Your Credit and Why Its Important

Money, debt, credit. These can be tough subjects to talk about. Is the topic of money considered "off limits" at your dinner table? When you're worried about not having enough money, wouldn't it be great if you could just talk about it? Bringing your financial problems out into the open gets you one step closer to fixing them.

The temptation to spend and borrow money is everywhere. Most people who use credit don't always have a clear idea of how it works or how getting in too much debt can lead to serious financial problems. The more you know about credit, the more opportunity you have to safeguard your hard-earned money and achieve financial stability.

Calculating your score

Getting the Score
To know how a credit score is calculated, it helps to see the numbers.
For example, Sharon has:

• an uneven payment history,
• a lightly better credit history,
• not very much outstanding debt,
• pursued no new credit for several years, and
• doesn’t own too many credit cards.

Her credit score is calculated in each of the five factors. Each factor below is worth 500 points. A perfect total credit score (in this example only) is 500.

Credit Score Criteria Criteria Score x’s Score and Percentage Weight Percentage Weight
Payment History (35%) 250 points x .35 87.5
Outstanding Debt (30%) 400 points x .30 120.0
Credit History (15%) 300 points x .15 45.0
Pursuit of New Credit (10%) 450 points x .10 45.0
Types of Credit In Use (10%) 425 points x. 10 42.5
Total Score 340 points

In this example, payment history is worth 35% (just over one-third) of Sharon’s total credit
score, whereas pursuit of new credit is only worth 10% of the total score. Sharon’s payment history is really important, but she doesn’t earn a big score because of her uneven payment history.

(Note: These five factors are used in FICO® score calculations, developed by Fair, Isaac and Co., Inc.)

Prepayment Penalty Mortgage
Borrower Information Guide - Prepayment Penalty Mortgages
The following information should be used as a guide and does not necessarily reflect Freddie Mac’s policies. This guide is designed to help borrowers to better understand Prepayment Penalty Mortgages and to evaluate various mortgage options.

What is a Prepayment Penalty Mortgage?
A prepayment penalty mortgage (PPM) requires a borrower to pay a fee if the borrower pays back the entire loan amount or a substantial portion of it before the end of the loan term when all payments would have been made. Generally, PPMs require that the fee be paid only if the borrower pays back the loan early, such as when the borrower pays back the loan in the first two to five years. A PPM should be an option that a borrower chooses after comparing the costs and benefits of a PPM to the costs and benefits of a mortgage that does not contain a prepayment penalty. Borrowers may choose a PPM on a 15- or 30-year fixed rate loan or on an Adjustable Rate Mortgage. Borrowers should review all mortgage loan terms and ask questions or seek help if there are terms that are not clear or are unexpected.

What constitutes a “prepayment”?
Prepayment means paying all or part of a mortgage debt before it is due, i.e., the date on which all payments would have been made if paid on schedule. Prepayment of a mortgage may occur when a loan is refinanced or when a substantial payment against the principal is made. A substantial payment is generally defined as an amount that exceeds 20 percent of the original principal balance.

What do borrowers receive in return for selecting a PPM?
Borrowers should receive a benefit for selecting a PPM such as lower fees or a lower interest rate. When considering a mortgage loan, borrowers should compare a PPM loan to a non-PPM loan. Use the following tables below to help identify the differences between these two types of mortgage loans.

How can a borrower determine if a prepayment mortgage makes sense for them?
Because a borrower usually only has to pay a penalty in the first few years of a loan, before choosing a PPM a borrower should consider how long they will likely keep the mortgage. If a borrower believes that they will want to sell their home, refinance or make a substantial payment on the mortgage in the first few years of a loan, then the borrower needs to weigh the cost of paying a penalty before taking out a prepayment penalty mortgage. In addition, a borrower should find out how much the prepayment penalty will be – the amount can vary between lenders.

Important information to remember:
• A PPM is always a borrower’s choice, never a requirement.
• Borrowers should make sure to review all mortgage loan terms and seek help for questions before signing documents.
• Prepaying means paying off the entire mortgage or a substantial portion of the principal before all payments have been made if paid on schedule to the end of the loan term.
• Borrowers need to confirm if the penalty fee is charged when a house is sold.
• Borrowers should be aware of the amount if the penalty fee is charged.
• To best understand if a PPM product is right for you, make sure to compare the PPM product to a non-PPM product.
NOTE: Borrowers should always research their options as they look for the right type of mortgage to meet their individual needs. For further assistance, borrowers may wish to contact a homeowner education or housing counseling agency in their area.