When interest rates fall, a homeowner should definitely call a lender about refinancing, but discuss your 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?
Q. when I should refinance my current mortgage loan?
You should refinance a mortgage when mortgage rates are lower than the rate you currently have on your loan. 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. The significance of savings in any scenario will depend on your income, budget, loan amount and the change in interest rate.Q. Should I refinance if I plan on moving soon?
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. Some lenders will charge a slightly higher than the 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. How much will it cost me to refinance my current home loan?
In addition to an application fee, 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. I 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.Q. What are points?
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 (1 point = 1% of the loan). One point on a $50,000 loan would be $500. 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% of the loan amount).Q. Should I try to pay as many discount points as possible to lower my loan's interest rate?
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 2, 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?
Due to the nature of interest rate increase or decrease, 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 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.Q. Should I lock-in my loan rate when I apply for a mortgage loan?
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 up 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 lender's lock fee seems excessive for your means, you might want to consider allowing the interest rate to 'float' until the loan closing.Q. Is Credit Problem impact my chances of getting a home loan?
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. 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 will.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?
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. Lenders 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. Should I choose the lender with the lowest interest rate and costs?
There are primarily 2 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.
Q. How can I tell who has the best deal on financing?
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 a 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. If after a few questions you do not feel comfortable with the lender, simply call someone else.
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