Frequently Asked Questions
When should I refinance?
Refinancing can be advantageous when mortgage rates are significantly lower than your current rate. Even a modest decrease of 1% or less in interest rates can potentially reduce your monthly mortgage payments. For instance, on a $100,000 loan at 8.5%, your monthly payment, excluding taxes and insurance, would be approximately $770. If you refinance to a 7.5% rate, your new payment would decrease to $700, resulting in savings of $70 per month.
The amount you save through refinancing depends on factors such as your income, budget, loan amount, and how interest rates fluctuate. Consulting with a trusted lender can help you assess these variables and determine if refinancing is a beneficial option for you.
What is an APR?
The Annual Percentage Rate (APR) represents the total cost of a mortgage as an annual percentage, encompassing not only the stated interest rate but also points and other credit expenses. It serves as a standardized metric for comparing different mortgage options based on their annualized costs. By including all fees, the APR provides transparency and prevents lenders from misleading consumers with low advertised rates that hide additional costs.
It's important to note that while the APR informs borrowers about the overall expense of a loan, it does not impact monthly payments directly. Monthly payments are determined solely by the loan's interest rate and duration. When comparing loans, requesting a good-faith estimate from lenders for the same type of program and interest rate enables borrowers to assess the true cost by focusing on the total fees associated with each loan offer, excluding non-loan-specific fees like insurance and title expenses. This approach ensures borrowers can make informed decisions based on the total financial impact of the loan rather than just the APR.
What are points?
A point in mortgage financing represents a percentage of the loan amount, where one point equals 1% of the loan's value. For instance, on a $100,000 loan, one point would amount to $1,000. Points are fees paid directly to the lender to secure specific mortgage terms. Discount points, specifically, are fees paid upfront to lower the interest rate on the mortgage. Lenders may also discuss costs in terms of basis points, where 100 basis points equal one point, or 1% of the loan amount.
Should I pay points to lower my interest rate?
Yes, paying discount points to reduce your mortgage's interest rate can be beneficial if you intend to remain in the property for several years. This strategy lowers your monthly loan payment and potentially allows you to qualify for a higher loan amount. However, if you plan to sell or refinance within just a year or two, the monthly savings may not outweigh the upfront cost of the discount points.
How is my credit judged by lenders?
Credit scoring is a tool used by creditors to assess your creditworthiness when you apply for credit. It gathers information from your credit application and report, including your payment history, types of accounts, outstanding debt, and account age. Using statistical analysis, creditors compare this data against the credit behavior of similar consumers to assign points for each factor that predicts repayment reliability. These points culminate in your credit score, typically ranging from 350 (higher risk) to 850 (lower risk), with higher scores indicating better creditworthiness.
FICO scores, developed by Fair Isaac Corporation, are the most widely used credit scores. Ensuring the accuracy of your credit report before applying for credit is crucial since it plays a significant role in many credit scoring systems. You can obtain your credit report from the three major credit reporting agencies—Equifax, Experian, and TransUnion—by contacting them directly. While these agencies may charge a fee for additional reports, you are entitled to one free credit report annually from each agency through AnnualCreditReport.com, although this free report may not include your credit score.
What can I do to improve my credit score?
Credit scoring models are intricate and can differ between creditors and types of credit. Changes in one factor can influence your score, but the overall impact depends on how that factor interacts with others in the model. Each creditor uses a specific model to evaluate credit applications, and only they can provide insight into actions that might enhance your score under their particular criteria.
Typically, credit scoring models assess several key aspects of your credit report. Payment history is crucial, with late payments, accounts in collections, or bankruptcy negatively impacting your score. The amount of debt you owe in relation to your credit limits also plays a significant role—if your balances are near your limits, it can lower your score. Additionally, the length of your credit history is considered; while a shorter history can affect your score, timely payments and low balances can offset this. Recent credit inquiries matter too; too many applications within a short period can negatively affect your score, although certain types of inquiries, like those for prescreened offers, may not count against you. To improve your credit score across most models, focus on paying bills punctually, reducing outstanding balances, and refraining from taking on new debt. Significant improvements in your score generally require time and consistent positive credit behaviors.
What documents do I need to prepare for my loan application?
When applying for a mortgage, certain documents are standard requirements, but additional documentation may be necessary depending on your specific situation. It's crucial to be cooperative and provide requested information promptly to expedite the application process. For your property, you'll typically need a signed sales contract with all riders, verification of your deposit, and contact details for realtors, builders, insurance agents, and attorneys involved. If applicable, provide a listing sheet, legal description, or condominium documents. Regarding income, prepare copies of your recent pay stubs and W-2 forms for the past two years, along with details of all employers during that period. If self-employed or earning additional income sources, tax returns for the last two years and year-to-date profit and loss statements are required. For those using alimony, child support, or benefits like Social Security income, provide supporting documents such as court orders or award letters.
Additionally, documentation for the source of funds and down payment is essential. This includes statements for savings, checking accounts, or other financial assets, as well as proof of proceeds from the sale of any existing property or gifts. Lastly, prepare a comprehensive list of current debts and obligations, including account details and monthly payments, along with a check to cover application fees.
Based on your application and credit report, additional documents may be requested to complete your mortgage application thoroughly and efficiently.
What is an appraisal?
An appraisal is an assessment aimed at determining the fair market value of a property. It is typically mandated by lenders, depending on the loan program, to ensure that the mortgage loan amount does not exceed the property's value. Conducted by a state-licensed appraiser, who is a trained professional, the appraisal provides expert opinions on property values, considering factors such as location, amenities, and physical condition.
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