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These days the most commonly used word amongst folks setting the fiscal policy and monetary policy is the unemployment rate. It has been quoted numerous times in the news channels and no wonder this indicator has taken a turn for the worse recently. So what exactly is unemployment rate? Bluntly speaking, it provides a snapshot in time of the number of persons out of the total working age population who are eligible to work, but cannot find work. 

You still with me? Let's break this down. 

The total population of the United States is 330 Million. See the graph below from FRED.

   

Now this can be further broken down as 

 

1) Civilian Non-institutional population (~260 Million) 

2) Civilian Institutional Population (~70 Million)

Civilian Institutional Population includes persons living in military installations, correctional and penal institutions, dormitories of schools and universities, religious institutions, hospitals and so forth. In order to calculate the unemployment rate, we consider only the Civilian Non-institutional population. Let's break this down further in to three distinct categories 

1A) Young Population i.e. persons who are below 15 years old: ~49 Million 

1B) Working age population i.e. persons who are between 15 and 64 years old: ~170 Million 

1C) Elderly population i.e. persons who are above 64 years old: ~41 Million 

The labor force participation rate is about 61 percent of the total Civilian Non-institutional population i.e. 61 percent of 260 Million which is ~159 Million. This indicates that while the working age population is 170 Million, the labor force participation rate is ~159 Million. So what happened to the remaining 11 Million?  These persons could have decided for various reasons to not actively look for work. They might have decided to drop off the labor force either because they have fallen off their ways, won a lottery or just decided that working is not for them. 

Out of the 159 Million persons, as of June 2020 the number of persons actively employed are ~142 Million, which leads to an unemployment rate of 11.1 percent. The graph below shows the unemployment rate since 2008 onwards.

   

For those of you who are numerically inclined, the following table gives the values for the past 6 months.

As you can see from above, the unemployment rate saw a shocking rise to ~15% in April and since then fallen to around 11 percent. Keep in mind, during the last recession in 2008-09 the unemployment was as high as 11 percent. Now do we see a V shaped recovery? Given the recent raise in COVID cases across the country and states rolling back some of the opening measures a "V" shaped recovery looks highly unlikely. 

So what happened in July 2020? At the time of writing this blog, July data has not yet been released. it is expected to be released on August 7th at 8:30am ET.

Credit Score - Magic number!!!

Have you ever wondered why is credit score so important to obtain a mortgage? Many folks are frustrated on being able to avail the lowest interest rates in spite of high credit scores. Let's demystify the theory behind credit score and it's huge impact on obtaining a mortgage.

Your credit score is the numerical representation of your credit history. It’s a three-digit number that expresses how consistent you are when you pay back debts.

 

Your credit score is based on information the three major credit bureaus – Equifax, TransUnion®and Experian – collect about you from creditors. Creditors include companies you borrow from or make payments to. Your mortgage or student loan lender, your credit card company, your landlord and your utility company can all report information to the credit bureaus about how you make payments.

Your credit score comes from the information on your credit report. Credit reports are detailed summaries of your borrowing history. They show previous and current credit accounts and your payment history. When you apply for a loan, your lender uses your credit report and score to determine whether to lend you money.

 

The credit score model was created by the Fair Isaac Corporation, also known as FICO, and it is used by financial institutions. While other credit-scoring systems exist, the FICO score is by far the most commonly used. There are a number of ways to improve an individual's score, including repaying loans on time and keeping debt low. 

 

A credit score can significantly affect your financial life. It plays a key role in a lender's decision to offer you credit. People with credit scores below 640, for example, are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage in order to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score.

 

Conversely, a credit score of 700 or above is generally considered good and may result in a borrower receiving a lower interest rate, which results in their paying less money in interest over the life of the loan. Scores greater than 800 are considered excellent. While every creditor defines its own ranges for credit scores, the average FICO score range is often used:

 

·      Excellent: 800 to 850

·      Very Good: 740 to 799

·      Good: 670 to 739

·      Fair: 580 to 669

·      Poor: 300 to 579

 

How to Improve Your Credit Score 

When information is updated on a borrower’s credit report, their credit score changes and can rise or fall based on new information. Here are some ways a consumer can improve their credit score:

• Pay your bills on time: Six months of on-time payments is required to see a noticeable difference in your score. 
• Up your credit line: If you have credit card accounts, call and inquire about a credit increase. If your account is in good standing, you should be granted an increase in your credit limit. It is important not to spend this amount so that you maintain a lower credit utilization rate.
• Don’t close a credit card account: If you are not using a certain credit card, it is best to stop using it instead of closing the account. Depending on the age and credit limit of a card, it can hurt your credit score if you close the account. Say, for instance, that you have $1,000 in debt and a $5,000 credit limit split evenly between two cards. As the account is, your credit utilization rate is 20%, which is good. However, closing one of the cards would put your credit utilization rate at 40%, which will negatively affect your score.

The Bottom Line 

Your credit score is one number that can cost or save you a lot of money in your lifetime. An excellent score can land you lower interest rates, meaning you will pay less for any line of credit you take out. But it's up to you, the borrower, to make sure your credit remains strong so you can have access to more opportunities to borrow if you need to.

 

Mortgage 101

A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear. Mortgages are also known as "liens against property" or "claims on property." If the borrower stops paying the mortgage, the bank can foreclose.

In a residential mortgage, a home buyer pledges his or her house to the bank. The bank has a claim on the house should the home buyer default on paying the mortgage. In the case of a foreclosure, the bank may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt.

Mortgages come in many forms. With a fixed-rate mortgage, the borrower pays the same interest rate for the life of the loan. Her monthly principal and interest payment never change from the first mortgage payment to the last. Most fixed-rate mortgages have a 15- or 30-year term. If market interest rates rise, the borrower’s payment does not change. If market interest rates drop significantly, the borrower may be able to secure that lower rate by refinancing the mortgage. A fixed-rate mortgage is also called a “traditional" mortgage. 

With an adjustable-rate mortgage (ARM), the interest rate is fixed for an initial term, but then it fluctuates with market interest rates. The initial interest rate is often a below-market rate, which can make a mortgage seem more affordable than it really is. If interest rates increase later, the borrower may not be able to afford the higher monthly payments. Interest rates could also decrease, making an ARM less expensive. In either case, the monthly payments are unpredictable after the initial term.

Other less common types of mortgages, such as interest-only mortgages and payment-option ARMs, are best used by sophisticated borrowers. Many homeowners got into financial trouble with these types of mortgages during the housing bubble years.

When shopping for a mortgage, it is beneficial to use a mortgage calculator, as these tools can give you an idea of the interest rates for the mortgage you're considering. Mortgage calculators can also help you calculate the total cost of interest over the life of the mortgage.

How to score an insane low interest rate !!!!

When you take out a mortgage to buy a home, you pay a staggering amount of interest over the years. The higher your rate, of course, the more you pay. So what determines that rate? Obviously, your credit history probably plays the biggest role, but there are other factors that go into it, too.

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As the Consumer Financial Protection Bureau (CFPB) points out, “even saving a fraction of a percent on your interest rate can save you thousands of dollars over the life of your mortgage loan.” It’s important to shop around and compare rates from different lenders, but you also want to know how those lenders think. Beyond your credit history, the CFPB says lenders also look at the following to determine your rate:

    Home location: Many lenders offer slightly different interest rates depending on what state you live in. To get the most accurate rates using our Explore Interest Rates tool, you’ll need to put in your state, and depending on your loan amount and loan type, your county as well.

    Down payment: In general, a larger down payment means a lower interest rate, because lenders see a lower level of risk when you have more stake in the property. So if you can comfortably put 20 percent or more down, do it—you’ll usually get a lower interest rate.

    Loan term : The term, or duration, of your loan is how long you have to repay the loan. In general, shorter term loans have lower interest rates and lower overall costs, but higher monthly payments. A lot depends on the specifics—exactly how much lower the amount you’ll pay in interest and how much higher the monthly payments could be depends on the length of the loans you’re looking at as well as the interest rate.

Of course, these aren’t the only factors. The type of loan and type of interest rate (variable versus fixed) also matter, but these are the factors you may not expect. The CFPB also has an “Explore Interest Rates” tool you can check out here to see what your rate would look like, depending on these different variables. Check out their recent post for more detail on each factor.