Debunking Credit Myths

Debunking the Biggest Credit Myths

If you’re in the market for a home loan, and you want to get the best rate, you may be looking to improve your credit score. So you start by doing what you think are all the right things: paying off some collection accounts, closing some credit lines. But you may be surprised to learn that actions like that can actually hurt your credit score, at least in the short term. That’s because what makes common sense doesn’t always make credit sense. In this article, we debunk the top three myths about increasing your credit score and get you on the road to improving your borrowing power quickly.

If there’s anyone who knows credit improvement, it’s Todd Archambault, President of eCredit Advisor. Archambault’s been in the business for close to 20 years now. We asked him what misconceptions he sees most with his clients. And in this blog, we’re going to debunk the top three myths about improving your credit score.

Myth #1: Paying off collection accounts helps my credit score
Won’t you look better to creditors if all your debts are paid off? It sure feels like it. But not so fast, according to Archambault. That’s partially because everything on your credit profile is governed by the date of your last activity. If you pay the collections account in full, it shows up as recent activity on your credit report, re-aging the debt and bringing that negative account now current. And that negatively affects your score.

Plus, while this could help in the long term (especially if you’re trying to improve your financial position), the negative impact on your credit does not go away immediately. In fact, that activity probably won’t come off your credit report until it reaches the statute of limitations (usually around 7 years). But, if you leave it alone, it shows up as old information on your report and has less impact on your credit score. If you’re looking to increase your credit score quickly (on the path to a loan, for example), you may want to wait to pay off that debt.

Myth #2: Closing credit cards accounts helps my credit score and having too many open credit cards could hurt my credit score
It sounds strange, but it’s important to have at least three lines of credit open, active, and in good standing so that monthly, they’re reporting your lending activity positively to the credit bureaus. Let’s take a step back and look at why: everything on your credit report is governed by percent of utilization. That means that the credit bureaus look at how much credit you’re currently using (how much you owe, essentially) divided by the total amount of credit available to you (your credit limit). The rule of thumb is to keep this at about 30%. That ratio shows creditors that you know how to manage your spending. If your rate is higher, it sends the opposite message. And Archambault says, “Banks lend money to people who don’t need it.” If you close all of your lines of credit, you lose your ability to show payment history, and those positive payments every month work in your favor! The more active open accounts you have, the easier it is to build your credit score. Having a small $5 or $10 balance on a credit card is going to give you a higher score. So keep that credit card and just use it once every 12 months.

Myth #3: Buying a car will help my credit score
This one’s a doozy, and it may change the way you approach car buying in the future. Archambault says if you take a good credit score into a car dealership (620 or above) with the intent to finance a new car, what the dealership does, essentially is “shotgun your credit.” They stand to make a return by placing you with a financial institution. So they farm out your credit score and shop you around to different financial institutions. Sounds harmless until you understand that this means they’re doing a hard inquiry on your credit about nine different times. That’s a LOT of hard inquiries, and that will definitely affect your score, sometimes, Archambault says, dropping it down 40 points!

Archambault says it’s better for you to go directly to your financial institution before even setting foot inside the dealership. They’ll pull your credit once. Then, have them finance the entire balance. For example, if you were planning to put $5000 down on a $25,000 car, Archambault says, finance the entire $25k with your financial institution. Then immediately pay the $5000 so you’re not only showing good payment history, but you’ve improved your balance to limit ratio right out of the gate!

On the path to good credit, a lot of us turn to the internet. Keep in mind there are a lot of online outlets that claim to give you an accurate reading of your credit score. Archambault says many of these sites show scores that are usually 60 points higher than what lenders in the mortgage industry pull. Lenders use your FICO score to qualify you for a home loan, and the only way to get a truly accurate FICO score is to have a mortgage advisor pull it for you. If you’re interested in learning more, reach out to us today at 702-255-5783.

There are plenty more myths out there about how to improve your credit, but if your goal is homeownership, then getting on the path to a good credit score is a must. Not only will it help you qualify for more financing, but the less you’ll likely pay in interest on your loan. Archambault says his credit improvement program is not about perfect credit, rather it’s designed to get your credit score as high as possible with the least amount of money out of your pocket in the fastest amount of time. But, there’s a catch. You have to do your part to improve your score. If you don’t, eCredit Advisor puts your service on hold until you’re ready. Give them a call if you’re ready to make some changes today!

When to Consider an Adjustable-Rate Mortgage (ARM)

If you haven’t noticed, the prices of homes have skyrocketed.  And stressed buyers are searching for any way to make their dream of homeownership attainable. In this new interest rate environment, ARMs (or Adjustable-Rate Mortgages) are making a comeback.  

Borrowers who choose an adjustable-rate mortgage accept the risk that their rate may change over the course of their mortgage term.  That risk can reap benefits, though, since, in many scenarios, it’s possible to save up to 1.5% on your interest rate by choosing a 7-year ARM over a traditional 30-year fixed-rate loan.

What is an Adjustable-Rate Mortgage (ARM)?

As the name suggests, an adjustable-rate mortgage (ARM) is a home loan in which the interest rate fluctuates throughout the life of the loan. This contrasts with a fixed mortgage in which the rate is locked in for the entire life of the loan. ARMs will typically offer lower interest rates initially, but borrowers’ monthly payments will change after a set period of time.

Advantages of an Adjustable-Rate Mortgage

Here are some of the advantages that make ARMs worth considering.

Low initial monthly payments. ARMs offer a low monthly payment for a set time after you purchase your home. With lower payments, you’ll have more flexibility in your budget. 

A good option for short-term buyers. If you buy a home but don’t intend to live in it for long, any potential future adjustments in rate may not be a problem.

Fluctuation could work in your favor. The risk you take is that interest rates may rise from the time you purchase your home. However, they also have the potential to go down and save you even more money.

Faster equity accumulation. When you have more cash on hand at the time of purchasing your home, you can benefit from the lower initial interest rate and apply the savings to the principal. This allows you to accumulate more equity at the beginning of your term.

Who Could Benefit From an ARM?

Buyers of starter homes and short-term dwellers. ARMs make sense if you know you do not plan to stay in your home for a long period of time. 

Borrowers whose income will increase in the near future. Those who have the reliable expectation that their income will be better able to afford any potential increases in monthly payments. An example of this case is a medical resident who is graduating soon and planning to receive a significant pay raise.

Homebuyers purchasing a home at a time when interest rates are expected to fall. When interest rates are higher than normal and economists predict that they will decrease soon, it may be worth it to choose a variable rate instead of locking in a higher fixed rate.

Understanding Your Adjustment Period

So what does the adjustment look like with an ARM?  You’ll often see ARMs expressed as two numbers: for example, a 5/1 ARM or 7/6 ARM.  Every ARM has a fixed rate period and an adjustable-rate period.  With a 5/1 year ARM, your interest rate will be fixed for five years, then after that 5 years, the interest rate will adjust once every year after that.  Sometimes the second number indicates months instead of years as in the case of a 7/6 ARM.   In that case, the rate is fixed for the first seven years and then changes every 6 months for the remainder of the term.

How Are Rates Determined?

Borrowers need to understand why rates change. There are two measurements used to calculate adjustable mortgage rates: the index and margin. The index is a base interest rate that indicates general market conditions. 

The margin is set by the lender at the time you apply for your loan and will usually add a couple of percentage points to the index. The index is variable and the margin is constant. Together they make up the ARM. For example, if the index rate is 3% and the margin on your loan is 2%, your interest rate will be 5%. While the index may change over time, the margin should remain the same.

Need Help Deciding if an ARM Is the Best Choice?

If you are planning to buy a home but don’t know which type of mortgage is best, let the experienced mortgage advisors at Alderus Mortgage guide you through the process. We provide a Total Cost Analysis to help you determine which mortgage product is the best fit for you. Contact us to get started!

Here’s our co-founder, Coby Baker, with more on why an ARM might make sense for you.

Total Cost Analysis

Gain total financial control of your home buying or refinancing experience… and avoid unwanted surprises.

Are you looking to purchase a new home but always end up putting it off because you’re uncertain of how much you’ll be spending per month? Maybe you’re looking to refinance but don’t fully understand the best time to do so or how you could benefit from the equity you’ve built up in your home. There is a ton of information out there telling you what to do and not to do… making it extremely difficult to make a well-informed decision. 

What if we told you we had a solution that would allow you to smoothly transition into homeownership or a new loan with very little hesitation and no financial surprises? 

It’s called the Total Cost Analysis, and it’s a big part of what makes the Alderus loan experience completely different from other mortgage companies. During the Total Cost Analysis process, one of our experienced Mortgage Advisors will work with you to fully understand your financial situation. Then, they’ll walk you through different scenarios and allow you to look at your options side-by-side. It’s as simple as a screen share. We walk you through everything, allowing you to ask questions in real-time. 

If you’re looking to purchase a home or refinance your current home, we’ll display several options you may not have considered. We discuss the loan amount, interest rates, term options, monthly payments (tax and insurance estimates included), and cash to close. There will be no unwanted surprises around the corner as we’ll be sharing with you your costs, fee details, and what you’ll be paying for the loan. This will also allow you the time to discuss the pros and cons of each option with one of our experts.

Understanding the overall picture of your loan is incredibly important to us because we know it can seem like there are a lot of unknowns and hidden costs. We want you to fully understand the options presented and what each one means for your family’s future.

Here at Alderus, client education is paramount for us. We’re committed to helping you dominate your financial future by starting off the home buying process on the right foot. Click here to schedule some time with one of our mortgage advisors today for your Total Cost Analysis.

Honoring and Serving Those Who’ve Served

It’s hard to imagine a more noble calling than serving our country in the armed forces. That’s why it’s only fitting that on November 11th, we pay tribute to these brave men and women who’ve protected our country for generations.

Because many of our veterans are so committed to our country, they are also committed to their communities. And one of the best ways to truly engrain yourself in a community is through homeownership. It’s the biggest investment any of us will make in our lifetimes. Yet, like many others, veterans face challenges when purchasing their dream home.

We’ve all seen the shifts in the market: fewer homes for sale, rising home prices, and low interest rates that lead to bidding wars. All of this adds up to a difficult home purchasing process and a lot of frustration.

At Alderus Mortgage, we take great pride in helping veterans become homeowners. With our Community Heroes Program, we waive the lender fees for members of the military, active or retired, and we make sure to provide our military members with service tailored specifically for them in appreciation of the selfless ways they have served others.

But there’s more! The government also recognizes the sacrifices of our current service members, veterans, and surviving spouses, and through the Veterans Administration (VA) provides home loan benefits that make homeownership a lot easier and more affordable. Some of those benefits include no down payment, limited closing costs, lower credit score requirements, and no mortgage insurance.

If you’re interested in a VA home loan, check your eligibility here:

On behalf of the entire Alderus A-Team, we want to thank all the veterans and their loved ones who have given so much to protect and serve us. We honor YOU this Veterans Day and every day.

Are Home Warranty Plans Required?

To answer the most pressing question, no — home warranty plans aren’t required when purchasing a home or using a mortgage lender. While other things may be required, such as homeowners insurance, home warranty plans are completely optional. Despite this, many homeowners still choose to purchase a home warranty plan for a variety of reasons.

In this article, we’ll go over the basics of home warranty plans including what they do, how they can benefit homeowners, and if they’re affordable. To learn more, keep reading.

What do home warranty plans do?

Home warranty plans offer a variety of plans for repairing and replacing appliances and systems in your home. Depending on the home warranty company and plan purchased, coverage may include just appliances, just systems, or a combination of both. This depends on the size of your home, your budget, and your preferences. Some home warranty companies offer optional add-ons, such as Old Republic Home Warranty.


Home warranty

When something breaks in your home, a home warranty company will quickly send a contractor to your home to make the repairs. Home warranty companies choose trusted contractors in your community ahead of time, so you get to avoid the step of finding someone you’re willing to have in your home, scheduling a time to visit, and establishing a relationship with.

Why would I need a home warranty plan?

It’s not in every homeowner’s best interest to purchase a home warranty plan. If things don’t break often or you don’t have the budget to pay a monthly fee, home warranty plans may not be for you. There may also not be a good home warranty company that offers coverage in your area.

Despite this, many homeowners choose a home warranty plan because of the cost and convenience factor. The ease of calling a home warranty company and having a contractor come to your home quickly is one of the main benefits of home warranty plans.

Having a home warranty plan may also be beneficial to you if you own an older home or find things to be breaking a lot. Not only are the quick fixes convenient, but it can also save you money not having to cover repair fees or replace parts every time something malfunctions.

Are home warranty plans affordable?

The cost of home warranty plans depends on the size of your home, the home warranty company, and the plan you choose. To determine if it’s affordable, you’ll have to research local home warranty companies and their coverage options to see if the costs fit in your personal budget.

Typically, home warranty plans charge a monthly fee in addition to a fixed service fee every time you call the company to have a repair fixed. As mentioned above, if you find things in your home to be breaking often, paying a monthly fee and service fee will likely be much cheaper than repairing or replacing every single that breaks. In turn, this can save you a lot of money.

On the other hand, if you don’t have anything break in a month’s period, you’ll still have to pay the monthly home warranty plan fee. Because of this, the affordability factor of home warranty plans truly depends on your personal circumstances.

Hopefully, you find this article helpful. If you’re looking to purchase a new home, consider finding a mortgage advisor you can trust. When it comes to home warranty plans, you’ll need to weigh the pros and cons of plans offered in your area to determine if it’s a good decision for your home or not. Good luck in your search!

young family discussing mortgage

How Do Mortgages Work?

Mortgages might be one of the most essential and common parts of the home-buying experience, but they’re also one of the most misunderstood. Whether you’re on the search for your first home or just need some clarification, here’s how mortgages work—and what you need to know.

What is a mortgage?

In the simplest terms, a mortgage is a loan from a bank or other financial institution that enables you to cover the cost of your home. It’s a legal agreement with the bank saying you will pay the loan back (plus interest) over the course of years—decades, usually. Unless you have the money to pay cash for your property, you’re going to need a mortgage.

Get mortgage pre-approval

Your first action item is to seek pre-approval from Alderus. It’s important to note that pre-approval and pre-qualification are two different processes. For pre-approval, the lender will check your credit and other financial information to determine what price home you can afford. This will give you a price range to stay within during your home search and lets buyers know that you’re serious when you make an offer.

Getting a typical mortgage takes an average of 20-35 days. So if you’re itching to buy right away, you’ll want to start the pre-approval process soon so you’re ready to go when you find the right house. Alderus recommends getting pre-approved and having all of your financial documentation ready in order to increase your chances of securing a mortgage in a timely fashion.

Some people also choose to get pre-qualified before getting pre-approved. A mortgage pre-qualification is an initial assessment of the type of mortgage you can qualify for, more of a big-picture idea of what you can afford. But it doesn’t carry the same weight with sellers or mortgage lenders as a pre-approval.

Apply for a mortgage

Once you find a home you want to put an offer on, you have to obtain the actual mortgage loan. Within three days of your application, you should receive a loan estimate that includes closing costs, the interest rate, and the monthly amount you’ll pay for the principal, interest, insurance, and taxes. After that, it’s off to the underwriter, who will review all of your financial information and make the final call to approve or deny your loan.

Yes, you can actually still be denied even after you’ve been pre-approved for a home in that range. Denials most frequently occur when some aspect of your financial picture shifts between the time you’re pre-approved and the time you apply for the actual mortgage (e.g., you lose your job or use a large portion of your savings).

If approved, you’ll sign the final mortgage loan documents during closing.

Getting a mortgage and buying a house is a milestone, so once the process is done, it’s time to celebrate!