Q & A
it time for me to refinance?
interest rates fall, a homeowner should definitely call
a lender about refinancing, but he or she should discuss
their entire financial situation and goals before making
any final decision. Is your goal to lower your monthly
payment? Consolidate debts? Get cash out for large purchases?
Change your interest deduction expense for your taxes?
Ask your lender to provide a couple of refinancing scenarios
for you, showing how your loan term length, monthly
payment and your total interest expense on the loan
will change. After looking at these scenarios, it will
be clear whether or not you should spend the money to
should I refinance my current mortgage loan?
is often said that you should refinance when mortgage
rates are 2% lower than the rate you currently have
on your loan. Refinancing may be a viable option even
if the interest rate difference is less than 2%. A modest
reduction in the loan rate can still trim your monthly
payment. For example, the monthly payment (excluding
taxes & insurance) would be about $770 on a $100,000
loan at 8.5%. If the rate were lowered to 7.5%, the
monthly payment would be about $700, a savings of $70.
The significance of such savings in any scenario will
depend on your income, budget, loan amount and the change
in interest rate. Your trusted lender can help calculate
the different scenarios.
I refinance if I plan on moving soon?
lenders will charge fees to refinance a loan. If you
plan to stay in the property for less than a couple
of years, your monthly savings may not get a chance
to accumulate and recoup these costs. Let's say a lender
charged $1,000 to refinance your loan, but it resulted
in a monthly savings of $50. It would take 20 months
(1,000 divided 50) to recoup the initial costs before
you start to realize some savings. Some lenders will
charge a slightly higher than average interest rate
on refinance loans, but waive all costs associated with
the loan. The attractiveness of these loans will depend
on the interest rate you are being charged on your current
Q. How much will it cost me to refinance my current home loan?
addition to an application fee ($250-350) you will likely
have to pay an origination fee (typically 1% of the
loan amount). In many cases you will have to pay much
of the same costs that you had to pay with your current
home loan (title search, title insurance, misc. lender
fees, etc.). The sum of these fees could cost you up
to 2-3% of the loan amount. If don't have the money
to pay for associated loan costs, look for lenders that
offer 'no-cost' loans. These loans will charge a slightly
higher interest rate, so ask a lender if it would still
make sense to refinance using this type of program.
are costs that need to be paid to a lender in order
to receive mortgage financing under specified terms.
A point is a percentage of the loan amount (one point
= one percent of the loan). One point on a $100,000
loan would be $1,000. Discount points are fees that
are used to lower the interest rate on a mortgage loan
(you are discounting the interest rate by paying some
of this interest up-front). Lenders may express other
loan-related fees in terms of points. Some lenders may
express their costs in terms of basis points (hundredths
of a percent). 100 basis points = 1 point (or 1 percent
of the loan amount).
I try to pay as many discount points as possible to
lower my loan's interest rate?
you plan on staying 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). If you only plan to
stay in the property for a year or two, your monthly
savings may not be enough to recoup the cost of the
discount points that you paid up-front. Ask your lender
how long it would take for your monthly savings to recoup
the costs of the discount points.
Q. What does it mean to lock the interest
rate on a mortgage loan?
to the nature of interest rate movements, mortgage rates
can change dramatically from the day you apply for a
mortgage loan to the day you close the transaction.
If interest rates rise sharply during the application
process, it could make a borrower's mortgage payment
larger than he/she previously thought. To protect against
this uncertainty, a lender can allow the borrower to
'lock-in' the loan's interest rate, guaranteeing the
borrower the prevailing loan rate for a specified period
of time (often 30-60 days). A lender may or may not
charge a fee for this service.
I lock-in my loan rate when I apply for a mortgage loan?
one knows for sure how interest rates will move at any
given time, but your lender may be able to give you
an estimate of where it thinks mortgage rates are headed.
If interest rates are expected to be volatile in the
near future, you may want to consider locking your interest
rate if rising rates will no longer allow you to qualify
for the loan. If your budget can handle a higher loan
payment or if the lenders lock fee seems excessive for
your means, you might want to consider allowing the
interest rate to 'float' until the loan closing.
had credit problems in the past. How does this impact
my chances of getting a home loan?
a home loan is possible even with extremely poor credit.
If you have had credit problems in the past, a lender
will consider you to be a risky borrower to lend to.
To compensate for this added risk, the lender will charge
you a higher interest rate and usually expect you to
pay a higher down payment on your home purchase (typically
20-50% down). The worse your credit is, the more you
can expect to pay for an interest rate and a down payment.
Not all lenders choose to lend to risky borrowers, so
you may have to contact several before finding one that
only been late a couple of times on my credit card bills.
Does this mean I will have to pay an extremely high
necessarily. If you have been late less than three times
in the past year, and the payments were no more than
30 days late, you probably have a pretty good chance
at getting a home loan at a competitive interest rate.
Lender guidelines will vary, but most lenders will excuse
a couple of minor 'late-pays' as long as the borrower
can provide a reasonable excuse explaining them (i.e.
job transition, illness). If the late-pays were 60+
days late and cannot be explained, you may have to settle
for a higher interest rate.
can I tell who has the best deal on financing?
comparison shopping among lenders, remember that a lender
can structure financing for a borrower several different
ways. A lender can charge higher fees and offer a low
interest rate while another may charge a slightly higher
interest rate with lower fees. In order to make an 'apples
to apples' comparison between lenders, ask each lender
what their interest rate is for a zero discount point
loan (based on a 30 or 60 day lock period). Then ask
each lender what they charge for an origination fee,
as well as any other fees they typically charge for
a loan, (i.e. broker, processing, underwriting). A reputable
lender will not hesitate in answering these questions.
I choose the lender with the lowest interest rate and
are primarily two things to consider when choosing one
lender over another: the quality of service being provided
and the cost of services provided. Quality of service
is especially important to those who have never purchased
a home. First-time home buyers will likely have many
questions regarding the financing process and available
loan options. When comparing lenders, ask each lender
several questions before you fill out any loan application.
A good lender should be able to get you through the
financing process leaving you confident that you made
a sound financial decision. If after a few questions
you do not feel comfortable with the lender, simply
call someone else.