There are no silly questions when it comes to home mortgages.
The best way to judge whether or not you should refinance is to figure out how many months it will take you to recoup the costs associated with refinancing.
For example, if a refinance would save you $100 per month and the costs were $1,500 to do it, then your breakeven point would only be 15 months. As long as you planned on living in the home for longer than 15 months, it makes sense for you to refinance.
The significance of such savings in any scenario will depend on your income, budget, loan amount and the change in interest rate. One of Advantage Lending Corp’s mortgage experts can help calculate the different scenarios.
Points are costs that can be paid to a lender in order to receive an interest rate below market conditions.
A point is 1% of the loan amount. 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).
If 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.
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 annual cost for each loan. The APR is designed to measure the “true cost of a loan.” It creates a level playing field for lenders. It 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.
Because different lenders calculate APRs differently, a loan with a lower APR is not necessarily a better rate. The best way to compare loans is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. You can then delete 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 than the lender with higher loan fees.
The following fees are generally included in the APR:
The following fees are sometimes included in the APR:
The following fees are normally not included in the APR:
Due 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.
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 — 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.
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: (800) 685-1111
Experian (formerly TRW): (888) EXPERIAN (397-3742)
Trans Union: (800) 916-8800
These agencies may charge you up to $9.00 for your credit report.
Appraisal is a document that gives an estimate of a property’s fair market value. An appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
The appraisal is performed by an “appraiser” who is typically a state-licensed individual trained to render expert opinions concerning property values.
In an appraisal, consideration is given to the property, its location, amenities as well as its physical conditions.
If you make a down payment of less than 20% of the purchase price of the home, mortgage lenders generally require that you take out Private Mortgage Insurance (PMI) that protects the lender incase you default on your mortgage.
You may need to pay up to a year’s worth of premium for this coverage at closing, which can amount to as much as several hundred dollars.
One obvious way to avoid this extra cost is to make a 20% down payment.