Should I refinance?

There are many reasons for refinancing, but the main reason is to save money.  Refinancing can help you save money by obtaining a lower interest rate that will reduce your monthly mortgage payment.  Furthermore, it will reduce the term of the loan which will save you money over the life of the loan.

Secondly, homeowners can consolidate debts through refinancing.   Credit card debts, second mortgages, credit lines, student loans, auto loans, etc, can be consolidated and replaced with a low interest rate mortgage.  Having less bills to pay and all your high interest loans replaced with the low interest mortgage, the result saves you time and money.  Debt consolidation also results in tax savings, since consumer loans are not tax deductible, while mortgage loans are.

The third reason why homeowners refinance is to convert their adjustable loan to a fixed rate loan.  This is to lock in the low rates to avoid higher payments with the fluctuation of the adjustable rate mortgage when interest rates are low.  

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Should I pay points?

A point is equal 1% of the total loan amount.  It is an upfront fee that reduces your monthly interest rate and total interest due over the life of a loan. By paying a discount point, you can lower your interest rate.  Consider it prepaid interest. 

It takes about five to seven years to recoup the cost of paying a point upfront.  For example, you take out a $100,000 30-year fixed mortgage, and you have the option of either paying 6% with no points or 5 3/4% with one point. With the 6% mortgage, your monthly payment will be $600. And with the 5 3/4% loan, it would be $584, a savings of $16 per month. After about 62 months, or a little over five years, you would have recouped the $1,000 point you paid upfront. And then you would start to benefit from the lower monthly payments.

In regards to this, you should also consider other ways to invest that $1,000.  if you can beat the taxable equivalent of your mortgage rate, then you should not pay for points.  Invest the money instead.  

Use this rule of thumb: If you plan to stay in the house for less than 3 years, do not pay points. If you plan to stay in the house for more than 5 years, pay 1 to 2 points. If you plan to stay in the house for between 3 and 5 years, it does not make a significant difference whether you pay points or not!

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What is an Annual Percentage Rate (APR)?

Introduced as part of the Consumer Credit Act of 1974, the annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The APR does NOT affect your monthly payments.  It is a function of the loan amount, the interest rate, the total added cost, and the terms. Nevertheless, it is designed to help borrowers compare different loan options.

Fees generally included in the APR are: points, pre-paid interest, origination fees, preparation fees, and private mortgage insurance (PMI).  Fees sometimes included in the APR are: application fees, and life insurance.  Fees generally not included are: appraisal, home-inspection, credit report costs, and title fee.

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Can my loan be sold?
What happens if my lender goes out of business?

Your loan can be sold at any time. There is a secondary mortgage market in which lenders frequently buy and sell pools of mortgages. This secondary mortgage market results in lower rates for consumers. A lender buying your loan assumes all terms and conditions of the original loan. As a result, the only thing that changes when a loan is sold is to whom you mail your payment. If your loan has been sold, your existing lender will notify you that your loan has been sold, who your new lender is, and where you should send your payments from now on.

If your lender goes out of business, you are still obligated to make payments! Typically, loans owned by a lender going out of business are sold to another lender. The lender purchasing your loan is obligated to honor the terms and conditions of the original loan. Therefore, if your lender goes out of business, it makes little difference with regards to your loan payments. In some cases, there may be a gap between the date of your lender's going out of business and the date that a new lender purchases your loan. In such a situation, continue making payments to your old lender until you are asked to make payments to your new lender.

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What is PMI? 

Most homebuyers who obtain loans that are more than 80 percent of their new home's value are required to have PMI or private mortgage insurance. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI. PMI is provided by private mortgage insurance companies.  It protects a lender against loss in case a borrower defaults on a loan; thereby enabling the buyer to obtain a mortgage with a lower down payment.  PMI makes it possible for  homeowners to purchase a home with as little as a three percent to five percent down payment.  Hence, without mortgage insurance, you might not be able to buy a home without a 20% down payment.

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What is a rate lock?

A lock-in, also called a rate-lock or rate commitment, is a lenders promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed.  The lock-in secures the interest rate during the process of your loan approval as long as your loan is processed and closed prior to the rate expiration date. This date is given to you when you lock-in the rate.  

You cannot close a mortgage loan without locking in an interest rate. There are four components to a rate lock:

The longer the length of the lock, the higher the points or the interest rate. This is because the longer the lock, the greater the risk for the lender offering that lock.
After a lock expires, most lenders will let you re-lock at the higher of the prevailing market rates/points, or the originally locked rates/points. In most cases you will not get a lower rate if rates drop. In some cases, prior to the rate lock expiration date, the lender may allow you to negotiate a rate lock extension at the original rate/points. An additional fee may be charged for this extension.
Lenders can lose money if your lock expires. This is because they are taking a risk by letting you lock in advance. If rates move higher, they are forced to give you the original rate at which you locked. Lenders often protect themselves against rate fluctuations by hedging.

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What happens if rates drop after you lock?

Most lenders will not budge unless rates drop substantially (3/8% or more). This is because it is expensive for them to lock in interest rates. If lenders let borrowers improve their rate every time rates improved, they'd spend a lot of time relocking interest rates, since rates fluctuate daily. Also, they would have to factor this option into their rates, and borrowers would wind up paying a higher rate. If rates drop, one option is to go to a different lender. In this case, you would be starting the loan process from the beginning. If you have your loan with a mortgage broker, however, they'll probably be able to move your loan package (including application) to a new lender offering lower rates. Before applying with a different lender, inform your original lender that you are aware that rates have dropped. You may be pleasantly surprised to find that they will work with you rather than lose you to a competitor.

What is the difference between
pre-qualifying and pre-approval?

Mortgage pre-qualification is the lenders opinion of your ability to obtain a loan. Pre-approval is a step above pre-qualification. Pre-approval involves verifying your credit, down payment, employment history, etc.  Pre-approval is based on the lenders underwriting decision after a thorough review of your complete loan application.  It means that you have in hand a lender's written commitment to put together a loan for you (subject to verification of income and employment).

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