Banks vs. credit unions: What’s the difference?

By Sabrina Karl

When shopping around for a top-rate savings account or CD, you’ll likely encounter several credit union options. If you’ve never banked with a credit union before, you might be wondering what the difference is between these institutions and traditional banks.

 

In short, banks are for-profit institutions that must satisfy their shareholders, while credit unions are not-for-profit with a focus on their member customers. And while almost anyone can open an account with a bank, only customers meeting certain geographic, employer, or other affiliation criteria can join most credit unions.

 

As a result of their profit status, banks tend to have higher fees and lower interest rates on savings. They may also charge more on loan and credit products. But their strong profit-making ability means they generally offer more products, branches, and ATMs, as well as better online and mobile options.

 

At a credit union, you may find better savings rates, lower fees, or lower-interest loans, as well as possibly stronger customer service. However, many credit unions offer less branch and ATM accessibility, and many have less customer-friendly mobile sites and apps.

 

You’ll also need to become a credit union member to be a customer. Each credit union defines a “field of membership” to indicate its affiliation or residency requirements. However, some credit unions accept members nationwide through a very broad member definition.

 

As for safety, the institutions are equivalent. Whereas your deposits at a bank are federally insured up to $250,000 by the FDIC, credit unions carry the same level of insurance from the NCUA.

 

For the highest convenience, broadest accessibility, and latest technology, banks will suit some consumers better, but at the cost of potentially higher fees and lower earnings. But for those wanting a top deposit rate or enhanced customer service, a credit union may be the winning bet.

Will changes in the Fed interest rate impact mortgages?

By Sabrina Karl

Though the Federal Reserve hasn’t changed interest rates since December, the prospect of them cutting rates has been much in the news. If you’ll be shopping for a mortgage or a refinance, you may wonder whether the Fed’s actions could impact future mortgage rates.

 

What the Fed reviews every 6-8 weeks is the Federal Funds Rate. This is what banks pay to borrow money from each other overnight to meet their required daily reserve levels. The higher the Fed rate, the more expensive it is for banks to do business, and as a result, the more they’ll charge borrowers and pay savers.

 

When the Fed raises rates, as it has done repeatedly the last three years, it primarily affects short-term and variable rates. The most prominent impact shows up in credit card rates and CD and savings account rates. The higher the Fed rate, the more banks will charge on credit card balances, and the more they’re willing to pay consumers for deposits into CDs and savings.

 

Auto loans can also be affected, as they are short- to medium-term loans. But the impact of Fed rate changes is less dramatic since auto loans generally last at least three years.

 

This leads us to mortgages, which are generally much longer term loans. More important, though, is that mortgage rates are largely influenced by market forces, such as demand from bond investors. This far outweighs the influence of the Fed, making mortgages significantly less susceptible to Fed rate fluctuations. In fact, there have been instances in history where the Fed rate and mortgage rates moved in opposite directions.

 

In short, no one can’t predict where mortgage rates will head anymore than reliably predicting exactly what the Fed will do. Forecasters will forecast, but nothing is certain until it actually happens.

How to protect your bank account from loan scammers

By Sabrina Karl

Fraudsters have honed numerous ways to separate you from your money, from outright theft of your personal information to sneaky ways of getting you to divulge it voluntarily. Since one of their deceptive tricks is posing as a loan provider, look for these signs of a legitimate lender if you’re looking to borrow money.

 

The Federal Trade Commission enforces numerous regulations on lending operations, including requiring all lenders to register in states where they do business. So one of the first things you can verify is whether the lender is registered in your own state.

 

The FTC also prohibits soliciting loans by telephone. So a marketing call for loan products is a strong tip-off that you’re dealing with a loan scammer. Also beware of offers mailed to you or pitched at your front door.

 

Legitimate lenders are keenly interested in your credit history when determining whether to approve your loan. So watch out for anyone touting guaranteed approval. Also beware if the lender never discloses that they’ll be pulling your credit report.

 

Another red flag of loan scammers is requiring you to pay application fees by providing them a prepaid debit card, a gift card, or a wire transfer. Although legitimate lenders are likely to charge fees, they typically add them to your loan balance rather than require upfront payment.

 

Lastly, any pressure to act very quickly before the offer expires is reason to pause. Legitimate loans may indeed have limited windows, but they will be sufficiently long to allow you to weigh options and make a careful choice.

 

A primary goal of loan scammers is extracting your bank account and social security numbers. So if you notice any of the warning signs above, be sure to keep your information private and move onto a lender you can verify.

APR vs. APY… What’s the difference?

By Sabrina Karl

Anyone who has shopped rates – whether for putting money in a CD or savings account, or for borrowing with a mortgage or credit card – has noticed banks and lenders using two acronyms that are almost, but not quite, the same. Sometimes they quote APR, other times APY. What gives?

 

APR stands for Annual Percentage Rate, and is the basic rate a bank either pays for deposits or charges for a loan. It’s the fixed percentage applied to your balance over the course of the year.

 

But as many savers and borrowers know, interest grows when it compounds. And that’s where APY comes in. APY stands for Annual Percentage Yield, and it’s the rate you’ll actually yield as a result of compounding.

 

Mortgages typically compound monthly and credit cards daily. For bank deposits, compounding may occur this often, or may just happen quarterly or semi-annually. The more compounding periods in a year, the bigger the gap between APR and APY.

 

That’s because interest is charged on previous interest each period. Do it just twice a year and the compounding effect is slight. But if it’s done 12 or even 365 times in a year, compounding will inflate the APY to a noticeably higher number than the original APR.

 

From there it’s easy to see why mortgage and credit card lenders typically quote the lower APR, while banks soliciting your deposits tend to quote the higher APY.

 

How much of a difference can it make? Take a mortgage quoted at 4.5 percent APR. After compounding monthly, the rate you’ll actually pay by the end of the year, or the APY, will be 4.59 percent.

 

Understanding this allows you to ensure you’re comparing apples to apples – APR to APR, or APY to APY, but never mixed – whenever you shop rates.

Why you should still consider local mortgage lenders

By Sabrina Karl

Anyone shopping for a home loan can see that online players have become a dominant force in the mortgage marketplace. Whether it’s big-name traditional banks or online-only lenders, the push to shop nationwide is as strong as ever.

 

But working with a local lender can still offer benefits, especially for certain types of homebuyers.

 

When you apply locally, you’ll be working directly with an individual loan officer, and most likely will meet with them face to face. This may seem simply quaint to some, but for others it can feel like a welcome friendly face during an otherwise intimidating process.

 

The feel-good aspect of personalized service is only part of the equation, though. For instance, self-employed homebuyers or those with multiple income streams may have difficulty gathering all their documentation, and a loan officer can assist in that process.

 

Mortgages by local lenders can also be approved more speedily, in some cases, since you are applying to an individual instead of a massive department that receives hundreds of applications a day.

 

A local loan officer may also be more flexible in approving your the loan. Whereas big lenders have rigid underwriting guidelines, a local lender may have more leeway. This is particularly true if it will keep the mortgage rather than sell it to Fannie Mae or Freddie Mac.

 

Local lenders often can even help if they foresee your application being rejected. They may be willing to work with you on steps that will strengthen your application so that your mortgage can be approved in the near future.

 

Rates and fees will of course be an important consideration. But for homebuyers who may want or need a more personal touch, a speedier process, or greater approval flexibility, the lenders in your community are worth a look.

 

How to foil phone scammers trying to get your bank info

By Sabrina Karl

Whether or not you’re familiar with the term phishing, you’ve most likely been a target. That’s because phishing scams attempt to access the private banking info of millions of Americans every year. Fortunately, easy-to-follow rules of thumb can help you thwart phishing criminals and keep your money safe.

 

A common strategy of phishers is to call you directly, presenting themselves as your bank. They may suggest there’s an issue regarding your account that needs your urgent attention, or they may simply say they’re conducting routine account maintenance. What they’ll likely ask for next is your bank account number, your banking login credentials, or your social security number.

 

Private information like this should never be provided over the phone to someone who has contacted you, since you have no idea who is actually on the other end of the line. No matter how official and convincing the caller may sound, someone calling to ask for this type of information should raise a red flag.

 

If the scammer doesn’t succeed in coaxing this information out of you in the initial phone call, they’re likely to try a couple more tactics. One is to urge you to call a phone number they provide for your bank, or to visit a specific web address that they provide. These are most likely spoofed numbers and sites, with calls being answered by accomplices of the caller and the fake website siphoning your sensitive information or installing malware on your computer.

 

The way to thwart them is to not provide sensitive information during the initial phone call, and to avoid calling any number or visiting any website the caller provides. If you want to contact your bank, call them at the phone number listed on your statements, or type your bank’s known web address directly into your browser.

Can I get a mortgage without a credit history?

By Sabrina Karl

When you apply to a lender for a home mortgage, one of the most important things they consider is your credit score. But what if you don’t have a credit history? Can you still get a mortgage?

 

Your credit report rates your worthiness to receive new credit by scoring the length of your history with credit cards and loans, along with your pattern of on-time vs. delinquent repayment. But for consumers who have shunned credit cards and who have never taken out a car or home loan, there is little or no information to inform their credit score.

 

If you’re in this situation and want to buy a home, your path will be a little trickier, or at least more cumbersome. But it’s not impossible to find a mortgage and a lender that will qualify you using nontraditional credit evaluation.

 

There are two main paths forward for homebuyers without a credit score: apply for an FHA mortgage or find a lender that does “manual underwriting”.

 

FHA mortgages explicitly allow for applicants who have a thin or non-existent credit file. In lieu of a credit history, FHA underwriting can evaluate your history of paying rent, utility bills, and insurance premiums. It also offers the ability to buy a home with a lower down payment of 5 percent or even less.

 

But FHA loans come with certain fees in exchange for their easier qualification terms and government backing. So if you have more than a 5 percent down payment available, you may instead want to look for a lender that offers manual underwriting.

 

These lenders aren’t common, but check smaller banks, online lenders, and local credit unions for this option. And be prepared to provide documentation of 12 months’ payment history for your rent and your utility, phone, and insurance bills.

Watch out for check overpayment scams

By Sabrina Karl

As sure as the sun rises, fraudsters will always try to separate people from their money. Bank accounts are particularly susceptible since they don’t carry the maximum liability protection that credit cards do. But knowing the most common scams can help you keep your account — and your money — safe.

 

Various agencies accept and track consumer fraud complaints, including the Federal Trade Commission, the Consumer Financial Protection Bureau, and the Better Business Bureau. In addition, many states also have their own consumer protection department.

 

From the millions of complaints received by these agencies, we know what the most commonly reported scams are, and one of these is the check overpayment scheme.

 

The scam targets those who are selling something via Craigslist, the classifieds, or another public avenue. The seller will get an offer, sometimes a generous one, from someone who appears very motivated to secure the deal and move the transaction quickly along.

 

After reaching an agreement, the buyer will later tell the seller some reason why their check will be for more than the purchase amount. They may say it was an error, or that the extra funds will cover fees they’ll incur from an agent or shipping representative. They then request that, after you deposit their check, you wire the surplus to a certain account or Western Union location.

 

The scam is that the check they’re providing will bounce, as it is counterfeit or forged. Your bank may not catch it immediately, but once they do, you will be out the full amount, and perhaps also your sale item if you shipped it.

 

Any check overpayment with a request to return the difference is a red flag, and you should abruptly end the transaction. In addition, it’s recommended you report the experience to all of the agencies above.

Does the first-time homebuyer credit still exist?

By Sabrina Karl

One of the consumer benefits that emerged from the Great Recession was the first-time homebuyer credit. Enacted by the Bush administration in 2008, the program provided a tax credit to Americans buying their first home.

Part of the Housing & Economic Recovery Act, the tax credit was available to first-time buyers who purchased their home in 2008, 2009 or 2010. Although the credit has since been retired, you may still be in luck if you qualified with a home purchase during those years and neglected to file the credit, or you became a first-time buyer later.

 

If you closed on your first home between April 9, 2008, and September 30, 2010, you could still qualify. A number of variables come into play, so the best way to determine your eligibility is to consult a tax accountant.

 

You’ll want to consider a few things before going down that path, however. For instance, on first homes purchased during the eligible 2008 dates, the credit is not in fact a true credit, as it requires repaying it with your annual tax return for 15 years after the home’s purchase. So someone claiming the maximum $7,500 credit would repay $500 per year over 15 tax returns.

 

In 2009, the Obama administration revised the program slightly, upping the credit to an $8,000 maximum and forgiving its repayment for those living in the home as their primary residence for at least 3 years after taking the credit. So if you bought during 2009 or 2010, but sold or moved within 3 years, you’re out of luck.

 

For first-timers who bought after the program’s 2010 sunset date, you may still have options. Many state and local governments offer their own programs for first-time buyers, so researching what’s available in your area could turn up other financial benefits.

When will my first mortgage payment be due?

By Sabrina Karl

If you’re contemplating how much to stretch on a down payment for a new home, or how much of the closing costs you can afford to pay on closing day vs. folding them into your loan, you might find yourself projecting what your cash flow will be after closing. Fortunately, mortgages have some built-in good news for you there.

 

The day of the month you close will impact how much is due at closing. But one thing won’t change, no matter when you close: You won’t have to make a mortgage payment the next month.

 

That’s because mortgages are paid in arrears, meaning for the month already passed, in contrast to how rent covers the coming month. In addition, the official due date of every mortgage is the first of the month, making it a payment for the previous calendar month.

 

Since people close on all different dates, but mortgage payments need to be the same every month once they start, your closing process evens things out by charging you the interest required to cover the remainder of the current month. Close on the 5th and about 25 days of interest will be charged at closing. Close instead on the 28th and you’ll only owe about two days of interest.

 

What happens as a result is that no one owes a mortgage payment on the first of the month following closing, since you’ll have squared up already for that month at closing. In turn, that means your very first mortgage payment won’t be due until the 1st of the second month after you close.

 

In other words, if you close on any date in April, you’ll get to skip May and your mortgage payments will begin June 1st, giving you a little cushion of time to rebuild your cash reserves.