My parents taught me that knowledge is power. On that note here are some frequently asked questions. The answers should give you information to make a smart, informed decision about refinancing your mortgage.
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). Refinance Loan Rates
Q. Should I try to pay as many discount points as possible to lower my home 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 home 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. 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. Your first step should be to check your credit report. Your credit score or FICO score has much to do with your qualifications for a loan and the interest rates offered to you. Make sure the information is accurate and up to date. If there are errors be sure to contact the credit bureau and legal entities to resolve the matter.
What is a FICO score?
A System developed by the Fair Isaac Company to determine the possibility that the borrower may default on financial obligations to the mortgage lender.
A number generated by a mathematical algorithm. FICO is a credit score scale used by many mortgage lenders that use a risk-based system to determine the possibility that an applicant will fail to pay back a loan. Your FICO score is a key factor in determining the size and type of mortgage you qualify for.
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.
If you have any other questions please give me a call.
Arnold Cohen
The Mortgage Store
303-488-5435
I'm in your neighborhood.