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While a lower interest rate will mean lower monthly payments and less total interest, a refinance will also mean paying closing costs and, in some cases, points. If the monthly savings exceeds these closing costs, refinancing is a good option. To determine how many months it will take to break even with closing costs, enter your loan details into my Refinance Calculator.
Credit scores analyze a borrower’s credit history considering numerous factors such as:
- Late payments
- The amount of time credit has been established
- The amount of credit used versus the amount of credit available
- Length of time at present residence
- Negative credit information such as bankruptcies, charge-offs, collections, etc.
To obtain a copy of your credit report, contact any of these credit-reporting agencies:
- Experian, www.experian.com
- Trans Union LLC, www.transunion.com
- Equifax www.equifax.com
- Pay your bills on time. Late payments and collections can have a serious impact on your score.
- Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
- Reduce your credit-card balances. If you are “maxed” out on your credit cards, this will affect your credit score negatively.
- If you have limited credit, obtain additional credit. Not having sufficient credit can negatively affect your score.
If the creditor concurs that an error has occurred, the credit card company must report and correct the error to the credit-reporting agency.
If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates.
If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates.
When the economy is expanding there is a higher demand for credit, so rates move higher; whereas when the economy is slowing, the demand for credit decreases and so do interest rates.
Inflation drives interest rates
Higher inflation is associated with a growing economy. When the economy grows too quickly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing.
When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.
After the loan officer determines that you pre-qualify, he/she then issues a pre-qualification letter. The pre-qualification letter is used when you make an offer on a property. The pre-qualification letter informs the seller that your financial situation has been reviewed by a professional, and you will likely be approved for a loan to purchase the home.
Pre-approval is a step above pre-qualification. Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is submitted to a lender’s underwriter, and a decision is made regarding your loan application.
When your loan is pre-approved, you receive a pre-approval certificate. Getting your loan pre-approved allows you to close very quickly when you do find a home. Pre-approval can also help you negotiate a better price with the seller.
As a result, the only thing that changes when a loan is sold is to whom you mail your payment. In the event your loan is sold you will be notified. You’ll be informed about your new lender, and where you should send your payments.
During that time, interest rates may change. But if your interest rate and points are locked in, you should be protected against increases. Conversely, a locked-in rate could also keep you from taking advantage of price decreases.
There are four components to a rate lock:
- Loan program
- Interest rate
- Length of the lock period
The longer the length of the lock period, the higher the points or the interest rate will be. This is because the longer the lock, the greater the risk for the lender offering that lock.
Conventional loans requiring MI are insured by private mortgage insurance. FHA loans are those whose MI is provided by the Federal Housing Administration, a public, government program backed by taxpayers.
Both mortgage insurance options have premiums, often paid by the borrower. Each program has advantages and disadvantages depending on your unique situation.
- Copy of Purchase Sales contract or Offer to Purchase and all addenda (signed by buyer and seller)
- Past 2 years’ tax returns and W-2s
- Past 2 years’ employment history
- Last 3 consecutive paycheck stubs (5 if paid weekly)
- Name, address, and phone for past 2 years’ residence(s) and landlord(s) (if renting, evidence of 12 months’ rent payments)
- Last 3 months’ statements for savings, checking, CD, money market accounts, etc.
- Recent statement on retirement accounts (IRA, 401k, 403-B, Annuity, etc.)
- Monthly payments and balances on all open accounts
- Proof of all additional income
- Divorce Decree (if applicable)
- Bankruptcy schedules/Discharge papers (if applicable)
Additional information that may be required:
- Estimated market value of assets, such as autos, furniture, personal belongings, etc.
- Be prepared to discuss where the money for closing will come from, including down payment and closing costs
Most monthly payments are based on four factors: Principal, Interest, Taxes and Insurance, commonly referred to as PITI.
- Principal: This is the amount originally borrowed to buy a home. A portion of each monthly payment goes to paying this amount back. In the beginning, only a small fraction of the monthly payment will be applied to the principal balance. The amount applied to principal will then increase until the final years, when most of the payment is applied toward repaying the principal.
- Interest: To take on the risk of lending money, a lender will charge interest. This is known as the interest rate, and it has a very direct impact on monthly payments. The higher the interest rate is, the higher the monthly payment.
- Taxes: While real estate taxes are due once a year, many mortgage payments include 1/12th of the expected tax bill and collect that amount along with the principal and interest payment. This amount is placed in escrow until the time the tax bill is due. Borrowers may be able to opt out of escrowing this amount, which would reduce the monthly payment, but also leave them responsible for paying taxes on their own.
- Insurance: Insurance refers to property insurance, which covers damage to the home or property, and, if applicable, mortgage insurance. Mortgage insurance protects the lender in the event of default and is often required in cases where borrowers have less than 20% equity in the home.Like real estate taxes, insurance payments are often collected with each mortgage payment and placed in escrow until the time the premium is due. Again, borrowers may be able to opt not to escrow the insurance amount, instead paying the total amount due in one lump sum on their own.
- Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000.
- Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month
- Divide the cost of the points by the monthly savings to come up with the number of months to break even.
In the above example, this number is 40 months. If you plan to keep the home for longer than the break-even number of months, then it makes sense to pay points, otherwise it does not.
The Federal Truth-in-Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate.
Example: 30-year fixed 8%, 1 point, 8.107% APR
The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.