Understanding Your Credit Score

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For Better or for Worse: Should My Tenant Install a Washer and Dryer? Q: I own an investment condo. My tenant has offered to install her own washer and dryer, but I’m concerned about liability. How should I handle this? A: Is the unit set up with proper connections, vents and drains to handle a washer and dryer? If yes, then the assumption should be that a portion of the unit is intended for that purpose. However, if that is not the case then you should get advice from the condo association before going further.There can be problems with leaks, venting,inadequate electrical service,etc. You likely want a special addendum to the lease to limit your liability and,as always, the tenant should be required to maintain renter’s insurance. Speak with an attorney for details. Q: I own a home that was built in 1964. It's a somewhat standard two-story ranch-style house in an affluent neighborhood. The downstairs family room has vinyl flooring that is shot, but I'm not sure I should invest too much in redoing it since I'm looking to sell the home within the next five years. Would a new floor affect the sale? A: Yes. If people see shoddy flooring they may wonder what damage they don’t see and that hesitation can be a major hurdle for a would-be buyer. Do the work now.You’ll enjoy the new floor and it likely will be cheaper than in five years. Q: I’m considering a loan that requires interest-only payments for the first five years. Is this a good financing option? A: Interest-only financing works for some borrowers but not for most. It’s likely to be a bad choice in a market where values are stable or falling. Imagine you borrow $200,000 at 6.5 percent for 30 years.The first five years are interest-only, so you pay $1,083 for principal and interest.A self–amortizing loan at the same rate would cost $1,264 a month – an additional expense of $181, at least for the first 60 months. In year six, however,the interest-only loan has a $200,000 balance and 25 years remaining on the loan term. If the interest rate for the entire 25-year period continues at 6.5 percent, the monthly payment for principal and interest would be $1,350 – a jump of $267 a month over the interest-only payment. See ASK OUR BROKER, Page 2

Rent vs. Buy

When Owning Might Not be Best BY BARBARA BALLINGER CTW Features

Sometimes, the American dream needs tweaking. Owning a home in a great location may not always represent the best financial and logistical decision, despite the big uptick in real estate appreciation in recent years. Certain situations and places make renting a better choice, even if temporarily, say

several financial and real estate experts. Reason No. 1 is that home prices may not have finished dropping. If you aren’t yet a homeowner, you may be smarter to continue renting and buy only after prices hit rock bottom. There are two fallacies in this argument, however, says real estate adviser Edo Raday, who heads up his own eponymous company in New York City.

First, timing a market almost always is impossible. Second, while prices have cooled a bit or aren’t rising as much in some areas, they’re also not plummeting in places like New York City, he says.What’s happening instead is that inventory has increased due to more homeowners deciding they want to take out the equity they’ve built up.The result is that buyers now have greater leverage to negoti-

ate terms in their favor, Raday says. At the same time, they shouldn’t think that sellers are giving away their properties. Cashing out isn’t the only reason to rent rather than buy, says Paul Purcell, another real estate consultant and partner in Braddock & Purcell in New York. A big gulf still remains in Manhattan between the price of

See RENT VS BUY Page 2

Credit Score:Your Path to a New Home BY CHARLES SCUTT CTW Features

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ike an athlete playing in the big game, it’s always important to be mindful of the score,especially if you’re yearning to claim the biggest prize of all: a new home.And the key to obtaining a mortgage loan with a preferred rate is to have a favorable credit score. A credit score is a fast and easy way to distill the information from a person’s credit report into a simple, three-number value. Your credit score is based on an array of factors, such as your outstanding debt, payment history, length of credit history, recent credit activity and types of credit in use. “A credit score is like a report card of how well you are doing managing your credit,” says Brette Sember, author of “The Complete Credit Repair Kit” (Sourcebooks, 2005).“It’s a quick, simple way of summing up what kind of consumer you are and how you manage your credit accounts.” Your credit score is going to be the first thing a potential mortgage lender is going to look at,“and first impressions count,” Sember says.“Improving your credit score will make it easier for you to get a mortgage.” Ultimately, the lower your credit score, the lower your interest rate, says Scott Bilker, founder of DebtSmart.com, Barnegat, N.J. The best-known credit score, FICO, was created by Fair Isaac Company, says Cate Williams, a vice president for Money Management International, Chicago, the nation’s largest nonprofit credit and debt counseling

service.“But there are numerous credit scoring formulas that have been created by various companies.The scoring ranges can vary from model to model.” The FICO model ranges from 300 to 850.There is not one magic number that says you have a good or poor credit score, but using mortgage lending guidelines, a score of 650 or above indicates a good credit history, says Williams. Currently, the national average FICO score is roughly 723. In general, scores exceeding 750 typically are considered excellent, while those below 620 often are deemed as risky. The three major credit reporting agencies – Experian, TransUnion and Equifax – rely on the FICO model to produce scores for lenders and business, although each agency has its own

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name for their FICO equivalent. Each agency also uses different ranges. For instance, Experian’s range is from 330 to 830, while Equifax follows FICO’s traditional 300 to 850 span. Sember says the best way to improve your score is to regularly obtain your credit report and to proactively work toward improving your credit history. Under the 2003 Fair and Accurate Credit Transactions Act, all Americans are entitled to a free copy of their credit report once every 12 months from each of the three credit-reporting agencies.You can obtain your complimentary report by visiting www.annualcreditreport.com, which is the only officially authorized Web site for consumers to access their credit report online for free. Consumers

also can request a free copy toll-free at (877) 3228228. With either method, you’ll be able to order reports from all three credit bureaus at the same time, which offers the advantage of comparing the reports all at once, or at different times throughout the year. Avoid accessing your report directly from the credit agencies, which may try to charge you a fee unless you qualify for a complimentary report, or from suspicious Web sites.The Federal Trade Commission warns consumers to be cautious of companies that make claims regarding credit

See CREDIT Page 2

RENT VS. BUY CONTINUED FROM PAGE 1 townhouses, condos and cooperative apartments versus rentals, he says.A luxury one-bedroom rental in a prime location may go for $3,000 a month while a similar unit might cost close to $1 million to purchase, Purcell says. Other good reasons to rent, at least in New York, he says, are the hefty supply of good rentals with lots of bells and whistles and the absence of any stigma in renting, which isn’t always the case in other markets, he says. The high cost of owning a home despite lower interest rates is another incentive to rent. After homeowners make a down payment and pay closing costs, they still have property taxes, homeowner’s insurance, and regular and surprise maintenance costs to bear on an ongoing basis, says Eva Rosenberg, a tax expert in Los Angeles who writes the tax column www.TaxMama.com and authored “Small Business Taxes Made Easy” (McGraw-Hill, 2004). To make matters a bit worse, homeowners face the lost-opportunity costs of investing all those dollars in another vehicle such as the stock market, she says. In some cities, however buying is more viable because the cost to buy and maintain a home is so much lower than elsewhere

CREDIT CONTINUED FROM PAGE 1 repair.These companies won’t do anything for you that you cannot do for yourself at little or zero cost. Be aware that while the report itself may be free, acquiring your credit score number typically carries a fee, usually between $5 and $10.You can purchase your credit score when you request your free credit report. “There are no free ways to obtain your credit score,” Williams says. When reviewing your credit report, read over all the information carefully and make note of any inaccuracies you see.You’ll want to report them to the major credit agencies and request that they make changes to your report. “If there are true errors in your credit report or if you need to have additional information

and because there are few attractive rentals. Kansas City is a good example, says Kris Drake, branch manager for Plaza Mortgage, Overland Park, Kan. In his area, a two-bedroom, two-bathroom house with garage and basement might cost only $160,000 to $180,000, while a comparable rental might go for as much as $1,300 to $1,400 a month. Money should not be the only reason to rent rather than buy. Some don’t know where they want to be long term due to a divorce or death of a spouse or partner. Or, they may find themselves in a new location. Renting first rather than locking themselves into a purchase gives them the benefit of time to explore their new hometown. Sharon Bond and her husband Keith took this route when they relocated to Chicago from New Jersey because of Keith’s job. They didn’t know the city and decided to rent in a convenient, downtown building close to Lake Michigan.After a year, they were ready to buy, but they purchased farther north in the city because of the more affordable prices.After another five years, they moved to the suburb Park Ridge because of Sharon’s job in nearby Glenview. Does she regret initially paying rent? Not at all, she says. “We’re glad we got to know the city.Another couple who moved at the same time we did moved

reported, it will take time to correct, but it will improve your score,”Williams says. The best ways to bolster your report and, consequently, beef up your score, are to reduce the amount of debt you owe, pay all your bills on time and within the agreed terms and only open new accounts when it’s absolutely necessary,Williams says. Be aware of how many open accounts you have in your report and how much money is available to you, said Sember. “And don’t apply for loans you don’t want because these are recorded as inquiries about your credit and will count against you.” As a rule of thumb,Williams says it’s wise to review both your credit report and score 60 to 90 days prior to seeking a mortgage loan, which should give you enough time to have any errors corrected.

right into a suburban home and never got to know Chicago,” she says. The idea of renting also can provide peace of mind to those who no longer want to worry about maintenance issues associated with owning a house. Seniors, in particular, may relish not worrying about having to call a plumber in the middle of the night, and they also may like the idea of living in a community with others the same age and a plethora of activities, says Cathy Rosebaugh, a seniors real estate specialist and president of Alterna Home Solutions, Raleigh, N.C.“Needs change as people age and as health issues develop,” she says. Whatever your pocketbook or reasons to find a new place to live, consider your time frame, too, suggests Sheryl Garrett, a financial planner and author of “On the Road: Buying a Home” (Dearborn Trade, 2006). “You shouldn’t buy unless you’re planning on staying in that residence for at least three years,” she says.“There’s no harm in taking your time to make a decision since hurrying can cause you to make a big mistake. Buying a home is such an emotional decision.Try and step back and remove the emotion and focus on the financial and lifestyle issues,” she says.

© CTW Features

Ask Our Broker CONTINUED FROM PAGE 1

However, payments in the second phase for interestonly loans are typically based on 6-month or 1-year adjustable mortgage rates. If the rates go higher, then the math changes radically. For instance, at 7.5 percent, the new monthly payment for principal and interest in the sixth year would be $1,478.The original fixed-rate payment, of course, still is $1,264. Is the higher rate a problem? Not if you have the income to support the monthly payment. But what if your income does not increase in the next five years? What if interest rates go to 7.5 percent, 8 percent or even higher? For a number of years we have seen a general decline in interest rates, so adjustable-rate mortgages have been a good option. However, we may be at a point where rates have begun to rise for a lengthy period. If that’s the case – and no one knows absolutely – then a fixedrate loan is a better choice for conservative borrowers.

Q: How do you find good contractors to do home repairs and improvements? A: There are different approaches to this question. My preference is to see what kind of work service people do when faced with smaller jobs.If someone does a good job and prices fairly, I give them more work in their specialty, say heating and air conditioning. I use local contractors who are licensed and insured as required by my jurisdiction, and I try to work with smaller local businesses – the type where the owner comes to the property. Once I grow comfortable with someone,say a plumber, I then feel safe asking if he or she can recommend an electrician, heating specialist or whomever if the need arises.What I’ve found is that if the contractor does good work he or she likely knows others who also are reliable, skilled and fair. I make a point to appreciate and respect people that provide services and treat me fairly,to know them on a first-name basis and to pay immediately. I try to use the same people for both my home and rental properties so I can give more business to people I trust.I also recommend them to other property owners because I want them to do well and stay in business. © CTW Features Peter G. Miller is the author of “The Common–Sense Mortgage” and a veteran real estate columnist. Have a question? Please write to [email protected].

© CTW Features

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