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Is Now A Good Time to Refinance - ANSWERS TO YOUR REFINANCING QUESTIONS
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Q. Is it time for me to refinance?
A. When interest rates fall, a homeowner should
definitely call a lender about refinancing, but he or she should discuss
their 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? Ask your lender to provide a couple of refinancing
scenarios for you, showing how your loan term length, monthly payment and
your total interest expense on the loan will change. After looking at
these scenarios, it will be clear whether or not you should spend the
money to refinance.
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 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. How much will it cost me to refinance my current home loan?
A. In addition to an application fee ($250-350)
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. If 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?
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
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 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.
Q. Should I lock-in my loan rate when I apply for a 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. 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?
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?
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.
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