When should I refinance?
It's generally a good time to refinance when mortgage rates are 2% lower than the current rate on your loan. It may be a viable option even if the interest rate difference is only 1% or less. Any reduction can trim your monthly mortgage payments. Example: Your payment, excluding taxes and insurance, would be about $770 on a $100,000 loan at 8.5%; if the rate were lowered to 7.5%, your payment would then be $700 – now you're saving $70 per month. The amount you save depends on your income, budget, loan amount, and interest rate changes. Your trusted broker can help you calculate your options.
What are points?
A point is a percentage of the loan amount, or 1-point = 1% of the loan, so one point on a $100,000 loan is $1,000. Points are costs that need to be paid to a lender to get mortgage financing under specified terms. Discount points are fees used to lower the interest rate on a mortgage loan by paying some of this interest up front. Lenders may refer to costs in terms of basis points in hundredths of a percent; 100 basis points = 1 point, or 1% of the loan amount.
Should I pay points to lower my interest rate?
Possibly, if you plan to stay in the property for at least a few years. Paying discount points to lower the loan's interest rate can be a good way to lower your required monthly loan payment, and possibly increase the loan amount that you can afford to borrow. However, if you plan to stay in the property for only a year or two, your monthly savings may not be enough to recoup the cost of the discount points that you paid up front.
What is an APR?
The annual percentage rate (APR) is an interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annualized cost for each loan. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders and prevents lenders from advertising a low rate and hiding fees.
The APR does not affect your monthly payments. Your monthly payments are strictly a function of the interest rate and the length of the loan.
Another way to compare loans is to ask for Loan Estimates for two loans with the same basic terms – e.g., type of loan (such as 30-year fixed) and the same interest rate. Ignore for a moment the fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan, in this comparison, than the lender with higher loan fees.
The following fees are generally included in the APR:
- Points (both discount points and origination points)
- Prepaid interest – The interest paid from the date the loan closes to the end of the month
- Loan-processing fee
- Underwriting fee
- Document-preparation fee
- Mortgage insurance
- Escrow fee
The following fees are normally not included in the APR for a mortgage:
- Title or abstract fee
- Borrower’s attorney fee
- Home-inspection fees
- Recording fee
- Transfer taxes
- Credit report
- Appraisal fee
What does it mean to lock the interest rate?
Mortgage rates can change from the day you apply for a loan to the day you close the transaction. If interest rates rise sharply during the application process it can increase the borrower’s mortgage payment unexpectedly. Therefore, a lender can allow the borrower to "lock in" the loan’s interest rate guaranteeing that rate for a specified time period, often 30-60 days, and sometimes for a fee.
What documents do I need to prepare for my loan application?
Below is a list of documents that are required when you apply for a mortgage. However, every situation is unique and you may be required to provide additional documentation. So, if you are asked for more information, be cooperative and provide the information requested as soon as possible. It will help speed up the application process.
- Copy of signed sales contract including all riders
- Verification of the deposit you placed on the home
- Names, addresses and telephone numbers of all real estate agents, builders, insurance agents and attorneys involved
- Copy of Listing Sheet and legal description if available (if the property is a condominium you will need to provide the condominium declaration, by-laws and most recent budget)
- Copies of your pay stubs for the most recent 30-day period and year-to-date (you will need different documentation if your income comes from self-employment, Social Security or other government benefits, or other sources)
- Copies of your W-2 forms for the past two years
- Names and addresses of all employers for the last two years
- Letter explaining any gaps in employment in the past two years
- Work visa or green card (copy front and back)
Source of Funds and Down Payment
- Sale of your existing home – Provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold (at closing, you must also provide a settlement/Closing Statement)
- Savings, checking or money market funds – Provide copies of bank statements for the last three months
- Stocks and bonds – Provide copies of your statement from your broker or copies of certificates
- Gifts – If part of your cash to close, provide Gift Affidavit and proof of receipt of funds
- Based on information appearing on your application and/or your credit report, you may be required to submit additional documentation
Debt or Obligations
- Prepare a list of all names, addresses, account numbers, balances, and monthly payments for all current debts with copies of the last three monthly statements
- Include all names, addresses, account numbers, balances and monthly payments for mortgage holders, and contact information for landlords, for the last two years
- If you are paying alimony or child support, include marital settlement/court order stating the terms of the obligation
- Check to cover Application Fee(s)
How is my credit judged by lenders?
Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points, known as a credit score, helps predict how creditworthy you are – that is, how likely it is that you will repay a loan and make the payments when due.
The most widely used credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. Your score on an application will fall between 350 (high risk) and 850 (low risk). You do not have one single FICO score; Fair Isaac has developed many different models, used for different types of credit. These models change over time, and it’s hard to predict which version a given lender is using. Different credit bureaus may have slightly different information in their files on you, and those differences may or may not matter for a particular scoring model. Some companies will offer to sell you a credit score. It’s important to understand that the number you get from one of those companies is not necessarily the same number a lender will calculate when it reviews your mortgage application.
Because your credit report is an important part of many credit scoring systems, it is very important to make sure it's accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:
Equifax: (866) 349-5191
Experian (formerly TRW): (888) EXPERIAN (397-3742)
TransUnion: (800) 888-4213
These agencies may charge you for your credit report.
You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. This free credit report can be requested through the following website: https://www.annualcreditreport.com. No other website provides your once-a-year free report.
What can I do to improve my credit score?
Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change – improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application and taking account of how the details in your credit report are affecting your score.
Nevertheless, scoring models generally evaluate the following types of information in your credit report:
- Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or have declared bankruptcy, if that history is reflected on your credit report.
- What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
- How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors such as timely payments and low balances.
- Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. For example, inquiries by creditors who are monitoring your account or looking at credit reports to make "pre-screened" credit offers are not counted.
- How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.
Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.
To improve your credit score under most models, concentrate on paying your bills on time and managing your level of debt. It's likely to take some time to improve your score significantly.
What is an appraisal?
An appraisal is an estimate of a property's fair market value. It's a document generally required (depending on the loan program) by a lender before loan approval to ensure the mortgage loan amount is not more than the value of the property. The appraisal is performed by an "appraiser," typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.
What is PMI (Private Mortgage Insurance)?
On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home, mortgage lenders might require you to get private mortgage insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to one-year's worth of PMI premiums at closing, which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or ask about other loan program options.
What is 80-10-10 financing?
With 80-10-10 financing, if you’re a borrower with a hefty income but less than a 20% down payment, a savings and loan association, bank or other institutional lender provides a traditional 80% first mortgage, and you get a 10% second mortgage and make a cash down payment equal to 10% of the home’s purchase price. By using this method, you are no longer obligated to take out PMI on your property.
The same principle applies if you can afford to make only a 5% down payment; 80-15-5 financing is also available. However, because a smaller cash down payment increases the lender’s risk of default, you may be asked to pay higher loan fees and a higher mortgage interest rate for 80-15-5 than for 80-10-10.
What happens at closing?
The property is officially transferred from the seller to you at "closing" or "funding."
At closing, the ownership of the property is officially transferred from the seller to you. This may involve you, the seller, real estate agents, your attorney, the lender’s attorney, title or escrow firm representatives, clerks, secretaries, and other staff. You can have an attorney represent you, especially if you can't attend the closing meeting, e.g., you’re out of state. Closing can take anywhere from one hour to several hours, depending on contingency clauses in the purchase offer or the need for any escrow accounts to be set up.
Most paperwork in closing or settlement is done by attorneys and real estate professionals. You may or may not be involved in some of the closing activities; it depends on who you are working with.
Prior to closing you should have a final inspection, or "walk-through," to ensure requested repairs were performed and items agreed to remain with the house are there, such as drapes, lighting fixtures, etc.
In most states, the settlement is completed by a title or escrow firm to which you forward all materials and information, plus the appropriate cashier's checks, so the firm can make the necessary disbursement. Your representative will deliver the check to the seller and then give the keys to you.