One thing that gets a lot of people in trouble with their credit scores is a past due account, also known in the industry as a collection or a collection account. These collection accounts stay on your credit report for 7 years. That is bad enough as it is, but it gets worse. Let's assume you have an outstanding five year old collection for $250 on a credit card. These past due accounts are usually sold off many times to different collection agencies that buy the debt for a fraction of what is actually owed and then they try to collect. This is one of the largest profit margin businesses going currently. If you buy a five year old $250 outstanding debt for $15, and then collect $30 of it, the collection agency has a 100% profit margin on that collection!

Credit scoring algorithms mainly focus on the last two years of credit history in general. So in our example, this collection account is still a negative and will hurt your credit score, though it is not as important since its five years old. The last couple of collection agencies that own the debt are usually smaller, less than reputable companies, and usually use scare tactics to get you to pay. They’re well aware that the debt will soon fall off of your credit report, so they get more aggressive as the collection account gets older.

Certainly a person can do the right thing and make payment to the collection company if they really owe the money, but there is a catch. These items stay on your credit report for seven years based upon “date of last activity”. So when you make even a small payment, it is going to start the clock over on the seven year waiting period. This means that if you make a payment years later, suddenly this old collection is going to look like a brand new collection again and stay on for seven more years. And, most importantly, your credit score will fall quite a bit because the credit scoring algorithms will treat this as a recent collection account.

I am not condoning the dismissal of outstanding bills, what I am suggesting is to work out issues like this ASAP, don't just throw your hands up when talking to creditors and tell them, "I don't care what you do, I am not paying the amount you think I owe." You have to come to a solution, and you have to do it quickly, or you will pay for it later.

I had an interesting exchange with a client that surprised me. We were discussing refinancing a loan in California. I ran the numbers and realized he could save $377 a month. We talked about how to proceed, but then he hesitated. He mentioned something about having to pay some sort of penalty when he refinanced, that he would not have to pay if he did not refinance. I finally realized he was talking about recourse versus non-recourse loans.

Recourse means the lender can sue you (has recourse against you) if your house sold at auction or through a short sale for less than the amount owed to the lender. If you borrowed $400,000 to buy your home and it sold at auction for $300,000 there is a shortage of $100,000 that lender can have recourse against you for that amount, depending on your state.

In some states (such as California) non-recourse laws apply only to “purchase money” loans (i.e. original home loans that are used to purchase property). So this means if you refinance a loan in California, the subsequent refinance loan can become a recourse loan.

So the client I first mentioned actually stopped, and thought about not refinancing and forgoing savings of $377 a month, so he could retain the ability to walk away from his mortgage and not be chased for any shortage. I was fascinated that someone would even think that way!

In many states equity lines are recourse loans. Hence, a loan you took out to purchase your house could be non-recourse, but the equity line of credit you got to pay down debt, replace the windows, and take a vacation won't be. And you may be liable for taxes on the deficiency regardless of whether the loan is recourse or non-recourse. Each state has its own rules for its recourse and deficiency statutes. You need to look up your state's current statutes and contact a local attorney to confirm current rules. Don't fully trust something you read off of the internet.

Yes, there really is a loan officer in the doughnut at times. What I am talking about is how business referrals are sourced in the mortgage industry. I'm afraid business is still referred the old-fashioned way, not by who earns it, but by who brings the freshest doughnuts to the Realtor office meeting, who picks up the tab at happy hour, who buys your Realtor tickets to the hockey game, and who hangs around the most in the realtor offices. Does this sound like a professional way to analyze a business vendor? Are you confident in getting a referral based on these methods? I hope you are, because this is still how business is done in our industry 8 times out of 10.

And I am not saying that things do not work out with this method, obviously if they did not, referrals would not be farmed out based on such a social method. What I am contending is that you may not be getting the top professional for the job, or the lowest price, or the best loan product. I am saying that in most professional transactions business is analyzed with much more objectivity, data analysis, metrics, and attention to detail; not who comes in the office with the best doughnut selection.

Getting a mortgage professional should instead be about who's the most experienced, who has the broadest base of products, who has a highly skilled team behind them, who is the most innovative, who works the most quickly, who is the most highly thought of across the industry, and who has the fastest turn times.

I would suggest that people take a hard look at a mortgage professionals website, if they even have one that goes beyond one or two pages, get an idea of their experience in all of the other things that you need to analyze, combined with a hard look at their price and see if that is competitive. Then if you believe that they will execute and deliver a competitive price, and if you believe that you like them and would be happy to work with them; that sounds like a well thought out decision as to who to use as a service provider. Buy your doughnuts on your own…take a more analytical approach when you choose a mortgage professional.

Is it time to refinance and save money? Maybe. I have a lot of clients who call me with 30 year fixed-rate mortgages and think that just because interest rates have dropped a lot they are going to switch to a 15 year mortgage and keep their payments the same, and cut a lot of years off of their mortgage. This is likely not going to happen. Take a look at the numbers below to see why, they speak for themselves:

current hypothetical mortgage:
30 Year Fixed Rate
$500,000 @ 5.50%
$2838/month principal & interest payment (not including taxes and insurance)

new 15 Year Fixed Rate mortgage:
15 Year Fixed Rate
$500,000 @ 3.50%
$3574/month principal & interest payment (not including taxes and insurance)

So you can see that even with an enormous drop in interest rates, the payment actually goes up quite a bit. This is not to say that you are not going to save money over the long haul with the 15 year mortgage option at the lower interest rate, but you're not going to save money every month. Here's what I mean:

The current 30 year hypothetical mortgage costs $1,021,680 over 30 years ($2,838 x 360 payments = $1,021,6800).

The new 15 Year Fixed Rate mortgage only costs $643,320, that saves $378,360 over time! So if you will own a property for the long haul, or forever, paying it off more quickly, certainly at a lower interest rate, saves an enormous amount of money. But don't expect to save money every month.