Should I Refinance?
Should I rent or buy?
What is a FICO Score?
How can I increase my credit score?
What if there is an error on my credit report?
Why do interest rates change?
Inflation drives interest rates
Can my loan be sold?
What is a rate lock?
What’s the difference between a conventional loan and an FHA loan?
What documents will I need to have to secure a loan?
How will my monthly payments be calculated?
Should I pay points?
What is an Annual Percentage Rate (APR)?
Find out if you can save money by refinancing your existing loan at current interest rate levels.
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.
Which is better for you: renting or buying? Everyone is different. Use my Rent vs. Buy Calculator to help you to compare the estimated costs of owning a home to the estimated costs of renting.
A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Credit scoring is widely accepted by lenders as a reliable means of credit evaluation.
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:
While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time:
- 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. Try to keep 75% of your available credit available.
- If you have limited credit, obtain additional credit. Not having sufficient credit can negatively affect your score.
To correct any errors on your credit report, you must write to the credit card company and explain the error.
If the creditor concurs that an error has occurred, the credit card company must report and correct the error to the credit-reporting agency.
Interest rate movements are based on the simple concept of supply and demand.
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.
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. 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.
A rate lock is a lender’s promise to “lock” a specified interest rate and a specified number of points for you for a specified period of time while your loan application is processed.
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.
Loans where the borrowers’ down payment is less than 20% often require mortgage insurance, which can be provided privately or publicly.
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.
This checklist outlines the principal documents and information that are generally required to complete the application. Additional documentation may be required, depending on the circumstances of your loan. By having the information available, you will save time and avoid delays.
- Most recent 30 days of pay stubs.
- W-2′s for 2011 & 2010
- 2011 & 2010 signed personal tax returns—all pages and all schedules
- If self employed, 1099′s and complete business returns, YTD P&L , business license and/ or DBA, copy of 3rd party verification such as an advertisement of your business.
- Social Security/Disability/Retirement Income Awards letters and proof it will continue for 3 years.
- Rental property-current leases, insurance, mortgage and tax statements for each property.
- Bank Statements: Most recent 2 months of statements, all pages for all accounts. Internet statements are acceptable if they contain your name, banks’ name, account numbers.
- Please source all deposits that are not regular pay checks. Sourcing should include a copy of the check deposited.
- Provide all pages of the most recent statement (s) for 401k, retirement, IRA’s, CD’s etc.
- Letter of explanation for any job gaps, decrease in income etc.
- If you are receiving child support/alimony, please provide proof of receipt for the most recent 12 months and the most recent support order.
- If you are paying child support/alimony, please provide a copy of the court order and payment plan.
- Mortgage, insurance and tax statements for any additional property owned.
- Driver license(s) & social security card(s).
- Name, address and phone number of your landlord.
- Divorce Decree—all pages.
- Complete copy of all bankruptcy papers including final discharge.
- Provide copy of earnest money check clearing the bank.
- If selling current home, need documentation of listing and contract.
- If current home has just been sold, then a copy of the HUD 1 statement and proof of receipt of proceeds.
- If receiving gift funds, need a completed gift letter and donor sourcing for gift funds (this is a complete copy of the donor’s bank statement showing the money coming out for the gift. Donor will also have to source any large deposits). We will also will need proof of deposit to borrower’s account (copy of check and statement with deposit on it) or if cashiers check made payable to title, we will need a copy of the cashier’s check.
- Name and phone number of your insurance agent for the subject property.
- Letter of explanation for all credit inquiries—must be specific for each inquiry and each result.
- Letter of explanation on any negative credit.
- Copy of the DD214 Member page 4 or if active duty, statement of service.
- Original Certificate of Eligibility.
- Name, address & phone number of nearest relative not living with you.
- Copy of Note & Deed of Trust.
- Copy of HUD 1 Settlement Statement.
- Copy of Survey, Tax Statements & Insurance Dec Page
- Copy of Current Mortgage Statement
How much you will pay each month will depend a lot on the term of your loan. That is, how long do you plan on paying the loan back. Most mortgages are either 30-year or 15-year terms. Longer term loans require less to be paid back each month; whereas shorter terms require larger monthly payments, but pay off the debt more quickly.
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.
The best way to decide whether you should pay points or not is to perform a break-even analysis:
- 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 Annual Percentage Rate is the actual cost of the mortgage, based on the mortgage interest rate and factoring in other costs, including points paid and underwriting and processing fees
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.
|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.