Credit Bureaus/Reports/Scores

Reader Question: Credit Report Impacts on a Mortgage Refinance

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This past week I was asked an interesting array of questions from some friends about to refinance their home. Our friends purchased a home about a year ago with a fixed, 30-year loan. The goal they want to achieve is a 15-year loan at a pretty significant rate reduction (approximately 1-1.5%). So the scenarios laid out in front of me were whether to refinance in one or both of their names, and how it would impact their credit.

Lets start with a little bit of background information, as it was told to me. The home is currently mortgaged in both of their names. He has a credit score in the 670+ range; her’s is in the 790+ range. I do not know the specifics of his lower scores.

Our friends have been shopping around the rates, and have determined that one option they have is to qualify for the loan in just her name. So their questions than become, what is the impact to both of their credit by doing so, or should they refinance their home in both of their names, like it currently is?

Their Options (From a Financial Planner)

I certainly am no expert when it comes to credit evaluation. I speak only from having some experience with maintaining great credit reports, and doing a lot of research on the best methods for maintaining excellence and using it to our advantage. So this scenario really made me think about the implications of moving mortgage balances over into one persons name, and how it would impact their reports/scores.

I had my own opinions, but decided to run it by our financial planner for his take on the whole situation, and here is his very excellent thoughts.

1) Should the mortgage be placed into only one persons name of a relationship, one needs to carefully consider the impacts of a divorce in the future with such a decision. No one likes to think about a divorce and they might say it will never happen, which is a great mindset to have, but in today’s world, it is something people should at least be thinking of before making the largest financial decision you will ever make.

That being said, should the home be placed into only one of their names, you need to consider what that means in a divorce situation. In our State, the house is joint property, and would be typically split all things equal. However, with the house in only one of their names, that person is the only one financially responsible for that home. If it was placed into just her name, and they get divorced, and he refuses to make payments to cover the house, and now she can not afford the home, you both lose the home. This could really muddy the waters of a divorce proceeding. Instead if it was in both of their names, there could be interest in both parties of maintaining the home, or least making the payments each month, to not ruin each others credit. In addition, there is then an asset that could be split between the parties.

2) Our financial planner brought up a very good point that he often encounters when being approached by his clients in this same situation. A refinance of your home costs money, typically thousands of dollars. What if the client took the money and directly applied it towards the principal instead? Paying just one extra payment per year can reduce the amount of interest you pay by 6-8 years (depending on your specific calculations). Paying 2 extra payments per year is even more savings. So if a refinance is going to cost say $3,500, that might be 2-3 extra loan payments directly being applied to the principal, getting ones loan down closer to a 15-year mortgage without the cost of a refinance.

The specifics of everyone’s situation is completely different and need to be evaluated as such. One needs to determine what is the payback period in the cost of the refinance versus the interest savings (i.e. over the course of how many payments will they recoup the cost of refinancing). One also needs to realistically think about how long they plan to stay in the home?

I also decided to bounce these scenarios off of my wife, to hear her very valuable opinion of what she thought of the situation should I propose such a plan of action to her.

Their Options (From My Wife’s Perspective)

How long do you plan to be in the home? How secure our your jobs? These are both excellent items to consider before going down the refinance path. Are you planning on staying in the home long enough to realize the savings in interest versus the cost of the refinance? In other words, your refinance could be costing you more money than if you would have just kept the old loan because you moved before recouping the costs.

Also, what is the likelihood of your jobs transferring you in the future? Is there a possibility several years from now your job may say we need you here, and then you are relocating? The time frame can, while possibly unknown, can greatly affect your returns on a refinance.

Their Options (My Opinion)

Again, I am far from any expert when it comes to credit analysis, but can only speak from my own experience, and my opinions are just that.

Here is the thing. If a mortgage is on your credit file, and you continue to pay off the bill each month, it is only going to help your credit by showing a responsible payment history on a different form of credit. So my first opinion would be to keep the mortgage in both of their names not only for the reasons above, but also because it is going to help your credit in the future.

So what will happen to his scores if the mortgage is no longer on the account? I have no idea unfortunately. Plenty of people have good credit without a mortgage on their file. The mortgage on his credit file should show up as paid in full following the refinance, which I would think would help out his scores, and remain on his file as a positive for an extended period of time.

The most important thing at this point is regardless of which decision they decide, they need to make sure they are not late and make all of their scheduled payments.

I am anxious to hear what they decide and how it impacts their credit over the course of the next couple of months. Hopefully I might have something to report back in the near future.

We Scored Babysitting in Hawaii for $15

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Sometimes I am simply amazed how thing work out, and how miles and points allow our family to do the impossible. If you read InACents, you know by making a couple of strategic moves over the past couple of months, as well a year or so of saving miles and rewards, we have now been able to score flights to Hawaii for our family for only $30 and Continental Airline miles. Then, just last week we were able to use our bounty of Priority Club Rewards to score 7 free nights while in Oahu for FREE saving our family over $1,150! In addition, we opened new Continental credit cards last month (1 personal/1 business for me; and 1 personal for my wife), netting us over 135,000 miles. So what should we do?

Well after some thought of spending two plus weeks in the Hawaiian Islands, I was personally a little bit worried about those times when I wanted to go off snorkeling with the wife with two little boys sitting on the beach. While I think Bug (2-year old) would have good intentions of watching Shark (10-month old) alone, I somehow figure one of them would end up with sand in his eye, not to mention seeing us on the local news as “those parents” who left their kids alone on the beach. It is not my idea of a well thought out vacation, and I really want to be able to explore the ocean a couple of times with my wife.

All the while we have been planning for our trip to the Land of Aloha, my in-laws have been carefully trying to figure out how they too can partake in the adventure. The big problem…they are not as point savvy yet as we are, and we are hoping by them seeing how all these free miles and points allow us to Save Money, Travel More, that they too will start to see the light and listen more closely when I talk about opening a new credit card (or two, or three, or…).

So without the use of a mountain of miles or points burning a hole in their pockets, they have to shell out the old, hard cash. That is great and all, but when you are looking at a two week vacation in Hawaii, you are looking at nothing short of $5,000, and that is just for flights, hotels, and vehicles. It is an expensive proposition. Therefore, my wife and I began to start thinking outside of the box.

We are fortunate to have already scored free flights and hotels for part of the vacation. Currently the only “hard” expense will be nights on the Big Island, vehicles, and inter-island flights unless I can figure out a way to use points from other programs. So I approached my wife with a plan.

What if we could pay for the flights going to Hawaii, and in return, maybe we cost share, or her parents cover some of the expenses on other aspects of the trip? Sounds good in theory, right? But there is still the logistics of getting another set of flights during the same weeks we will be in Hawaii. And there was nothing we could do until all the miles posted to our Continental accounts from opening the credit cards. However, in the meantime, we approached my wife’s parents with a proposed plan.

After some thought, they agreed provided their portion of the trip was only 9 days (2 days of traveling to and from, and 7 days on the islands). Sweet, I can work with that.

Then fast forward to yesterday, and the miles just so happen to post to both of our accounts! Now I have options. So even though I have been watching the reward flight options for weeks, I decided to run some itineraries to see what I could find, only to about fall out of my chair.

After weeks, if not months of searching for our own flights, there they were sitting all pretty and waiting to be booked. Two tickets out of Cleveland (we have to get all the way to Chicago for our flights) to Hawaii exactly straddling our time between Oahu and the Big Island. Really, is it my early Christmas present all over again?

Off to call the in-laws to make sure they are ok with the days and times. Check. Back to my desk to quickly book them before my miracle disappears. Check. Quick call them back up and get their OnePass account numbers. Check. Ta-da! 80,000 miles later and $15 in fees later, and we just scored babysitting in Hawaii for 7+ days! Have fun with the boys grandma and papa, as my wife and I are going out to dinner and swimming to a secluded island somewhere!

That, ladies and gentleman is exactly why I love the mileage and points game!

Credit Karma Skewed Scoring Methodology

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I am completely baffled with Credit Karma and their method of calculating credit scores. Back in June, when we were getting pre-approved for a new mortgage and our bank provided us with our credit scores, I found it peculiar that there was a substantial difference between my TransUnion and Credit Karma credit scores.

Credit Karma is really only meant to be a tool, which helps assist in estimating your score based on a similar TransUnion calculation and report. Recently Credit Karma added a monitoring service that notifies you if there were any changes in your report. So I found it shocking when last week I received a notification that there was a new hard inquiry from my bank. However, I figured maybe the hard pull from the loan, which we closed back in mid-July, finally trickled its way down to our TransUnion reports. Well fast forward to later last week, and we each received a letter from our bank stating our hard credit pull dated August 23, 2011 showed a score of 788 for me and 753 for my wife. Ok, so what the heck is this about?

So I called my loan officer to see if it was standard practice to pull our credit a month after we closed on a new mortgage. I figured maybe anything is possible in this horrible market. Well our loan officer was completely baffled also because they do not pull credit reports after closing.

The next day I received some credit application in the mail from my bank. So the next step was to contact the bank directly and see why the heck they needed to perform a new hard pull of our credit for this rogue credit line. I am still investigating the matter with my bank, but basically they went ahead and pre-approved us for credit cards without our permission. Who the heck pulls your credit prior to issuing a credit card application? I was told if we were not interested, I could shred the applications. We are really pissed about it, and I am escalating the issue with management this week.

Now that I know why we had our credit pooled again, I wanted to figure out how my score compared with Credit Karma. I updated my Credit Karma score on August 20 (score of 737) and August 25 (743). Again my actual TransUnion score on August 23 was 788. Why the heck is there such a huge point difference? I can understand the scores being slightly different depending on the calculation methodology used between TransUnion and Credit Karma. However, I am showing a point difference of 45-51 points, and I consider that substantial.

So I contacted Credit Karma, and this was the response we received (bolding mine):

Hello,

Our customer support team personnel has replied to your support request #####:

Credit bureaus use many different scoring models, even within the same credit bureau. These credit models and scores vary depending on what type of information the institution that requests the score is looking for.

As an example, mortgage companies will get a different score than a company providing auto loans, since they are looking for different types of credit history and credit factors.

http://www.creditkarma.com/question/difference_in_credit_scores

TransUnion has two primary credit scores. One is called the TransRisk with a range up to 850, the other is called the VantageScore with a range up to 990.

For more information, please feel free to contact us at blog@creditkarma.com.

We hope this response has sufficiently answered your questions.

Thanks for using Credit Karma!
Credit Karma Support

Well I knew the response would cause more questions than answers. However, maybe we learned something here. Could it really be true that depending on what type of loan one applies for there are different scoring models? If this is true, this is completely new news to me. I understood there are different scoring models, even beyond what they mentioned above, but this adds a whole additional layer to the equation.

The positive side to this whole mess is to look at the facts. My wife and my current TransUnion scores are 753 and 788, respectively. Looking back to June, our scores were 753 and 793, respectively. Therefore, my wife’s score stayed exactly the same while I took a 5 point drop. I find this to be VERY good news because we now carry a second mortgage and had to sign-up for all new utilities, which some perform their own credit pulls, albeit, possibly from other credit bureaus.


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