The “Miracle” of Compound Interest

Ok, so it’s not really a miracle. That just happens to be what the financial specialists like to call it. However, compound interest plays an important part of how you manage your mortgage, so this month we are going to focus on how this concepts plays into your long term plan.

Compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding. A bank account, for example, may have its interest compounded every year: in this case, an account with $1000 initial principal and 20% interest per year would have a balance of $1200 at the end of the first year, $1440 at the end of the second year, $1728 at the end of the third year, and so on.

Your financial future depends on this concept. Unless you are someone that thinks the government will take care of you into old age, you need to save money. You need to have money for living expenses, you need to have insurances for the unexpected, you need to have funds set aside for emergencies, you need to have money put away for when you reach the point where you are no longer physically able to work. If you save money and that money is compounding interest you obviously have less to save to reach the point where you have that comfort level. If that passive income then earns more money for you by compounding additional interest you are making your money work for you.

Why does this affect me in the mortgage world? Most people I deal with for mortgages are focused on their mortgage rate and how to eradicate that mortgage as quickly as possible. People see their Truth in Lending disclosure and the ridiculous amount of interest they will pay over the course of the loan and all of their focus shifts on avoiding that. For example, if you are 25 years old and you take out a $200,000 loan you will pay $143,739 over the course of 30 years. I could write a whole different newsletter about why paying all of that interest still outweighs renting but the point I want to drive home today is that if your focus is on saving money instead of earning more you will not be able to outpace spending. Also, every extra payment you make to the mortgage lender gives them the leverage advantage until the day you pay off that mortgage in full.   If you have been paying extra money towards principal and then get hurt at work, fired, laid off, etc. how will you pay your mortgage? If you are not insured properly and don’t have enough liquidity you may end up going through the foreclosure process and all of that money that you put into that house will no longer be yours. After all, which house do you think a lender will be more patient on during the foreclosure process? The one with 10k in equity or the one with 100k?

Does this mean that paying extra on your mortgage is a bad idea? Absolutely not. What it means is that you have to prioritize your plan. Do you have savings? Do you have an emergency fund? Do you have disability insurance? Do you have life insurance? Are you max funding your retirement accounts? If you said no to any of those questions your focus should not be on paying additional to the principal on your mortgage. If your answer was no to any of those questions you may need to work with a financial professional to help get that part of your plan on track. If that is the case please let me know. I work with several financial planners and would be glad to match you up with someone.

Thank you for taking the time to read this month’s newsletter. If you have any questions or suggestions for future topics feel free to reach out to me at brian@teamhuntonmortgage.com.

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Is it time to Refinance?

But the TV says it’s a good time to refinance….

When we have a mortgage interest rate dip it apparently makes for good news. Good Morning America had a segment on NOW being a great time to refinance because of how great the rates are and my wife asked me (for about the 100th time), “Why don’t we refinance?”  After I explained the reasons why it doesn’t make sense for us I got the inspiration to tell everyone when the best time to refinance really is.

Here’s the answer. The market has no bearing on if it’s a great time to refinance.It is all relevant to your overall goals and financial strategy. Refinancing has so much more to do than with interest rates. Getting a lower interest rate could be what some people’s goal is but it is just one of the motivations.

You can look at refinancing for…
a lower rate,
for a fixed rate,
for a shorter term or a longer term,
for equity harvest for a number of reasons
for debt consolidation,
among other strategies.

The point is that each person has their own unique factors in their life that may have a different motivation and getting a lower rate isn’t necessarily the best idea.

Here’s an example.I had a client come to me that had gotten in over their head with some poor credit card decisions that affected their credit score. They had a 5% rate on their mortgage (which was low to the market at that time) and equity in their home. Their concern was that they didn’t want to give up their rate but at the same time were worried that their cash flow issues would wind them up in foreclosure. We came up with a two part plan to help them save their home and lower their stress.

First, we refinanced the house and used their equity (which was an unused asset) and consolidated their payments. Their new mortgage had an 8% interest rate because of their credit score but overall their payments were lower than what they had been putting out in total payments prior to the refinance. This also took their debt, in their circumstance their bad debt, and made it tax advantaged debt. The second part of the plan was credit repair so their goal over the next 12 months was to make sure that they recovered from their bad decisions.

Once we got to the point where their credit had been repaired about 14 months later, we refinanced them back into a 5% rate and lowered their payment again. This plan didn’t negate the debt they had accumulated but had positioned it so that they were able to apply more to principal to lower that debt more quickly and also to save their home.

When is it a good time to refinance? There is only one way to know. Get an evaluation. With minimal information I can look at your current loan and evaluate your situation to let you know what things are open to you. Right now is a GREAT time to take advantage of that. Rates are low but also very volatile and could move higher at any time and capturing that lower rate may be the key to opening up some options for you. The last quarter of 2014 saw a huge amount of new purchases that brought values up in many areas so if you need a little more equity to have a refinance make sense for you it might be there now.

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Resolution to change or to embrace who you are?

Resolution to change

or to embrace who you are?

After seven seasons, this past fall Sons of Anarchy had its series finale.  If you liked this show then you never missed an episode and the rest of you think I’m crazy for starting this newsletter talking about a television show that centered on a fictional outlaw motorcycle club.  The protagonist spent the better part of the seven seasons trying to get his club away from being outlaws and into legitimate business.  He spent every season committing some pretty heinous crimes to get to that point but nonetheless this was the stated purpose.  In the last episode he states to his father figure that he thought he could change but he really can’t and that at the end of the day he will always be a criminal so he embraced it.

As I watched this episode I was feeling pretty burnt out from working 50-60 hour work weeks.  I felt like I never had the time to sit back and enjoy life because whenever I slow down I feel like I should be doing more work which then ruins that down time for me.  I thought back to my first newsletter of 2014 where I told everyone that 2014 would be THE year that I finally took it easy and enjoyed the life that my wife and I have built together.   I talked about more time with family, more vacations, and more dinners out.  I sat back and thought that evening that I just need to embrace who I am.  I am always going to be the guy that works around the clock.  I am always going to be the guy that isn’t satisfied with any modicum of success with what I do and will always strive for more.  I just need to understand that’s who I am and embrace it.

At the end of the day though, there has to be a moral to the story.  The moral is that no matter what it is you need to embrace, be happy doing it.  Every person thinks they will be happy “after” something is achieved or “if” their circumstances change in some way.  My advice is to take the “after” and the “ifs” out of your life.  Be happy now.  If your goal is to lose weight and think you will be happy after you do try to be happy with the person you are already and that you have ability to reach more goals.  Happiness is a mindset not a goal.  Enjoy all the time you have now and focus on the present you.  Keep that perspective and see how it changes your relationships and helps you reach your goals.

Since we have established that my New Year’s resolution is to embrace being a workaholic, give me a call so I can help you strategize on how to buy your new home this year or save money on the mortgage you already have.  Please don’t let me have any down time; I’m looking forward to 2015 being even greater than last year.

Happy New Year!

All the best to you, your family, and your organization,
Brian
Brian Hunton
MBA Mortgage – Team Hunton
Licensed Massachusetts Mortgage Broker- MBA Mortgage Corporation Athol Branch identification #401084- License #MB2880-100. Licensed by the Massachusetts Division of Banks. License #MB2880 Licensed by the New Hampshire Banking Department. License #11440-MBR Licensed by the Rhode Island Division of Banking. License #20072210LB FHA Approved Broker Licensed by the Department of Housing & Urban Development. License #28012-0000-2 NMLS #2880
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Reasons to Buy & Sell in Winter !

Buying in the winter… 
 
  
 

Traditionally, fewer homes are sold during the winter months of December, January and February nationwide.

Astute home buyers can take advantage of this drop-off, and potentially find a “better deal”.
There are a few reasons why.

 

1. There are fewer homebuyers in the winter, this means you have more time to make solid informed offers on properties you really like.

2. House prices traditionally are at their lowest in December. Sellers who are serious about selling and have had their homes on the market since spring may be anxious to accept an offer they may not have considered earlier.

3.  Mortgage Processing can go quicker during the winter months. With less volume, paperwork tends to be processed smoother and faster. Meaning your closing could happen faster than in the spring or summer time.

4. Realtors typically have more time int he winter to really navigate your housing wants and needs, meaning you get more personalized attention. 

5. You will be able to see how well the heating system is working. Most buyers don’t realize a homes heating system is sub standard until the winter after they buy. You can also get a good idea of how well the home is insulated and any other winter home concerns!

 

 

Selling in the Winter 
You know buyers in the winter are serious! There are steps you can take to brighten your home and make the showing pleasant and enjoyable for your buyers.  

1. Manage the Snow –

  • Continually shovel a path through the snow, especially if it’s still falling.
  • Footprints on freshly fallen snow will turn to ice if the temperature is low enough, so scrape the walk.
  • Sprinkle a layer of sand over the sidewalk and steps to ensure your buyers’ stable footing.
  • Remember to open a path from the street to the sidewalk so visitors aren’t forced to crawl over snowdrifts.

2. Use Natural Light – 

  • Pull up the blinds, open the shutters, push back the drapes on every window.
  • Turn on every light in the house, including appliance lights and closet lights.
  • Brighten dark rooms with few windows by placing spotlights on the floor behind furniture.
3. Heat up –
  • Pump up that thermostat. It’s better to heat the house a degree or two warmer than usual and then set the temperature at normal. This prevents the heat from kicking on when the buyer is present, because some HVAC systems are loud.
  • You want the temperature inside to be comfortable and to give the buyer more of a reason to linger, especially on a cold day.
  • Light the fireplace, but open the damper, place a grate in front of it and don’t leave it unattended for very long. You don’t want your house to catch fire!

4. Serve & Make Smells of Winter Foods at Open Houses

  • Don’t serve muffins or any other kind of food that can be popped into the mouth because you want buyers to stay for a while and notice elements they might otherwise miss.
  • Hot soups such as tortilla, potato or squash are delicious on a cold day.
  • Chili or stew is a great alternative to soup, but leave a receptacle for disposal of the paper bowls and spoons.
  • Hot apple cider or cups of cocoa make great beverage choices.
5. Provide Info about things
  • Attach printed cards to items and in rooms that provide further information the buyer might miss or might not know. You have so little time to make an impression.
  • If you have an antique chandelier in your dining room, put a card on it that discloses its age and other important details.
  • If you have removed the washer and dryer from the laundry room, attach a card to the wall describing the room.
  • If your basement stairs are steep, attach a card to the railing that cautions buyers to watch their step.
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Four Reasons Why Mortgage Rates Could Go Up (and why it matters to you)

Can you afford to lose $175/month?

Did you know that the monthly payment on a $200,000 30 year mortgage would go up by a whopping $175 per month if mortgage rates go up slightly from 3.5% to 5.0% like they were just 3 short years ago?!

 

Here are four reasons why mortgage rates could go back up, costing you at least $175/month:

 

#1 – End of the Fed’s $2 Trillion “Quantitative Easing” Programs

Here’s a chart showing how $2 trillion of government intervention drove 30 year mortgage rates down by over 2% in the last few years:

 

The Fed’s unprecedented intervention in the bond market was known as “Quantitative Easing” because the Fed increased the “quantity” of the US money supply by purchasing over $2 Trillion of mortgage bonds and US Treasuries. This enormous government intervention in the markets (known as QE1 and QE2) has consistently kept mortgage rates down below 5% during the last few years.

 

 

As unemployment lessens and the economy recovers, the Fed will stop their intervention.  In fact, they have indicated that in the future, they may even decide to SELL some of the $2 trillion in bonds that they have purchased over the past few years. This leaves us wondering, “What happens when the bond market loses its biggest buyer?” Further, “What happens when the biggest buyer becomes the biggest seller?” This undoubtedly means that interest rates are more likely to be higher than lower in this scenario.

 

#2 – Uncertainty Surrounding Fannie, Freddie, and the FHA

 

From 1996-2003, the government was steadily involved in 85-90% of mortgages.  From 2003-2008 we saw the rise of the sub-prime mortgage and the government’s involvement dropped to about 60% of mortgages.  After the mortgage crisis, the government’s involvement has risen to almost 100% of all mortgage transactions.  If you track interest rates over these same periods you can see the largest spread between interest rates (government vs non-government) was during the period with the least amount of government involvement.

 

The government’s involvement in the mortgage markets is part of the reason why mortgage rates are so low today. In fact, mortgages that don’t include any government involvement (like jumbo mortgages) carry interest rates that are 0.25% – 2% higher than mortgages that do include government involvement (like conforming and FHA mortgages).  There are many proposals on the table now to reduce the role of Fannie Mae, Freddie Mac, and the FHA in the US mortgage markets so there is the potential to see rates go higher by .25% to 2% depending on what the final outcome of the government’s involvement in the mortgage process is determined to be.

 

#3 – Over-Regulation of the Mortgage Market

The Dodd-Frank financial reform law and other regulations have resulted in tougher lending standards and higher legal costs for the mortgage industry. As you can expect, many mortgage lenders will be passing these higher costs along to the borrowers who borrow money from them.

 

For example, one of the new rules mandates that all mortgages that aren’t considered “qualified” will carry higher interest rates.  There is a lot of debate going on right now about the definition of “qualified”, but generally you can expect that most adjustable rate mortgages, interest-only mortgages, and loans that involve less than a 20% down payment will carry higher interest rates in the future than they do today.

 

#4 – Skyrocketing US Government Debt

There are two ways that the ballooning US government debt situation will drive mortgage rates higher:

 

1 – More Supply than Demand

More government debt = more supply of bonds in the market

More supply of bonds = lower bond prices

Lower bond prices = higher interest rates

 

2 – Risk of More Inflation

More government debt = higher risk of inflation

Higher risk of inflation = higher mortgage rates

 

The main question is not whether interest rates are likely to go up in the future… that answer is obvious. The main question is what can you do about it RIGHT NOW?

 

What should do with your current mortgage?

 

What are your options when it comes to buying a new house and locking in a low interest rate?

 

How can you take advantage of the clearance sale going on in the mortgage and housing market without risking your family’s financial future?

 

My clients face tough questions like these every day. That’s why we are here to help people like you make the right decisions.  If you need advice, or know someone who does, please contact us so that we can help you.

 

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When Banks Compete, You Win! Right?

The Financial Race.

We have all heard it before.  Seen the commercials, had a pop up on the computer, heard an ad on the radio.  Certainly seems like the best idea ever.  The lower the rate,  the lower your payment and why not search the entire internet to find that person that can give you the lowest rate?

Here is what people don’t realize.  You aren’t really searching a whole internet of bankers and mortgage brokers.  You are searching that particular site of the people that have chosen to pay to be there.  Some mortgage professionals have decided the best way to build their business is to pay for leads.  When you put an inquiry into a site your name is then sold to any number of people depending on how much the person buying the leads is willing to pay.  For example, if a mortgage provider pays $100 for every name that is sent to them, they may be the only one to get your name.  However, if the price is only $10 a name then the name might be sold to ten potential mortgage providers.  In any event, you don’t have all banks competing and potentially not even the best banks completing.

You may still end up with a great rate or great service and be completely happy.  Just because someone buys leads to start their business or to supplement their business model doesn’t mean that they are incompetent and can’t do a good job.  However, in the past month alone I have had two examples of where internet shopping went bad for people.

First I had a friend tell me that she had responded to an online solicitation.  After she got through the typical embarrassment of someone saying to me that they talked to someone else before talking to me because they like to keep their information “private” from friends she went on to ask me for my advice on the situation.  I obliged and went over the paperwork with her and my concerns on whether the mortgage would close based on appraisal concerns, which is typical when you have an online mortgage originator who doesn’t have an intimate knowledge of the area.  Everything else appeared normal and told her to proceed as long as she was willing to risk the price of the appraisal.  I followed up for the next few weeks and was told that her mortgage broker told her she was “all set, closing soon” at each time.  Then I got the call out of the blue with, “’You were right, I should have listened to you.  He just called and told me he can’t get it done because of the appraisal.”  I’m married so I rarely hear the words, “you were right” so once I realized what I heard I continued with the conversation and while it didn’t feel good it hadn’t worked out for her it was good to hear her state why this is why you need to know and trust the people you work with and would be sending me every referral she had.

The second example occurred when I got a call from a Realtor that had someone who had shopped online for a mortgage to “get the best deal” and wasn’t sure if they were getting a good deal.  He asked if I could help them understand the disclosures that had been sent to them by a mortgage originator in Boston.   As a courtesy to him I told him I would help them understand their product and paperwork in the interest of helping him get them into their new home.  This couple stated that they had received two sets of disclosures yet really didn’t know what type of loan they were in or any of the caveats with it.  The loan was set up correctly and was the correct product so the concern here was that when someone spends their day making cold calls and paying for leads then their business is not based on service and in face interaction.  Being able to see someone in person gives me the opportunity to read their body language so when there are things that it looks like they need more explanation on I can then provide that for them.  That’s not something that can occur on the phone or internet.  If knowing and understanding what you are doing as you make the decision to take on the biggest household debt you have then meeting with someone local is likely to be your best bet.

We all fish in the same pond.  Rates are determined by lenders, the secondary market, and mortgage backed securities.  Most professionals will have access to the same products so make sure you know the person has a strong reputation for professionalism, service, and community support.  Make your decisions based on referrals of family and friends that have had positive experiences and remember the best rate in the wrong mortgage will cost you more in the long run than a good rate in the right program.

 

 

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Setting the Foundation for Buying a Home in 2013

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Most people realize this is an incredible time to buy a home.   Buying a home is a major milestone in most people’s lives.  How do you put yourself in the best position to make that dream a reality?

There are a few things to be prepared for in terms of getting a mortgage.  Lenders will review your credit, employment, income and assets.

Check out your free credit score with one of the online services or call us to get an idea of where you stand.  We generally want to see at least a 640 credit score and no more than one late payment of over 30 days within the last 12 months.  Take a look at your credit card balances.  If they are more than 30% of your total credit allowed then you need to have them paid down.  The first reason is that this has a significant impact on your overall credit score.  Secondarily, if you are carrying a large percentage of non-tax advantaged debt you should consider putting a plan in place to reduce those balances before getting a mortgage.

Lenders like to see consistency in your employment with at least two years in the same line of work.  Why is this a concern?  If you have a little job security then you are a risk of losing your ability to pay for the mortgage debt.  If the economy has caused you to move around within your field in the last two years but you are consistently employed at the same income level you should be ok.  Large and/or unexplainable gaps in employment may add to the scrutiny in terms of getting you approved.  If you are considering a career change or think there is a chance that your employment may change, you may want to rent while you are waiting out the changes.

Lenders allow 29% of your gross income when they qualify your mortgage amount.  This percentage is for your principal, interest, taxes and insurance on your potential home.  Having a consistent two year history of income is the easiest way to be approved.  If you have additional income like overtime, child support, etc. it needs to be a consistent two years in order for this to be added to your overall ratio.  Generally, your consistent base salary is going to set the tone for your approval.

Assets determine your ability to pay a down payment or pay for closing costs.  Even if you are using a no money down loan and having the seller pay your closing costs, having the assets available make it so that you aren’t limited to one product over another.  Also, the assets are considered reserves.  This means that if you lose your income due to injury or job loss, how many months could you survive?  This isn’t necessary to have but creates much less scrutiny as well as flexibility with your allowable ratios which could make the difference in getting the house that you desire.

Lastly, be prepared for a longer closing time.  I have closed loans in as little as eight days and have seen a general cycle at around 30 days.  However, there is a significant increase in the scrutiny on buyers and the homes to be purchased.  Combine this with the huge volume of people refinancing at every lender due to the low interest rates and you are now looking at a 45 and sometimes 60 day cycle.  If time is important to you, don’t delay your decision to move forward.

Not sure if you’re ready yet?  Give us a call.  We will review all four factors in qualifying for a mortgage with you and give you tips and time lines if you aren’t in the best position yet.  The process takes very little of your time and we are always happy to help you achieve home ownership.

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Our Give Thanks Winner

With 208 votes we are happy to announce that the Athol Animal Control has won our first ever Give Thanks Contest!!!!

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Thanks to all the hard work of our three non profits chosen for this contest!

The Final Vote Tally’s

– Athol Animal Control – 208 votes
– North Quabbin Chamber of Commerce –  198 votes
-Montachusett Veterans Outreach Center – 83 votes

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Buying in a Fall Market.

All of the pundits have been pushing the “historically low rates” and this “is the best time to buy in years” for what seems like two years to me.  I’m hear to tell you that NOW is finally the best time to buy.  Here’s why.

There are a number of things pointing to this being the crest of the time to buy.

Some are obvious.  Yes, rates are lower than they have ever been.  While this seems like it’s a good thing for buyers, it has led to another issue for buyers.  The combination of low rates and low prices has opened the door for many people that haven’t been able to be a part of the market in the past to now be able to buy homes.  Adding this supply of buyers saturating the purchase market is that fact that even though many home values have leveled off, several sellers are still underwater with their mortgage and cannot sell or feel like they need to recover more value before they can sell.  Large supply of buyers and smaller supply of houses is causing a transition into a sellers’ market for the people that can afford to sell.  Buying ahead of this rush will prevent potential bidding wars and help to secure the best price possible for the house.

Why buy in the fall?  Nine years in a row my busiest time of the year for purchases has been October through December.  The large lot of people selling wait until school is back in session, vacation season is over, yet want to be finished with their house sale before the holiday season or want to start the New Year in a fresh location.  Almost half of my business occurs in these three months.  If you’re interested in being a home owner, don’t stand on the sidelines while the other buyer’s take advantage of the most aggressive time of year for sellers.

How about the need to make sure there are no hidden surprises?  This is the safest time to buy in terms of being able to see what the home truly looks like.  With a New England winter soon to set in, home roofs and landscaping will be covered in snow.  Last winter may have been mild but two years ago we didn’t see the ground for over three months.  Getting ahead of that to be able to see landscaping, paved driveways, etc. can prevent costly surprises in the spring.

If you want to make sure you are part of this buying season you need two things.  You need to get your financing in order and contact us for your mortgage pre-approval.  Knowing your financial options is paramount.  Second, you need a professional real estate agent on your side.  Too often people want to contact the seller’s agent directly or just search on their own.  Professionals can tell you what specific markets look like, areas with a high or low percentage of price cuts, and ratios of sales to asking prices.  This is all part of the effort of helping you negotiate the best price for a house.  Once we have your pre-approval done, ask us who the best real estate agent will be for you.  We would be happy to put you in touch with the best person to help you, your family, and your friends achieve their dreams of home ownership.

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Credit Score Tips

The type of credit that you have open – 10% impact on your score. A good mixture of auto loans and leases, credit cards and mortgages is always best. Too many credit cards is not a good thing, and having a mortgage does increase your score.

Practical steps to improve your score in this area are:

  1. Having 3-5 revolving credit cards open is optimal.
  2. Having a good mix of auto loans, credit cards and mortgages is positive for the score; rather than having a concentration in credit cards only.

The number of recent inquiries that have been made by creditors – 10% impact on your credit score. Inquiries affect the score for one year from the time the inquiry is made. Personal inquiries do not count toward your score. In other words, you can check your credit report as often as you like and that won’t affect your score. The score is only affected if a potential creditor checks your credit. Potential creditors include credit card companies, auto finance companies, department stores and mortgage companies.

The reason that inquiries impact your credit score is because the scoring system assumes that if you have many recent inquiries, you must be strapped for money and in some type of “panic” mode, trying to get credit wherever you can find it. The system also assumes that all these inquiries will eventually result in new accounts being opened, and as stated before, the system doesn’t like you to open new accounts and punishes you by giving you a lower credit score.

Here are three practical steps that you can take to improve your credit score in this area:

  1. Multiple auto and mortgage inquiries are treated as only one inquiry if made within 14 days of each other. So, it is better to shop for a car or a mortgage over a two week time-frame, rather than to prolong it over a longer timeframe.
  2. Don’t apply for a lot of credit or open multiple credit cards at the same time.
  3. If you are thinking of applying for a mortgage within the next 90 days or so, it would be good to wait until after your mortgage closes before you apply for any new credit.
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