Q. Rates Are Low. Is Now A Good Time To refinance?
A. When interest rates are lower than your current mortgage rate, a homeowner should definitely contact multiple lending institutions for competitive home mortgage loan refinancing rates.
Carefully assess your financial situation and goals before making any final decision. Answer the following questions:
- Is your goal to lower your monthly payments?
- Do you need to consolidate debt?
- Do you need cash for large purchases?
- Are you seeking to adjust your interest deduction expense for tax purposes?
Once you determine your reason for refinancing consider the amount of cash back your require. Using a mortgage refinance calculator determine the amount of savings per month and annually according to lowest available refinance rates. Seek lenders who offer the lowest refinance rates nationwide.
Q. When should I refinance my current mortgage loan?
A. It 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.
Q. Should I refinance my home loan if I plan on moving soon?
A. Most 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 loan.
Q. What are points?
A. Points 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).
Q. Should I try to pay as many discount points as possible to lower my home loan’s interest rate?
A. 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.
Q. What does it mean to lock the interest rate on a home mortgage loan?
A. 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. A simpler process would be to have several lenders contact you.
Q. Should I lock-in my loan rate when I apply for a home mortgage loan?
A. No 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.
Q. I’ve had credit problems in the past. How does this impact my chances of getting a home loan?
A. Obtaining 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. Your first step should be to check your credit report. Your credit score or FICO score has much to do with your qualifications for a loan and the interest rates offered to you. Make sure the information is accurate and up to date. If there are errors be sure to contact the credit bureau and legal entities to resolve the matter.
Q. What is a FICO score?
A. System developed by the Fair Isaac Company to determine the possibility that the borrower may default on financial obligations to the mortgage lender. A number generated by a mathematical algorithm. FICO is a credit score scale used by many mortgage lenders that use a risk-based system to determine the possibility that an applicant will fail to pay back a loan. Your FICO score is a key factor in determining the size and type of mortgage you qualify for.
Q. I’ve only been late a couple of times on my credit card bills. Does this mean I will have to pay an extremely high interest rate?
A. Not 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.
Q. How can I tell who has the best deal on financing and home refinancing rates?
A. When 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.
Q. Should I choose the lender with the lowest interest rate and costs?
A. There 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.