Understand home loans so you can save a bundle

You wouldn't jump-start a car battery or deep-fry a turkey without understanding what each job requires. Do it wrong, and it could blow up in your face. Yet countless Americans today are buying homes or refinancing their loans without knowing what the job entails or how the process works.

As a result, too many people pay home-loan costs that are thousands of dollars higher than they could be and end up with loans they don't understand.

A recent poll by GMAC Mortgage shows that a key misunderstanding is credit scores, their importance to obtaining a mortgage and how people can improve their scores so they can save money on home loans.

"Having good credit is critical to securing a favorable mortgage rate, so it's extremely important that consumers understand their credit score. With proper long-term planning, consumers can improve their credit rating to avoid higher interest rates and, as a result, larger monthly payments on their home," says Paul Fein, senior vice president and southeast divisional manager, GMAC Mortgage.

"A good credit score requires more than timely bill payment; consumers must be conscious of their debt-reduction efforts and outstanding revolving credit before they begin" looking for a mortgage. Many people think their credit score and their credit history are the same thing. They aren't. Your credit history shows what you did in the past and accounts for much of your credit score. But your credit score is far more important because it predicts what you will do in the future. Will you pay your mortgage on time? Will you fall behind? Will you go into foreclosure? Lenders look at your credit score for those answers.

Fair Isaac Corp. created the first credit score system in the 1980s. Even though there are different types of scores for different types of credit -- automobile, mortgage, credit cards and so on -- they all look at the same basic data. Your score is a complex blend of information gathered from five areas: your credit history; how much you owe compared with your credit limit; how long you have had credit; the types of credit you have; and how often you apply for new credit.

Among the most pervasive fallacies is that credit scores revolve around income. GMAC interviewed 1,000 consumers across the nation and found that more than 50 percent thought they could raise their credit score simply by raising their income. They can't, and you can't, either, because your credit score has nothing to do with your income level. In fact, your income does not even appear on your credit report.

The survey also found that only 42 percent knew that their payment history was a major factor in determining their credit score; 64 percent of respondents said they would check their credit only six months before buying a home. Yet it can take a year or longer to raise a credit score to a level that will qualify you for the lowest mortgage rate available.

The highest credit score a consumer could get would be 850. Depending upon whom you are talking to, 620 is a "good" score; other lenders say that it is only adequate and that "good" would be 660, 680 or 700. Every lender sets its own standards, but in most cases, a 620 will get you the "going rate" on a "standard" 30-year loan, as long as you also make a down payment. Interest-only, zero-down-payment and other unconventional mortgages likely would require a higher score.

Lenders also will look at your income, the size of your down payment and how much you have in savings. Because lenders view credit scores differently, always check with more than one lender when shopping for a mortgage.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.