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CNN Live Saturday
"Dollar Sign"
Aired July 19, 2003 - 16:29 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
SEAN CALLEBS, CNN ANCHOR: Welcome everyone. Today on "Dollar Signs", making the most of your money with federal interest rates the lowest anyone's seen in more than 4 decades. A lot of people are thinking about new homes, or refinancing the ones they already have. How do you choose the mortgage that is right for you. Well here is CNN's financial correspondent, Ali Velshi.
(BEGIN VIDEOTAPE)
ALI VELSHI, CNN FINANCIAL CORRESPONDENT: It looks a lot like the end game in the mortgage business.
ELLEN BITTON, PARK AVENUE MORTGAGE GROUP: Lock in your rate now. Lock in your rate and then if they come down further, lock again.
Mortgage rates have fallen for 3 years straight and some people continue to hold out, expecting that they'll fall further as the economy contniues to struggle. So, do you roll the dice and hold out?
MELISSA COHN, PRESIDENT, MANHATTAN MORTGAGE: You generally tend to lose out when you play the mortgage market and prime examples, over the course of the past three weeks, where mortgage rates have actually gone up a full percentage point.
VELSHI: The national average for a 30-year fixed rate mortgage is now just 5.23 percent. Just a year ago, that rate was 6.46 percent. In July of 2001, the same mortgage cost 7.17 percent, and just three years ago, you'd pay 8.14 percent for a 30-year fixed.
For home buyers, low rates mean that you buy more house for the same monthly payment. Here's how, let's assume you can spend $1,500 a month on a mortgage payment. At 5.5 percent, you can get a mortgage of $265,000. If rates go up 1 percent, you'll get a little more than a $237,000 loan for the same monthly payment. That means 1 percent increase in rates gives you about 10 percent less buying power.
So, how do you get the best rate?
COHN: I would go online and look at the various Web sites and ask your friends who they went to for mortgages. I'm sure you'll get lots of different stories and lots of different options, and then you should pick up the phone, call around, and make sure you do an apples to apples comparison. Make sure that you're shopping for a 60-day rate lock, you are looking at the same type of loan product, and go from there.
VELSHI: The other question, what length of term do you choose? Shorter-term variable rate mortgages do offer better loans than longer fixed-term mortgages.
COHN: What you need to consider is how long you think you'll be in that home. Will you be there for the next five to seven years? Then you should probably consider an adjustable. Will they carry you out feet first in 40 years? Then you should probably consider a fixed rate.
(END VIDEOTAPE)
VELSHI: Sean, the issue here is to remember that rates we're talking about at 5.23 percent, that's the national average for a 30- year fixed term loan. Now, a few weeks ago that rate went below 5 percent for the first time since anybody started keeping track, 4.99 percent. There are places in the country you can do better than that on a 30-year fixed, and there are places where you're going to pay a lot more money.
Your rate is going to depend on where you are, your credit relationship with the bank, your credit history, your income, your assets, things like that. But the experts are telling me what we're seeing now for the first time in three years is a credible trend that mortgage rates might actually be rising.
CALLEBS: Well, Ali, your excitement is palpable, you're about ready to come out of that chair. Sit tight for just a minute. We're going to involve you in this panel discussion in just a second and talk more about that.
Ok. So you are finally comfortable with the idea of getting that mortgage or maybe just refinancing your existing one. What is the first step to help us walk through the process? We are going to bring in our guest.
Now, we have a gentleman from Washington, D. C., Ira Carnahan. He is the Washington based associate editor of "Forbes" magazine, and he can handle your refinancing questions. Ira, thanks for joining us here today. Let's talk about refinancing. Everybody I've talked to, if they're not doing it, they're talking about it. What are some of the things -- what are some of the things you have to think about as you decide whether to do this? Are there -- is it -- are there mine fields out there?
IRA CARNAHAN, EDITOR, "FORBES" MAGAZINE: There really are. It's a surprisingly complicated process. And a lot of folks who could save money by doing it still haven't done it yet.
What you have to start out by looking at is how much you're going to save per month by refinancing. And you're going to compare, then, that monthly savings to the cost up front it's going to take you to refinance. So, for example, if you're going to save $100 a month by taking a new loan with a lower rate, you want to then compare that to the costs that it's going to cost -- you're going to pay to do that, which might be, say, $2,000. You then take that $2,000, divide it by your monthly savings of $100, and that tells you how many months you need to be in the loan for it to make sense for you to refinance right now. CALLEBS: Ok, I want to bring Ali in here as well. Ali, let's talk about getting prequalified. We have some graphics made up about this. What are some of the things people need to think about?
VELSHI: Well, what you need to do is you need to compare apples to apples when you get prequalified. It a heated up market like we're in right now, a lot of loan -- a lot of offers to buy property won't be accepted if it's contingent upon getting a mortgage. So, you want to go into that deal with at least a prequalification letter from the bank.
Now, there are a couple things you need to think about. The bank will usually lock the rate in for 60 days, and they'll probably give you a 30-day extension. However, lenders are so busy right now that they often can't close the deal in the very 60 days that they've given you to start with. So, in many cases, it's not much of a negotiation at all to get a prequalification extended. You get a rate. You get them to lock it in. If the rates go lower thereafter -- it's like the mortgage broker in my story said -- get a new letter from them. You can always go lower. The rate -- the prequalification allows you to get in there at the lowest rate that you can get into.
The other thing is it also allows you to determine how much the bank is going to let you buy, how much you qualify for, what those payments are going to be. Very, very smart move.
The worse thing to do is get tricked into buying an expensive house and then go to the bank to see if you can work it out.
CALLEBS: Ok, Ali and Ira, we are going to get to some questions in just a moment. But Ira, let's talk about getting the right loan and then selecting the right lender. What are some of -- I mean, lot of people think it's so low out there. How can I go wrong?
CARNAHAN: Well, you can. I mean, one of the big decisions you have to make right off the bat is whether you want to go for a long- term fixed rate loan, typically for 30 years, or an adjustable loan, which typically is fixed for a year or five years, and then adjust with the market.
CALLEBS: What about hybrid loans, specialty loans?
CARNAHAN: Right. So that would be a hybrid loan, where it's fixed for a little while and then starts adjusting. And a lot of people feel like if you think rates might go up, that you want to go ahead and lock in the longer-term rate right now. The drawback, of course, is you're going to pay a higher rate.
CALLEBS: And quickly, choosing your lender. A lot of times you'll hear mortgage companies say, you should go after this lender. How do you avoid that pratfall?
CARNAHAN: There's a couple things I suggest. One useful option when you are just starting out is to go onto the internet and check out some of the rates there to get a sense of where rates are. There are a number of services that will give you quotes from a number of different lenders, and you can get a feel for what's out there. If you go to a mortgage broker, as well, he'll be able to check a lot of different lenders and give you your feel for what your options are with different companies.
CALLEBS: Ok, gentlemen, we are going to go to our first e-mail question. It should pop up here shortly. We'll throw it out there for both. Let's start with Ali. It says, "Hi. Who does a better job for you, a mortgage broker or a mortgage lender. And what is the difference? Fees cheaper?" Good question from Sammy. Ali, we will throw it to you first.
VELSHI: Excellent question. As Ira just mentioned, one of the advantages of using a mortgage broker is they can compare what the rates are out there. One of the problems is a lot of people think, well, there's Ditech, there's E*TRADE, there's homeloan.com. There's all these companies out there. I'm going to go and apply for a loan on all of them and see what I get. Every time you submit an application, in addition to the fact that there may be a fee for that application, they go into your credit report, and your credit report takes a hit as a result of that. When various people start checking credit report, that starts taking a hit.
So, it's not that you need to use a mortgage broker to get around that, but what you need to do is make sure you're not applying all over the place for loans. You can have discussions with various people and say, this is my income, this is my asset situation, I've got a copy of my credit report, here's my score. What's likely going to happen when I apply for a loan?
But do not go indiscriminately applying for loans all over the place. You'll find suddenly that your otherwise stellar credit report has taken a hit. And in turn, Sean, that's going to cost you more on your mortgage.
Now, a mortgage broker is like a real estate broker. They have access to different kinds of lenders, and they can compare rates for you. Not to say one is better than the other. There are a lot of people out there making loans, but as Ira pointed out, the internet is a remarkable tool. Do some research there first and make your decision. Certainly don't get locked into someone just because your real estate agent gave you the name of a mortgage broker.
CALLEBS: Sure. Ali, Ira, sit tight for just a second. We are going to step away for just a moment. More tips coming your way after a short commercial message. And, of course, press e-mail us at dollarsigns@cnn.com. Or call this number, 1-800-807-2620. We'll be right back in just a quick minute.
(COMMERCIAL BREAK)
CALLEBS: Welcome back to DOLLAR SIGNS, everyone. We're talking about how to pick the right mortgage for you. Joining us to answer the loan questions are our panel, CNN Financial Correspondent, Ali Velshi, and, of course, Ira Carnahan with "Forbes" magazine.
And just in case there aren't enough guys with ties on on a Saturday afternoon, John Adams, the -- he's a radio host of homeownership experts, and, of course, he is joining us from Jacksonville. Had a little trouble getting that one out, John. Sorry about that. Thanks for joining us.
JOHN ADAMS, RADIO HOST: Happy to be here, Sean.
CALLEBS: Thank you. We have Louise on the phone. Louise, go ahead please.
UNIDENTIFIED FEMALE: Yes, I think it's the most confusing thing I've ever seen. I have a loan right now. My house is worth about over $300,000, and I have a mortgage on it for about $62,000 now, balance, and I'm beginning to pay more of the principal than interest now. But it's 7.625, which is very high. I can do better than that on a 15-year fixed rate at 4.875, and some of them have no discount points and no appraisal fees, and it's confusing.
CALLEBS: Do you have a point, John? Jump in here.
ADAMS: Well, caller, how many years do you have left on the existing mortgage, please?
UNIDENTIFIED FEMALE: Probably about six or seven.
ADAMS: About six or seven. You might want to look, rather than a fixed-rate loan, you might do better with what's called a hybrid mortgagor or a two-step loan. They're available in a five- or a seven-year variety. What happens is, it's an adjustable rate product, but it locks you in for a five- or a seven-year period at a low interest rate. You could adjust your payments to pay this thing down to zero during that time period. Right now, you could get a five-year balloon mortgage as low as 4.0 percent. Coming down from 7.25, that's going to be a significant savings for you, and you'll have the loan paid out in just about the same period of time.
CALLEBS: Ok, Ira, you jump in on this one. Bernie from Florida is on the phone. Has a question about a credit score. Bernie, go ahead, please.
UNIDENTIFIED MALE: This question is for Ali.
CALLEBS: Ok, Ali.
UNIDENTIFIED MALE: If possible. It's in regards to the credit score, which is the Fair Isaac rated score, and as you pointed out before, you take a hit every time you make an inquiry on your report. And there's other factors that affect your credit reporting. With that, how do you know how much of a hit -- the score is based on a scale of 500 to 800.
VELSHI: Yes.
UNIDENTIFIED MALE: An inquiry will give you how much of a hit of that 500 to 800? With overextended credit, how much of that overextended credit will that absorb into that scale? VELSHI: Yes. I see where you're going with this. This is an excellent question. I'm glad you pointed it out because what I don't want to do is overstate the fact that inquiring on five mortgage mortgages is going to destroy your credit rating. What it is is you've got a credit report which is an indication of all of your credit. Your credit score is a snapshot of your credit position at a particular time. So, what happens is if I take my credit score today, between 500 and 800, let's say I score a 700, not a bad credit rating. All of a sudden, I decide to go searching for a mortgage, and I make applications to ten different lenders, not a broker, ten different lenders online. I'll go back to my credit rating. Without any of my credit behavior having changed, my credit score may have gone down.
Now, you're asking a specific question about how much. I couldn't tell you how much. All of the three major credit reporting agencies could tell you how much, but it is one small factor in determining your credit score.
ADAMS: Right. Ali, can I jump in?
VELSHI: Yes.
ADAMS: I've done some research on the Fair Isaac scoring model. They don't like the research that I've done, but my research indicates that for each inquiry that you have, assuming your score is in the 700 range now, there's a reduction of approximately four points. Now, Fair Isaac claims that all inquiries in a related industry, such as mortgage lending, within a 30-day period, are treated as one inquiry.
However, again, my research indicates that that's not always the case, and you can look for at least a four-point drop. So in your hypothetical example, if you've dropped...
VELSHI: That could be 40 points.
ADAMS: That could be 40 points, and that could be the difference between qualifying for the loan that you're looking for and not.
VELSHI: Or getting it at a good rate or a bad rate.
CALLEBS: Ira, any thoughts?
CARNAHAN: Yes, I guess, you know, obviously there's a tradeoff there. At the same time, you do want to cover your bases and make sure that you're shopping around, but that is something you need to watch for.
ADAMS: Let me jump in it I might. One of the ways that you can minimize the impact on your credit score is to get a copy of your own credit report along with the score and provide that to the mortgage lending institutions and specifically direct them not to pull your credit report.
CALLEBS: Good information there, gentlemen. We have Robbie from Michigan on the line. Robbie, go ahead, please. UNIDENTIFIED MALE: My name is Robbie Chinerad (ph). My mortgage balance on my house is $43,000, the equity on the house is $48,000. I refinanced a year back at 5.75. I'm going to be in the house for another five, six years. Is it wiser for me to refinance again because my mortgage -- my balance being less, actually.
CALLEBS: Let's give Ira a chance on this one. Ira, go ahead, please.
CARNAHAN: Yes, it's going to be a tough call because your balance is relatively low. It's going to take you a while to get back enough savings to make up the up-front cost of the refinance. I mean, if it ends you costing you a couple of thousand dollars to refinance, you're going to have to be in that loan for a good while before you're going to make that $2,000 back.
CALLEBS: So your thoughts, what should he do?
CARNAHAN: I would -- to give you an exact answer, you actually need to use one of these calculators that you can find on lots of different web sites, where you plug in what your balance is, you plug in tax bracket, how long you expect to be in the loan. One really good calculator is at the site mtgprofessorcom -- mortgage professor dot com. But a lot of different sites offer it, and if you want to get an exact answer, you need to plug those numbers in.
CALLEBS: There's some information, Robbie. Everybody stick tight. We have a lot of phone calls and a lot of e-mails. We are going to get to more after this commercial break. We'll be right back.
(COMMERCIAL BREAK)
CALLEBS: We are back, and we are talking about finding the best mortgage for you. Once again, our panel out here, our own expert, Ali Velshi, John Adams from the John Adams radio show, an expert on home ownership, as well as Ira Carnahan, the Washington based associate editor of "Forbes" magazine.
Guys, we have a quick e-mail This one is coming in from Debra saying, "I've heard that sites such as lendingtree.com, where banks compete for your business, are the easiest and most convenient way to obtain legitimate, competitive loan offers from multiple lenders." What do you guys think about this?
ADAMS: Well, let me jump in. I have a bias toward local lending institutions. I think, especially for the first-time home buyer, it's critical that you have somebody that you can look across the table at, hold them accountable, and talk to face-to-face. I think the home- buying decision is, for most people, the biggest investment they ever make and doing so over the internet is a scary experience. I've done it myself.
And I would say for someone who is very sophisticated, both financially and with the internet, has bought several houses before, I've no problem with using the internet, once as a research tool, and second, as a source.
CALLEBS: But a local guy you can go face to face with, right, John? That's what you're talking about.
ADAMS: Absolutely. And not only that, you can hold them responsible. If he's a member of your local chamber of commerce, you can go down there and say, hey, where's my mortgage?
CALLEBS: Ok, Ali, I can see you're ready to jump in on this.
VELSHI: Yes, one of the things John brings out is that it's the most expensive thing you are ever going to do usually, buying a house. The second most expensive thing you are likely to do is buy a car. And not a lot of people buy their cars over the internet either. They do a lot of research.
What these online lenders have done is they have caused a lot of downward pressure, a lot of competitive pressure, in the market. And that can only be a good thing. That is not to say that you can't pick up the phone and speak to somebody at one of these online lenders. They have become very, very good at customer service. The idea of completing a very complicated transaction like a loan almost exclusively online is not a likelihood. It's not a possibility.
CALLEBS: Ok, Ira, I want you to take this next e-mail question for us. It's coming from Maureen in the town of Tifton, Georgia, saying, "Don't you lose whatever equity you have gained in your property when you refinance in order to take advantage of these lower rates?" True or false?
CARNAHAN: That's -- ok, let me just jump in just real quick, though, with the online lending. I've actually refinanced three times online in the last two years, and, I mean, everyone has a different experience, but mine has been quite good. So, I'd have to offer an endorsement on that.
CALLEBS: Ok. We'll take it.
CARNAHAN: But in terms of losing equity in your house if you refinance at a lower rate, that's definitely not the case. You've got an outstanding balance on your loan, and all you're doing is getting a lower rate on that outstanding balance. Unless you were to, say, take cash out in a cash out refinance, your equity in your home is preserved.
CALLEBS: Ok, gentlemen, we have Carrette (ph) is on the phone now. Carrette (ph), please go ahead. Carrette (ph), are you there? Well, through the brilliance of electronics -- let's go to one more e- mail. We'll pop an e-mail up here from Bill from Chattanooga. "I have less than a perfect credit history. I want to refinance, save money. My credit history has been good for at least five years, but it takes seven years to come off your credit report. A lot of companies require up front fees just for me to find out I'm denied. How can I find a company that will give me a better rate without committing to a lot of fees up front?" John, we'll let you start this one. ADAMS: Well, let's jump in. I think the thing that's important here for him to recognize is that what lenders are looking at primarily is not his credit report. They're looking at his credit score. And one of the great things about THE Fair Isaac model is that it puts the most emphasis on the recent history. So, even if you went bankrupt two or three years ago, as time goes by, that event causes less and less impact in a negative way on your credit score. So, he needs to find out...
CALLEBS: And there are places to find out this information for free. He doesn't have to pay fees, right, guys?
ADAMS: That's correct. And he can take that credit score, he can call a dozen lenders and find out, do you have programs for people that have credit scores in this price range? Would I qualify? And I think that gets back to Ira's first suggestion of shopping and comparing, which I think is a great thing to do.
CALLEBS: Ok, we have Don on the phone for us. Quickly, want to get to as many questions as we can. Don, please go ahead.
UNIDENTIFIED MALE: Yes, I'm trying to get a refinance. I filed for bankruptcy about two-and-a-half years ago, and by the way, my credit score is 700. We cleaned out all the garbage, had good credit before this, and everybody I've talked to says, oh, fine credit score, but you filed for bankruptcy three years ago, can't help you. Going crazy on this because it's supposed to be based upon a credit score, but then you call Ditech or B of A, and it's no, the bankruptcy's there, can't help you.
CALLEBS: Ali, let's let you start.
VELSHI: Yes, there's a whole specialty market for this sort of thing. As John just mentioned, the idea that your credit score is high is probably because it's a current snapshot of what you've got right now. You need to do an internet search. You need to speak to some brokers. They will find people who will lend you money, even though you've gone bankrupt in the past. The problem is you're not going to get these fantastic rates that we're talking about. There will be a premium for you.
CALLEBS: Ira, quickly, any thoughts?
CARNAHAN: Right. I think this is definitely a case where you do want to use a mortgage broker, someone you can deal with person to person because that's someone who can, you know, deal with some of the special details of the situation.
CALLEBS: There you go. Ok, gentlemen, we could go on all day, judging from the e-mails, the phone calls, but we've run out of time. Judging from the popularity of this, let's do this again sometime. Once again, John Adams, the host of the John Adams radio show, Ira Carnahan, the Washington based associate editor of "Forbes," and as always, Ali Thanks very much for being here, Ali, We'll talk again soon, buddy. Ok, in other news, actor Will Smith and Tour de France dominator, Lance Armstrong, are profiled next on "PEOPLE IN THE NEWS," and at 6:00 p.m., more "CNN LIVE SATURDAY," all the day's news and a special look at the 25th anniversary test tube baby. Then at 7:00, is the budget deficit sinking the U. S. economy. Do not miss the tough talk from our "CAPITAL GANG."
I'm Sean Callebs. Thanks very much for joining us. We are back after a break with a check of the headlines.
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Aired July 19, 2003 - 16:29 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
SEAN CALLEBS, CNN ANCHOR: Welcome everyone. Today on "Dollar Signs", making the most of your money with federal interest rates the lowest anyone's seen in more than 4 decades. A lot of people are thinking about new homes, or refinancing the ones they already have. How do you choose the mortgage that is right for you. Well here is CNN's financial correspondent, Ali Velshi.
(BEGIN VIDEOTAPE)
ALI VELSHI, CNN FINANCIAL CORRESPONDENT: It looks a lot like the end game in the mortgage business.
ELLEN BITTON, PARK AVENUE MORTGAGE GROUP: Lock in your rate now. Lock in your rate and then if they come down further, lock again.
Mortgage rates have fallen for 3 years straight and some people continue to hold out, expecting that they'll fall further as the economy contniues to struggle. So, do you roll the dice and hold out?
MELISSA COHN, PRESIDENT, MANHATTAN MORTGAGE: You generally tend to lose out when you play the mortgage market and prime examples, over the course of the past three weeks, where mortgage rates have actually gone up a full percentage point.
VELSHI: The national average for a 30-year fixed rate mortgage is now just 5.23 percent. Just a year ago, that rate was 6.46 percent. In July of 2001, the same mortgage cost 7.17 percent, and just three years ago, you'd pay 8.14 percent for a 30-year fixed.
For home buyers, low rates mean that you buy more house for the same monthly payment. Here's how, let's assume you can spend $1,500 a month on a mortgage payment. At 5.5 percent, you can get a mortgage of $265,000. If rates go up 1 percent, you'll get a little more than a $237,000 loan for the same monthly payment. That means 1 percent increase in rates gives you about 10 percent less buying power.
So, how do you get the best rate?
COHN: I would go online and look at the various Web sites and ask your friends who they went to for mortgages. I'm sure you'll get lots of different stories and lots of different options, and then you should pick up the phone, call around, and make sure you do an apples to apples comparison. Make sure that you're shopping for a 60-day rate lock, you are looking at the same type of loan product, and go from there.
VELSHI: The other question, what length of term do you choose? Shorter-term variable rate mortgages do offer better loans than longer fixed-term mortgages.
COHN: What you need to consider is how long you think you'll be in that home. Will you be there for the next five to seven years? Then you should probably consider an adjustable. Will they carry you out feet first in 40 years? Then you should probably consider a fixed rate.
(END VIDEOTAPE)
VELSHI: Sean, the issue here is to remember that rates we're talking about at 5.23 percent, that's the national average for a 30- year fixed term loan. Now, a few weeks ago that rate went below 5 percent for the first time since anybody started keeping track, 4.99 percent. There are places in the country you can do better than that on a 30-year fixed, and there are places where you're going to pay a lot more money.
Your rate is going to depend on where you are, your credit relationship with the bank, your credit history, your income, your assets, things like that. But the experts are telling me what we're seeing now for the first time in three years is a credible trend that mortgage rates might actually be rising.
CALLEBS: Well, Ali, your excitement is palpable, you're about ready to come out of that chair. Sit tight for just a minute. We're going to involve you in this panel discussion in just a second and talk more about that.
Ok. So you are finally comfortable with the idea of getting that mortgage or maybe just refinancing your existing one. What is the first step to help us walk through the process? We are going to bring in our guest.
Now, we have a gentleman from Washington, D. C., Ira Carnahan. He is the Washington based associate editor of "Forbes" magazine, and he can handle your refinancing questions. Ira, thanks for joining us here today. Let's talk about refinancing. Everybody I've talked to, if they're not doing it, they're talking about it. What are some of the things -- what are some of the things you have to think about as you decide whether to do this? Are there -- is it -- are there mine fields out there?
IRA CARNAHAN, EDITOR, "FORBES" MAGAZINE: There really are. It's a surprisingly complicated process. And a lot of folks who could save money by doing it still haven't done it yet.
What you have to start out by looking at is how much you're going to save per month by refinancing. And you're going to compare, then, that monthly savings to the cost up front it's going to take you to refinance. So, for example, if you're going to save $100 a month by taking a new loan with a lower rate, you want to then compare that to the costs that it's going to cost -- you're going to pay to do that, which might be, say, $2,000. You then take that $2,000, divide it by your monthly savings of $100, and that tells you how many months you need to be in the loan for it to make sense for you to refinance right now. CALLEBS: Ok, I want to bring Ali in here as well. Ali, let's talk about getting prequalified. We have some graphics made up about this. What are some of the things people need to think about?
VELSHI: Well, what you need to do is you need to compare apples to apples when you get prequalified. It a heated up market like we're in right now, a lot of loan -- a lot of offers to buy property won't be accepted if it's contingent upon getting a mortgage. So, you want to go into that deal with at least a prequalification letter from the bank.
Now, there are a couple things you need to think about. The bank will usually lock the rate in for 60 days, and they'll probably give you a 30-day extension. However, lenders are so busy right now that they often can't close the deal in the very 60 days that they've given you to start with. So, in many cases, it's not much of a negotiation at all to get a prequalification extended. You get a rate. You get them to lock it in. If the rates go lower thereafter -- it's like the mortgage broker in my story said -- get a new letter from them. You can always go lower. The rate -- the prequalification allows you to get in there at the lowest rate that you can get into.
The other thing is it also allows you to determine how much the bank is going to let you buy, how much you qualify for, what those payments are going to be. Very, very smart move.
The worse thing to do is get tricked into buying an expensive house and then go to the bank to see if you can work it out.
CALLEBS: Ok, Ali and Ira, we are going to get to some questions in just a moment. But Ira, let's talk about getting the right loan and then selecting the right lender. What are some of -- I mean, lot of people think it's so low out there. How can I go wrong?
CARNAHAN: Well, you can. I mean, one of the big decisions you have to make right off the bat is whether you want to go for a long- term fixed rate loan, typically for 30 years, or an adjustable loan, which typically is fixed for a year or five years, and then adjust with the market.
CALLEBS: What about hybrid loans, specialty loans?
CARNAHAN: Right. So that would be a hybrid loan, where it's fixed for a little while and then starts adjusting. And a lot of people feel like if you think rates might go up, that you want to go ahead and lock in the longer-term rate right now. The drawback, of course, is you're going to pay a higher rate.
CALLEBS: And quickly, choosing your lender. A lot of times you'll hear mortgage companies say, you should go after this lender. How do you avoid that pratfall?
CARNAHAN: There's a couple things I suggest. One useful option when you are just starting out is to go onto the internet and check out some of the rates there to get a sense of where rates are. There are a number of services that will give you quotes from a number of different lenders, and you can get a feel for what's out there. If you go to a mortgage broker, as well, he'll be able to check a lot of different lenders and give you your feel for what your options are with different companies.
CALLEBS: Ok, gentlemen, we are going to go to our first e-mail question. It should pop up here shortly. We'll throw it out there for both. Let's start with Ali. It says, "Hi. Who does a better job for you, a mortgage broker or a mortgage lender. And what is the difference? Fees cheaper?" Good question from Sammy. Ali, we will throw it to you first.
VELSHI: Excellent question. As Ira just mentioned, one of the advantages of using a mortgage broker is they can compare what the rates are out there. One of the problems is a lot of people think, well, there's Ditech, there's E*TRADE, there's homeloan.com. There's all these companies out there. I'm going to go and apply for a loan on all of them and see what I get. Every time you submit an application, in addition to the fact that there may be a fee for that application, they go into your credit report, and your credit report takes a hit as a result of that. When various people start checking credit report, that starts taking a hit.
So, it's not that you need to use a mortgage broker to get around that, but what you need to do is make sure you're not applying all over the place for loans. You can have discussions with various people and say, this is my income, this is my asset situation, I've got a copy of my credit report, here's my score. What's likely going to happen when I apply for a loan?
But do not go indiscriminately applying for loans all over the place. You'll find suddenly that your otherwise stellar credit report has taken a hit. And in turn, Sean, that's going to cost you more on your mortgage.
Now, a mortgage broker is like a real estate broker. They have access to different kinds of lenders, and they can compare rates for you. Not to say one is better than the other. There are a lot of people out there making loans, but as Ira pointed out, the internet is a remarkable tool. Do some research there first and make your decision. Certainly don't get locked into someone just because your real estate agent gave you the name of a mortgage broker.
CALLEBS: Sure. Ali, Ira, sit tight for just a second. We are going to step away for just a moment. More tips coming your way after a short commercial message. And, of course, press e-mail us at dollarsigns@cnn.com. Or call this number, 1-800-807-2620. We'll be right back in just a quick minute.
(COMMERCIAL BREAK)
CALLEBS: Welcome back to DOLLAR SIGNS, everyone. We're talking about how to pick the right mortgage for you. Joining us to answer the loan questions are our panel, CNN Financial Correspondent, Ali Velshi, and, of course, Ira Carnahan with "Forbes" magazine.
And just in case there aren't enough guys with ties on on a Saturday afternoon, John Adams, the -- he's a radio host of homeownership experts, and, of course, he is joining us from Jacksonville. Had a little trouble getting that one out, John. Sorry about that. Thanks for joining us.
JOHN ADAMS, RADIO HOST: Happy to be here, Sean.
CALLEBS: Thank you. We have Louise on the phone. Louise, go ahead please.
UNIDENTIFIED FEMALE: Yes, I think it's the most confusing thing I've ever seen. I have a loan right now. My house is worth about over $300,000, and I have a mortgage on it for about $62,000 now, balance, and I'm beginning to pay more of the principal than interest now. But it's 7.625, which is very high. I can do better than that on a 15-year fixed rate at 4.875, and some of them have no discount points and no appraisal fees, and it's confusing.
CALLEBS: Do you have a point, John? Jump in here.
ADAMS: Well, caller, how many years do you have left on the existing mortgage, please?
UNIDENTIFIED FEMALE: Probably about six or seven.
ADAMS: About six or seven. You might want to look, rather than a fixed-rate loan, you might do better with what's called a hybrid mortgagor or a two-step loan. They're available in a five- or a seven-year variety. What happens is, it's an adjustable rate product, but it locks you in for a five- or a seven-year period at a low interest rate. You could adjust your payments to pay this thing down to zero during that time period. Right now, you could get a five-year balloon mortgage as low as 4.0 percent. Coming down from 7.25, that's going to be a significant savings for you, and you'll have the loan paid out in just about the same period of time.
CALLEBS: Ok, Ira, you jump in on this one. Bernie from Florida is on the phone. Has a question about a credit score. Bernie, go ahead, please.
UNIDENTIFIED MALE: This question is for Ali.
CALLEBS: Ok, Ali.
UNIDENTIFIED MALE: If possible. It's in regards to the credit score, which is the Fair Isaac rated score, and as you pointed out before, you take a hit every time you make an inquiry on your report. And there's other factors that affect your credit reporting. With that, how do you know how much of a hit -- the score is based on a scale of 500 to 800.
VELSHI: Yes.
UNIDENTIFIED MALE: An inquiry will give you how much of a hit of that 500 to 800? With overextended credit, how much of that overextended credit will that absorb into that scale? VELSHI: Yes. I see where you're going with this. This is an excellent question. I'm glad you pointed it out because what I don't want to do is overstate the fact that inquiring on five mortgage mortgages is going to destroy your credit rating. What it is is you've got a credit report which is an indication of all of your credit. Your credit score is a snapshot of your credit position at a particular time. So, what happens is if I take my credit score today, between 500 and 800, let's say I score a 700, not a bad credit rating. All of a sudden, I decide to go searching for a mortgage, and I make applications to ten different lenders, not a broker, ten different lenders online. I'll go back to my credit rating. Without any of my credit behavior having changed, my credit score may have gone down.
Now, you're asking a specific question about how much. I couldn't tell you how much. All of the three major credit reporting agencies could tell you how much, but it is one small factor in determining your credit score.
ADAMS: Right. Ali, can I jump in?
VELSHI: Yes.
ADAMS: I've done some research on the Fair Isaac scoring model. They don't like the research that I've done, but my research indicates that for each inquiry that you have, assuming your score is in the 700 range now, there's a reduction of approximately four points. Now, Fair Isaac claims that all inquiries in a related industry, such as mortgage lending, within a 30-day period, are treated as one inquiry.
However, again, my research indicates that that's not always the case, and you can look for at least a four-point drop. So in your hypothetical example, if you've dropped...
VELSHI: That could be 40 points.
ADAMS: That could be 40 points, and that could be the difference between qualifying for the loan that you're looking for and not.
VELSHI: Or getting it at a good rate or a bad rate.
CALLEBS: Ira, any thoughts?
CARNAHAN: Yes, I guess, you know, obviously there's a tradeoff there. At the same time, you do want to cover your bases and make sure that you're shopping around, but that is something you need to watch for.
ADAMS: Let me jump in it I might. One of the ways that you can minimize the impact on your credit score is to get a copy of your own credit report along with the score and provide that to the mortgage lending institutions and specifically direct them not to pull your credit report.
CALLEBS: Good information there, gentlemen. We have Robbie from Michigan on the line. Robbie, go ahead, please. UNIDENTIFIED MALE: My name is Robbie Chinerad (ph). My mortgage balance on my house is $43,000, the equity on the house is $48,000. I refinanced a year back at 5.75. I'm going to be in the house for another five, six years. Is it wiser for me to refinance again because my mortgage -- my balance being less, actually.
CALLEBS: Let's give Ira a chance on this one. Ira, go ahead, please.
CARNAHAN: Yes, it's going to be a tough call because your balance is relatively low. It's going to take you a while to get back enough savings to make up the up-front cost of the refinance. I mean, if it ends you costing you a couple of thousand dollars to refinance, you're going to have to be in that loan for a good while before you're going to make that $2,000 back.
CALLEBS: So your thoughts, what should he do?
CARNAHAN: I would -- to give you an exact answer, you actually need to use one of these calculators that you can find on lots of different web sites, where you plug in what your balance is, you plug in tax bracket, how long you expect to be in the loan. One really good calculator is at the site mtgprofessorcom -- mortgage professor dot com. But a lot of different sites offer it, and if you want to get an exact answer, you need to plug those numbers in.
CALLEBS: There's some information, Robbie. Everybody stick tight. We have a lot of phone calls and a lot of e-mails. We are going to get to more after this commercial break. We'll be right back.
(COMMERCIAL BREAK)
CALLEBS: We are back, and we are talking about finding the best mortgage for you. Once again, our panel out here, our own expert, Ali Velshi, John Adams from the John Adams radio show, an expert on home ownership, as well as Ira Carnahan, the Washington based associate editor of "Forbes" magazine.
Guys, we have a quick e-mail This one is coming in from Debra saying, "I've heard that sites such as lendingtree.com, where banks compete for your business, are the easiest and most convenient way to obtain legitimate, competitive loan offers from multiple lenders." What do you guys think about this?
ADAMS: Well, let me jump in. I have a bias toward local lending institutions. I think, especially for the first-time home buyer, it's critical that you have somebody that you can look across the table at, hold them accountable, and talk to face-to-face. I think the home- buying decision is, for most people, the biggest investment they ever make and doing so over the internet is a scary experience. I've done it myself.
And I would say for someone who is very sophisticated, both financially and with the internet, has bought several houses before, I've no problem with using the internet, once as a research tool, and second, as a source.
CALLEBS: But a local guy you can go face to face with, right, John? That's what you're talking about.
ADAMS: Absolutely. And not only that, you can hold them responsible. If he's a member of your local chamber of commerce, you can go down there and say, hey, where's my mortgage?
CALLEBS: Ok, Ali, I can see you're ready to jump in on this.
VELSHI: Yes, one of the things John brings out is that it's the most expensive thing you are ever going to do usually, buying a house. The second most expensive thing you are likely to do is buy a car. And not a lot of people buy their cars over the internet either. They do a lot of research.
What these online lenders have done is they have caused a lot of downward pressure, a lot of competitive pressure, in the market. And that can only be a good thing. That is not to say that you can't pick up the phone and speak to somebody at one of these online lenders. They have become very, very good at customer service. The idea of completing a very complicated transaction like a loan almost exclusively online is not a likelihood. It's not a possibility.
CALLEBS: Ok, Ira, I want you to take this next e-mail question for us. It's coming from Maureen in the town of Tifton, Georgia, saying, "Don't you lose whatever equity you have gained in your property when you refinance in order to take advantage of these lower rates?" True or false?
CARNAHAN: That's -- ok, let me just jump in just real quick, though, with the online lending. I've actually refinanced three times online in the last two years, and, I mean, everyone has a different experience, but mine has been quite good. So, I'd have to offer an endorsement on that.
CALLEBS: Ok. We'll take it.
CARNAHAN: But in terms of losing equity in your house if you refinance at a lower rate, that's definitely not the case. You've got an outstanding balance on your loan, and all you're doing is getting a lower rate on that outstanding balance. Unless you were to, say, take cash out in a cash out refinance, your equity in your home is preserved.
CALLEBS: Ok, gentlemen, we have Carrette (ph) is on the phone now. Carrette (ph), please go ahead. Carrette (ph), are you there? Well, through the brilliance of electronics -- let's go to one more e- mail. We'll pop an e-mail up here from Bill from Chattanooga. "I have less than a perfect credit history. I want to refinance, save money. My credit history has been good for at least five years, but it takes seven years to come off your credit report. A lot of companies require up front fees just for me to find out I'm denied. How can I find a company that will give me a better rate without committing to a lot of fees up front?" John, we'll let you start this one. ADAMS: Well, let's jump in. I think the thing that's important here for him to recognize is that what lenders are looking at primarily is not his credit report. They're looking at his credit score. And one of the great things about THE Fair Isaac model is that it puts the most emphasis on the recent history. So, even if you went bankrupt two or three years ago, as time goes by, that event causes less and less impact in a negative way on your credit score. So, he needs to find out...
CALLEBS: And there are places to find out this information for free. He doesn't have to pay fees, right, guys?
ADAMS: That's correct. And he can take that credit score, he can call a dozen lenders and find out, do you have programs for people that have credit scores in this price range? Would I qualify? And I think that gets back to Ira's first suggestion of shopping and comparing, which I think is a great thing to do.
CALLEBS: Ok, we have Don on the phone for us. Quickly, want to get to as many questions as we can. Don, please go ahead.
UNIDENTIFIED MALE: Yes, I'm trying to get a refinance. I filed for bankruptcy about two-and-a-half years ago, and by the way, my credit score is 700. We cleaned out all the garbage, had good credit before this, and everybody I've talked to says, oh, fine credit score, but you filed for bankruptcy three years ago, can't help you. Going crazy on this because it's supposed to be based upon a credit score, but then you call Ditech or B of A, and it's no, the bankruptcy's there, can't help you.
CALLEBS: Ali, let's let you start.
VELSHI: Yes, there's a whole specialty market for this sort of thing. As John just mentioned, the idea that your credit score is high is probably because it's a current snapshot of what you've got right now. You need to do an internet search. You need to speak to some brokers. They will find people who will lend you money, even though you've gone bankrupt in the past. The problem is you're not going to get these fantastic rates that we're talking about. There will be a premium for you.
CALLEBS: Ira, quickly, any thoughts?
CARNAHAN: Right. I think this is definitely a case where you do want to use a mortgage broker, someone you can deal with person to person because that's someone who can, you know, deal with some of the special details of the situation.
CALLEBS: There you go. Ok, gentlemen, we could go on all day, judging from the e-mails, the phone calls, but we've run out of time. Judging from the popularity of this, let's do this again sometime. Once again, John Adams, the host of the John Adams radio show, Ira Carnahan, the Washington based associate editor of "Forbes," and as always, Ali Thanks very much for being here, Ali, We'll talk again soon, buddy. Ok, in other news, actor Will Smith and Tour de France dominator, Lance Armstrong, are profiled next on "PEOPLE IN THE NEWS," and at 6:00 p.m., more "CNN LIVE SATURDAY," all the day's news and a special look at the 25th anniversary test tube baby. Then at 7:00, is the budget deficit sinking the U. S. economy. Do not miss the tough talk from our "CAPITAL GANG."
I'm Sean Callebs. Thanks very much for joining us. We are back after a break with a check of the headlines.
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