these notch points, changes in the score between 660 and 720 won't affect your borrowing costs. Starting with a score of 662, it is very unlikely that you can get to 720 within four months. </p>
<p>Down payment notch points are much more uniform across the market. They are 20 percent, 15 percent, 10 percent, 5 percent, 3 percent, and 0 percent. </p>
<p>Since you can increase your down payment from 3 percent to 5 percent, you can be confident that your borrowing cost will decline. This decline could take the form of a lower mortgage insurance premium, a smaller second mortgage for the amount of the loan over 80 percent of property value, and possibly a lower rate on the second mortgage. </p>
<p>Bottom line: Use your savings for a larger down payment."</p>
He forgot to say, that if she buys she will be in big trouble. Which lender is stupid enough to loan her money anyway?
<strong>"I'm preparing to purchase a house in February 2008. In preparation, I am saving every month, but I am not sure of the best use of those funds. I have four credit cards with balances equal to about 45 percent of their maximums, and applying my savings to the cards would reduce the balances to about 30 percent. This would raise my FICO score, which is currently 662. Alternatively, I could make the minimum payments on the cards and use my savings to increase the down payment from 3 percent to 5 percent. Which use of my savings would have the greater impact on my borrowing costs?"
The answer from Jack M. Guttentag:
</strong>
<p>"Your FICO score is hurt by having four cards with large balances, and paying down the balances would surely raise your score. That it would increase by enough over four months to affect your borrowing costs, however, is very doubtful. </p>
<p>Lenders price mortgages using notch points for many variables, including both FICO scores and down payments. A notch point is a critical point at which your borrowing cost changes. While practices do vary, common notch points for FICO scores are 660 and 720. </p>
<p>If the lender you shop uses these notch points, changes in the score between 660 and 720 won't affect your borrowing costs. Starting with a score of 662, it is very unlikely that you can get to 720 within four months. </p>
<p>Down payment notch points are much more uniform across the market. They are 20 percent, 15 percent, 10 percent, 5 percent, 3 percent, and 0 percent. </p>
<p>Since you can increase your down payment from 3 percent to 5 percent, you can be confident that your borrowing cost will decline. This decline could take the form of a lower mortgage insurance premium, a smaller second mortgage for the amount of the loan over 80 percent of property value, and possibly a lower rate on the second mortgage. </p>
<p>Bottom line: Use your savings for a larger down payment."</p>
He forgot to say, that if she buys she will be in big trouble. Which lender is stupid enough to loan her money anyway?
