The pre-approval process is much more complete than pre-qualification. For pre-qualification, the loan officer asks you a few questions and provides you with a pre-qual letter. Pre-approval includes all the steps of a full approval, except for the appraisal and title search. Pre-approval can put you in a better negotiating position, much like a cash buyer.
The most common reason for refinancing is to save money. Saving money through refinancing can be achieved in two ways: By obtaining a lower interest rate that causes one’s monthly mortgage payment to be reduced. By reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total of the payments made during the life of the loan can be reduced significantly. People also refinance to convert their adjustable loan to a fixed loan. The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments. A third reason why homeowners refinance is to consolidate debts and replace high-interest loans with a low-rate mortgage. The loans being consolidated may include second mortgages, credit lines, student loans, credit cards, etc. In many cases, debt consolidation results in tax savings, since consumers loans are not tax deductible, while a mortgage loan is tax deductible. The answer to the question “Should I refinance?” is a complex one, since every situation is different and no two homeowners are in the exact same situation. Even the conventional wisdom of refinancing only when you can save 2% on your mortgage is not really true. If you are refinancing to save money on your monthly payments, the following calculation is more appropriate than the rule of 2%: Calculate the total cost of the refinance example: $2,000 Calculate the monthly savings example: $100/month Divide the result in 1 by the result in 2000 in this case 2000/100 = 20 months. This shows the break-even time. If you plan to live in the house for longer than this period of time, it makes sense to refinance. Sometimes, you do not have a choice you are forced to refinance. This happens when you have a loan with a balloon provision, but with no conversion option. In this case it is best to refinance a few months before the balloon comes due. Whatever you choose to do, consulting with a seasoned mortgage professional can often save you time and money. Make a few phone calls, check out a few websites, crunch on a few calculators and spend some time to understand the options available toy
You cannot close a mortgage loan without locking in an interest rate. There are four components to a rate lock: 1. Loan program. 2. Interest rate. 3. Points. 4. Length of the 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. Let’s say you lock in a 30-year fixed loan at 6% for 2 points for 15 days on March 2. This lock will expire on March 17 (if March 17 is a holiday then the lock is typically extended to the first working day after the 17th). The lender must disburse funds by March 17th, otherwise your rate lock expires, and your original rate-lock commitment is invalid. The same lock might cost 2.25 points for a 30-day lock or 2.5 points for a 60-day lock. If you need a longer lock and do not want to pay the higher points, you may instead pay a higher rate. After a lock expires, most lenders will let you re-lock at the higher of the original price and the originally locked price. In most cases you will not get a lower rate if rates drop. 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. Some lenders do offer free float-downs ��i.e. you may lock the rate initially and if the rates drop while your loan is in process, you will get the better rate. However, there is no free lunch��the free float-down is costly for the lender and you pay for this option indirectly, because the lender has to build the price of this option into the rate. What do you do if the rates drop after you lock? Most lenders will not budge unless the rates drop substantially (3/8% or more). This is because it is expensive for them to lock in interest rates. If lenders let the borrowers improve their rate every time the rates improved, they spend a lot of time relocking interest rates, since rates fluctuate daily. Also they would have to build this option into their rates and borrowers would wind up paying a higher rate. Lock-and-shop programs Most lenders will let you lock in an interest rate only on a specific property. If you are shopping for a house, some lenders offer a lock-and-shop program that lets you lock in a rate before you find the house. This program is very useful when rates are rising. New-construction rate locks Most lenders offer long-term locks for new construction. These locks do cost more and may require an up-front deposit. For example, a lender might offer a 180-day lock for 1 point over the cost of a 30-day lock, with 0.5 points being paid up-front, as a non-refundable deposit. Most long-term new-construction locks do offer a float-down��i.e. if rates drop prior to closing, you get the better rate
We have been asked on several occasions, �Please Explain how PMI Works� PMI is usually required when the new home buyer is applying less than a 20% down payment towards the purchase of their new home. Mortgage insurance protects lenders across the United States from losses due to defaults on first mortgages for residential properties. If the borrower defaults and the lender has to foreclose on the property, the mortgage insurer (UGI, for example) reduces or eliminates the loss to the lender. Although this seems to be just an added cost, it really benefits the borrower by allowing them to use lower down payments when purchasing a home. As a result, they can write off more interest deduction on their annual taxes. Private mortgage insurance is typically paid for by the borrower. The initial premium is paid at closing and a monthly amount may be included with the payment made to the lender who remits the payment to the insurer. Please feel free to contact us at anytime! We look forward to hearing from you and helping you determine the best Loan Program and the Best Rate available! If you or someone you know is in need of a mortgage home loan we would love the opportunity to provide a good faith estimate and discuss what options are available to you.
The best way to decide whether you should pay points or not is to perform a break-even analysis. This is done as follows: 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 house for longer than the break-even number of months, then it makes sense to pay points; otherwise it does not. The above calculation does not take into account the tax advantages of points. When you are buying a house the points you pay are tax-deductible, so you realize some savings immediately. On the other hand, when you get a lower payment, your tax deduction reduces! This makes it a little difficult to calculate the break-even time taking taxes into account. In the case of a purchase, taxes definitely reduce the break-even time. However, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all, so there is little or no effect on the time to break even. If none of the above makes sense, use this simple 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! Zero-Point/Zero-Fee Loans Whatever happened to the conventional wisdom of waiting for the rates to drop 2% before refinancing? You have a 30-year fixed loan at 6.5%. A loan officer calls you up and says they can refinance you to a rate of 6.0% with no points and no fees whatsoever. What a dream come true! No appraisal fees, no title fees and not even any junk fees! Is this a deal too good to pass up? How can a bank and broker do this? Doesn’t someone have to pay? Whose money is being used to pay these closing costs? No��this is not a scam. Thousands of homeowners have refinanced using a zero-point/zero-fee loan. Some refinanced multiple times, riding rates all the way down the curve in 2002, 2003 and, in 2004. Some homeowners used zero-point/zero-fee adjustable loans to refinance and get a new teaser rate every year. The way this works is based on rebate pricing, sometimes also known as yield-spread pricing, and sometimes known as a service-release premium. The basic idea is that you pay a higher rate in exchange for cash up front, which is then used to pay the closing costs. You will pay a higher monthly payment��so the money is really coming from future payments that you will make. You can also think of this as negative points! For example, a 30-year fixed loan may be available at a retail price of : 6.0% with 2 points or 6.25% with 1 point or 6.5% with 0 points or 6.75% with -1 point or 7% with -2 points On a $200,000 loan, the loan officer can offer you 6.75% with a cost of -1 point, which is a $2,000 credit towards your closing costs. A mortgage broker can use rebate pricing to pay for your closing costs and keep the balance of the rebate as profit. What are the benefits of a zero-point/zero-fee loan? The main benefit is that you have no out-of-pocket costs. As a result, if the rates drop in the future, you could refinance again even for a small drop in rates. So if you refinanced on the zero-point/zero-fee loan to get a rate of 6.75% and if the rates drop 1/2%, you can refinance again to 6.25%. On the other hand, if you refinanced by paying 1 point and got a rate of 6.25%, it may not make sense to refinance again. Now, if the rates drop another 1/2%, a zero-point/zero-fee loan can drop your rate to 5.75%, whereas if you paid points, you may have to do a break-even analysis to decide if refinancing will save you money. The zero-point/zero-fee loan eliminates the need to do a break-even analysis since there is no up-front expense that needs to be recovered. It also is a great way to take advantage of falling rates. Some consumers have used zero-point/zero-fee loans on adjustable loans to refinance their adjustables every year and pay a very low teaser rate. What are the disadvantages of a zero-point/zero-fee loan? The main disadvantage is that you are paying a higher rate than you would be paying if you had paid points and closing costs. If you keep the loan for long enough, you will pay more��since you have higher mortgage payments. In the scenario where you plan to stay in the house for more than 5 years, and if rates never drop for you to refinance, you could wind up paying more money. If, on the other hand, you plan to stay at a property for just 2-3 years, there really is no disadvantage of a zero-point/zero-fee loan. Whose money is it? Since you are being paid “cash” up-front in exchange for a higher rate, it really is your own money that will be paid in the future through higher payments. Investors who fund these loans hope that you will keep the loans for long enough to recoup their up-front investment. If you refinance the loans early, both the servicer and the investor could lose money. To summarize, zero-point/zero-fee loans in many cases are good deals. Make sure, however, that the lender pays for your closing costs from rebate points and NOT by increasing your loan amount. So if your old loan amount was $150,000, your new loan amount should also be $150,000. You may have to come up with some money at closing for recurring costs (taxes, insurance, and interest), but you would have to pay for these whether you refinanced or not. Zero-point/zero-fee loans are especially attractive when rates are declining or when you plan to sell your house in less than 2-3 years. Zero-point/zero-fee loans may not be around forever. Lenders have discussed adding a pre-payment penalty to such loans, however few lenders have taken steps to implement such a measure.