When is 0% for a car loan not really zero??

Good Morning! Today’s blog is guest written by our Personal Auto Shopping Service Manager, Bill Fultz. Bill had over 20 years in the auto sales business before he came to work at our credit union. Here, Bill gives us an education on how a zero percent auto financing deal may not actually equal zero percent for the consumer and could cost them more than conventional financing.

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This time of year, we make our members a lot of auto loans. One of the phrases we often hear is, “I can get Zero Percent financing at the dealership.” But, is Zero Percent financing really 0%? Do you save more money taking the car with the dealer’s 0% financing or would you be better off negotiating the price of the car including the rebate and taking out a loan from your local credit union?

Here is the dealer’s basic program: 0% financing for up to 60 months or you have the option of taking a rebate from $1,000 to $2,000 and find your own financing. Which one is the better deal for you? Let’s look at this 0% deal and compare it to a low interest Meriwest Credit Union 60 month loan with the manufacturer’s rebate applied.

Dealer loan:

$20,000 @ 60 months 0% interest = 60 payments of $333.33

Meriwest Credit Union loan after $2000 rebate is applied:

$20,000 minus $2,000 rebate = $18,000

$18,000 @ 1.99% * = 60 payments of $315.20 total interest paid: $925.20

$18,000 + $925.20 = $18,925.20

You save $1,074.80 ($20,000 - $18,925.20) with a Meriwest Credit Union loan

(This is an example. Your actual savings will depend on the size of the rebate on the Vehicle you purchase and the actual rate you qualify for at the Credit Union).

Besides the outright savings using your Credit Union loan, you also get that savings up front!  That means that even if you decide to sell or trade in your vehicle before the 60-month loan is paid, you already have saved the money when you purchased. 

If you decide the 60-month 0% is the better way to buy, also consider that in order to actually save the full amount you must keep the car the entire 60 months.  If you sell or trade before that time period, you have lost the value of the rate.  Statistically most 60 month loans are paid off by members in a period of 36 months, as members choose to sell or trade in their vehicles on a newer model and in some cases as a result due to an accident.  

Members who take the up front cash rebates are free to do as they please with regards to trade-in etc, since they are not forced to keep the vehicle for the full term of the loan in order to realize the advantage of low or 0 % financing.  So, if you are in the market for a new vehicle from a manufacturer offering large rebates or artificially low interest rates, contact a Meriwest Credit Union financial service representative to give you a comparison between a Meriwest loan and the Dealer’s.  You might find out that 0% isn’t really as good as it sounds!

About P.A.S.S.: Whether you're looking for a new or used auto, using P.A.S.S. means you don't have to deal with dealership salespeople. Instead, you work directly with Bill Fultz, Meriwest's Personal Auto Shopper and your very own insider in the automotive world. He has access to thousands of new and used cars in dealer inventories all over the state. Need a new or used car? Check our link at WWW.Meriwest.com/PASS for more info.

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Our next Financial Education Workshop:

Credit Myths and Credit Repair

December 11, 2013 - 6:30pm

Meriwest Credit Union Main Office

Training Room

5615 Chesbro Ave

San Jose CA 95123

Please RSVP to Gmeyer@meriwest.com

 

Let's Compare FHA vs. Conventional Mortgages Today

Today’s blog is a guest blog from Dan Hapner, the Director of Mortgage Sales at Meriwest Mortgage.

With home sales continuing to grow and the expectation that interest rates may be on the rise, let’s pause to consider the best loan products we might use for our next home purchase. FHA is a popular option for some families and I think it is important we understand the distinct differences between this form of government sponsored loan and a regular conforming conventional loan that is underwritten according to guidelines provided by Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corp).

FHA Loans

The FHA, Federal Housing Administration, has been helping Americans own homes for 70 years. The FHA guarantees or insures home loans made by their qualified member lending institutions. This allows homebuyers to access a home without having to come up with a large downpayment. Typically, conventional mortgages require a 20% downpayment. FHA guaranteed mortgages can be made with as little as 3.5% downpayment! That downpayment can be 100% gifted to the borrower. There is no “seasoning” requirement of having the funds on hand 90 days prior to the purchase.

FHA guaranteed loans can be adjustable or fixed. They also have two graduated payment programs that can help families get into their first home at a reduced monthly payment that will grow as their income grows. Most of the FHA guaranteed loans are made at a fixed interest rate and is typically lower than a conventional loan.

How does it rate as a first time homebuyer loan? Not bad, but the news is not all good either.

The Good: FHA requires a FICO score of 580 for the 3.5% low downpayment program.

Many participating FHA lenders require a FICO score of at least 620 in order to qualify for an FHA home loan. Just because the FHA minimum is 580 does not mean a particular bank is willing to issue credit to those with that score--the FHA loan program is a voluntary one, lenders are not required to participate, and the FHA cannot force the bank to lower its FICO requirements. These FICO scores are significant as most conventional loans require a FICO score of 680 or better. Another advantage for FHA is the maximum loan limit is $625k vs. $417k for a conventional loan. FHA maximum’s are increased in areas with high priced housing such as the San Francisco Bay Area to $729,750. FHA loans often allow for a higher debt to income ratio, making more borrowers eligible.

The Bad: For most FHA loans, the sellers will pay the closing costs. This can be an impediment to selling to a particular buyer if they intend to use an FHA loan. Closing costs can be very expensive for the seller and make an FHA loan difficult to use for the buyer. This is particularly true in the case of a short sale home if the sellers don’t have a lot of cash on hand or equity. The sellers need to be flush with cash or equity in the case of a buyer with an FHA loan.

First time homebuyers need to be aware of the costs involved in using an FHA loan to finance your home purchase. As the loan is not a conventional loan, it is going to require mortgage insurance. FHA mortgage insurance will cost the buyer 1.5% of the total loan amount upon closing and then 0.5% of the loan each year to pay for the mortgage insurance. On a $400,000 loan that would mean a mortgage insurance cost of $8,000 in the first year; the upfront insurance payment of $6,000 at closing and then $2,000 the first year in annual premiums. The mortgage insurance stays in effect for the life of the loan. The only way to eliminate the insurance is through paying off the loan or through refinancing.

Another issue involved in FHA lending is the approval of the property. The property must meet FHA standards. If the collateral is not up to FHA standards, the seller must pay for repairs. This can be an impediment for sellers with homes that need a little work. If a house is being sold “as is,” it may not be a good target for an FHA type loan.

Time is also a factor. FHA loans typically take longer to process than a similar conventional loan.

Conventional Loans

Most of the mortgages made in the United States are conventional mortgages. These are used for purchase and for refinancing an existing loan. They can be an adjustable loan or a fixed rate type of loan. As most lending institutions offer conventional home financing and set their own interest rates, borrowers can have a wide range of lenders and interest rates from which to choose. FHA loans are limited to approved lenders.

Generally, conventional mortgages require a 20% downpayment for home purchase transactions. A purchase with less than 20% down would require private mortgage insurance (PMI) be paid for by the applicant. PMI generally costs 1% of the total loan amount annually. The insurance payment is usually included with the loan payment. A $400,000 mortgage that requires PMI would have a charge of $4,000. That would add $333 to each monthly payment.

Conventional loans also require an applicant have a 680 or better FICO score. This is higher than an FHA loan, but less than is required for most consumer loans which is 740.

There are fees involved with conventional loans, such as processing fees, application fees, and appraisal fees. But if one is willing to pay a slightly higher interest rate on their loan, they can avoid fees altogether. By paying an additional point or one percent of their loan amount upon closing, they can pay down their loan interest rate and possibly save themselves thousands of dollars over the life of the 30 year loan. Conventional loans have a lot of options when it comes to interest rates and fees.

There are local government and non-profit programs that can provide some downpayment assistance and thus decrease the downpayment needs. As an example, Meriwest Mortgage works with the Housing Endowment and Regional Trust in San Mateo County, HEART of San Mateo. They offer homebuyers up to $78,225 in downpayment assistance and that can offset up 15% of the purchase price with just 5% down. These downpayment assistance programs can be used to eliminate the need to pay for mortgage insurance and can be very helpful in making a home purchase more affordable for first time homebuyers.

As conventional loans are offered all across the country in every municipality, there is a great many lenders from which to choose. Competition is your friend and keeps fees down and processing times speedy. Most of the HEART Program loans are processed in less than thirty days and are often completed and closed in only 20 days!

As we saw with the need to provide PMI in cases of small downpayments, there are some warts on conventional loans. As these loans are sold on the secondary market to Fannie Mae and Freddie Mac once processed and booked as a mortgage backed security, borrowers have fewer options in regard to default. What this means to a borrower is the issuing lender does not own the loan and thus has no control over the default process and cannot make arrangements with the borrower to reduce interest rates, payment forbearance, etc. Currently, these borrowers are being encouraged to take part in the HARP and HAMP Government Programs to help families in foreclosure.

In conclusion

Let’s keep in mind that the United States Government does not make home loans. They guarantee or insure home loans. What this means is the lender is insured against loss by default of the borrower. It does not insure the borrower or guarantee the borrower against default in any way.

Do you have more questions about a future home purchase or a refinance of your existing loan? Please contact Dan at dhapner@meriwest.com.

Meriwest Mortgage and Meriwest Credit Union are Equal Housing Lenders.

Meriwest Credit Union deposits are insured up $250,000 by the NCUA

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Our next set of workshops will be taking place at our Sunnyvale Financial Center at 563 E. El Camino Real in Sunnyvale, next to Togo's Sandwiches. To attend, please RSVP with Greg Meyer at gmeyer@meriwest.com or 408-365-6328.

Auto Finance 101 - Learn the in's and out's of purchasing a car. Research your car and your financing. Learn how to make the deal and avoid dealer tricks. Negotiate your purchase price, interest rate, and terms.

6:30PM - 7:30PM on Oct. 16th

Sunnyvale Financial Center

Credit Myths and Repair - Learn how to access your credit report from all three credit bureaus and your credit score for free. How do inquiries effect your score? What happens to your credit after you pay a collection? Have a late payment? Get a divorce?

6:30PM - 7:30PM on Oct. 23rd 

Sunnyvale Financial Center

Meriwest Credit Union

CAR SALE!!!

 November 9th and 10th at the Meriwest Credit Union Main Office 

5615 Chesbro Ave, San Jose CA 95123

Come to see our wide selection of late model, gently used cars offered at bargain prices by our MCU approved dealers.

Consolidating Your Banking May be a good Idea

We understand why consolidated banking is a good idea from the financial institution’s point of view; they maximize the profit from that particular customer and no longer have to expend any effort in trying to capture their other banking/lending/investments. But, why is it a good idea for the client?

Financial institutions concentrate their sales efforts on bringing in a larger share of the customer’s wallet. This can also work to the customer’s advantage. As a customer, you may be able to receive benefits such as better interest rates and reduced or no fees for bringing in their loans, retirement savings and other investments. Free checking accounts, free safe deposit boxes, very low cost overdraft protection, personal document shredding, free coin counters, preferred rates on credit cards and auto loans are some of the advantages of having your finances in one place. Another good reason for combining your accounts is relationship pricing on loans and savings products. This means that, depending on the size of your overall relationship, you may be able to get higher rates on your time deposits and lower rates or reduced rates on your borrowing. With many institutions, you will see increased benefits as their deposits and relationships increase in size. Often these are tiered benefits that kick in at $10K, $25K, and $50K.

If you have a particularly large relationship; one that includes your investments and home and business loans, you may find yourself in a unique position. Your financial institution may make some very significant concessions should you decide to look elsewhere for your banking services. Are you refinancing your mortgage? Your manager will likely do their best to meet or beat any competitor’s quote!

But it’s not just financial savings. There are some real convenience issues here too! Combined statements are very convenient; being able to see all your accounts in one statement saves a lot of time. When you enter your online banking, all of your accounts can be accessed at once for transfers and other business.

You can have a better, often more personal relationship with your financial institution. As a manager myself not too many years ago, I had always assigned my best bankers to my top clients. I have always believed bank managers should treat his or her best and most profitable clients like royalty. They should assign an employee to them as their “Personal Banker.” Now, if the manager is not in, the customer has an assigned representative to support their financial needs.

Finally, when you die, if all your accounts are in one place, you have made things much easier for the executor of your estate. They don’t need to go to multiple financial institutions to settle the estate. This saves your family time and effort. 

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It is Homebuying Weekend June 7th and 8th at the Meriwest Credit Union's Sunnyvale Financial Center on El Camino at Fair Oaks. Friday the 7th is Mortgage Day. Loan Agent Bruno Gonzalez will be present all day to answer your home purchase and refinance questions.  

On Saturday, June 8th, we will be presenting "Homebuying Strategies for the Current Bay Area Housing market."

Presented by Michael Mendenhall of Keller Williams Realty, with Bruno Gonzalez of Meriwest Mortgage. 

You will learn:

• The truth about foreclosures, short sales and other sources of housing inventory.
• Purchasing real estate in today's changing housing market
• Possible problems when purchasing a short sale home, flipped or bank-owned property.
• Defining your homeownership goals and creating a step-by-step strategy to achieve them.
• What you need to have in place to start looking for a home.
• The benefits of homeownership in the bay area.
• How to view homes and make offers that get accepted, at the best price with the most favorable terms.
• Understanding your financing choices when purchasing a home.
• Acquainting yourself with the required real estate documents.

 I hope you can join us June 7th and 8th in Sunnyvale!

A History of FICO Scores Part II

In the 1950’s, someone asked the question, how can we judge someone’s credit without having to read the entire credit report?

You see, not only was time an issue, reading the reports and making judgments based on the information in them became an issue. You could have two loan underwriters look at the exact same loan package and come up with wildly different opinions on a person’s credit. Some would give their approval of the loan and others denied the credit. There was no set of rules that told underwriters how to decipher and utilize the information they were gleaning from credit reports. It was all just “someone’s opinion,” very subjective.

Thousands of new borrowers were being approved daily and lenders needed a way to mitigate or gauge risk and develop a national standard for credit worthiness. In 1956, a company named Fair Isaac Company came out with a revolutionary idea; Credit Scores, also knows as FICO Scores.

How does the scoring work? FICO takes several important financial factors into account. The two most critical factors are the borrower’s payments and the balances they maintain. These items make up 65% of the score; 35% for the payment history and 30% for the balance ratio. That’s why a late payment has such a serious effect on our score. Collections are worse for us and our scores. The effect of a late payment on a loan or credit card will start to diminish after 24 months. If one has an open collection, the collection will have the same weight on their score on the last day of seven years as it did on the first day it was placed on the person’s report. The lesson here is very simple, make your payments on time and you will never have to deal with late payment issues or collections.

Balances play a role in our score if we don’t pay them down. 30% of your score is determined by the balances a person is carrying vs. how much they have available. Maintaining outstanding credit card balances by paying only the minimum payment can be very detrimental to your score. We have to make an effort to pay our outstanding balances off. For scoring purposes, the balances are added together and a ratio is calculated vs. the total amount of credit available.

The three remaining factors are our History. How long have we managed credit? That accounts for 15% of our score.

Finally, 10% each is allocated to the types of credit we manage and the number of inquiries made on our report annually.

With this data put into a computer algorithm, a number could be determined. That number would be an indicator of risk. A high number would indicate less risk is involved in lending to a person where, conversely, a low number would indicate a lower likelihood of repayment. This also led us to “FICO Score Lenders;” lenders that only grant credit based upon a predetermined level of score.

What is a “FICO Score Lender?” Typically, our major banks are using the FICO score as the primary determining factor in making their initial credit decisions. Let’s say a financial institution has 300 offices in California. On any given day, each office might send a loan application to their loan underwriting department. The underwriters, the staff who decide credit decisions, might number a dozen but receive 300 applications in one day. Prior to 1956, they would have to view each credit report to make a decision. Now, they enter the social security number of the applicant and the credit bureau gives them a number. If today’s number is 740, then any applicant with a FICO Score of 740 or above will get a further review of their loan package. The borrowers with a FICO Score of 739 or less are declined for credit as they did not make the score. Not only does the FICO Score help us determine risk, it helps lenders render faster credit decisions. Often, we can approve someone based on their credit within 24 hours.

Some may ask if using a score like this is fair. The FICO Score is basically colorblind. Credit is ultimately granted to those who have proven they can manage it well. It is typically declined for those who manage it poorly. Over the years, the score has been adjusted down for times when credit was loosened and adjusted upwards for times when we had to tighten up on the use of credit. Today, most financial institutions are looking for borrowers with a FICO Score of 740.

Are credit unions just like banks on FICO Scores? Not necessarily, credit unions generally take a more holistic approach to lending; meaning they tend to take a look at the “whole borrower,” not just their credit score. Before a credit union renders a credit decision on someone, we will take into account how long this person has been on the job? How long have they have lived in the area? How long have they been a CU member? Of course, a CU will consider their income and debt to income ratios before we provide our final decision. What this means is, if a borrower comes in with a FICO Score at 739, or 735, we don’t automatically decline their loan request. We take a wider look at our borrower to determine their creditworthiness.

Can banks help their clients with loans just like credit unions do? Sure they can, but they don’t! They will tell you they don’t have the time. It takes to much time to make decisions on marginal credit applications. Time is money and we need that money to show a profit to our shareholders.

I used to work for a bank that called itself the “Largest Financial Services Provider in the World.” One of my bosses once said to me, “We need to make profit. If we don’t make a profit, we might as well be a credit union.” As if there is something wrong with that?

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Thank you. I hope you enjoyed our history of FICO scores. If you want to learn more about credit, please attend our next Credit Myths Workshop this Wednesday the 24^th at our Monta Loma Financial Center in Mountain View: 580 North Rengstorff Ave, Mountain View CA.

To RSVP for this workshop, click this link.

Credit Myths and Credit Repair

Credit Myths and Repair    April 24th at 6pm   Monta Loma Financial Center

Learn how collections, credit inquiries, and late payments effect your credit score. What is a FICO score? You will learn how to access your credit report and your credit score for free. Learn from the experts.

The Costs of Bad Credit Part 2

The cost of bad credit can be very high; provided a credit issuer will give you credit. Last week, we looked at the costs of incurring bad credit such as late fees and higher rates. This week we will take a look at who may lend to a risky borrower and the extended cost of bad credit.

A credit score indicates to the lender the likelihood of a loan being repaid. The higher the FICO score, the more likely a loan will be repaid. Often times, those with low scores are offered a higher (AKA sub-prime) rate for car, home, and other credit purchases. It would not be unusual for someone with a low rating to be offered a 10-14% or higher interest rate on a used car loan when the prevailing rates for someone with a good credit rating would be about 7% or less. That was prior to the recent recession. Lenders are much more conscious of the defaults in subprime loans that have occurred over the past 5 years. Many have stepped away from the subprime market completely. Thus, for many lenders, either you qualify for a loan or you don’t. The subprime loan is no longer an option for many traditional lenders or many borrowers.

There are still some institutions that will lend to people with slightly less than perfect credit; they are known as credit unions. Why? Because credit unions take a more holistic approach to lending to their members. The FICO Score is important, but is not the only factor considered when lending. A credit union may require a higher down payment of subprime borrowers and/or ask them to pay a slightly higher interest rate. They will look at the applicant’s employment; how long have they worked for the same company? How long have they lived in the same home or neighborhood? How has the member managed their credit over the past 24 months? The answers to these questions may increase or decrease the interest rate or down payment.

As an example, let’s say a FICO score of equal to or greater than 740 is the target score for the institution and someone in that score range will get a rate of 2.99% for a new car loan with zero down. In this case, if someone misses the target by a bit, say the member comes in at 680, the credit union would likely make the loan with a somewhat higher rate than the base rate to help the member. Instead of 2.99%, perhaps the loan would be for 5.50%.

In this case, a car loan of $15,000 applied for a borrower with a 740 score and a borrower with a 680 score, there is a 2.51% difference in the loan rate (2.99% APR vs. 5.50% APR). The borrower with the 740 score will pay only $934 in interest over a 4 year period where the borrower with the lower score might pay as much as $1,745; a difference of $811 over the four year loan term. The borrower may not only be required to pay a higher interest rate, they may have to come up with money for an additional down payment. Subprime borrowers are often called upon to have a higher equity in their security than those with preferred rates. That is an additional cost to the subprime borrower. That is money that has to come out of savings leaving the borrower with reduced liquidity. Another cost is the loss of earned interest on the money used for the down payment. Let’s say the borrower has to put up an additional $3,000 in order to qualify for the loan, $3,000 in a savings account at 1% APY for 4 years would have earned $125. That’s better than spending an additional $800 in interest expenses.

Avoid these increased costs by managing your credit correctly.

• Pay your bills on time and pay more than the minimum when possible.
• Pay down outstanding balances.
• Avoid using your entire credit available limit
• Only apply for credit when you want it. Don’t apply for a card just to get a discount!
• Read your credit contracts. Don’t get caught in a consumer trap. 

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Are you planning on buying a home? This is one of the great times to purchase one. Loan rates are low and home prices are starting to rise!  If you are ready to buy, visit our next Homebuyer's Seminar here at the Meriwest Credit Union main office on Sept. 8th. Get all the details you need to finance your home purchase! 

Curious about rates? Here are some links to our current interest rates on consumer and home loans:

Auto Loans - New and Used

Home Loans

Equity Lines of Credit