Refinancing is beneficial when interest rates drop at least 1-2% lower than your current mortgage rate. Even a small reduction can lower your monthly payments. For example, on a $100,000 loan at 8.5%, the monthly payment is around $770. If the rate decreases to 7.5%, the new payment would be $700, saving you $70 per month. Your actual savings depend on your loan amount, budget, and financial situation. Consult with a trusted lender to determine the best option for you.
A point represents 1% of the loan amount. For example, one point on a $100,000 loan equals $1,000. Lenders charge points as part of the loan cost. Discount points allow borrowers to reduce their interest rate by paying more upfront. Lenders may also refer to points in basis points—100 basis points equal 1 point or 1% of the loan amount.
Paying points is beneficial if you plan to stay in the home for several years. Lowering the interest rate reduces your monthly mortgage payments, potentially increasing the amount you qualify to borrow. However, if you plan to move within a year or two, the savings may not justify the upfront cost of the points.
The annual percentage rate (APR) reflects the total cost of a mortgage, including interest, points, and certain loan fees, expressed as a yearly rate. It helps compare loans more accurately than the stated interest rate. However, APR does not affect your monthly payment, which is based solely on the interest rate and loan term.
Interest rates fluctuate during the loan application process. A rate lock guarantees a specific interest rate for a set period (usually 30-60 days), protecting you from rate increases before closing. Some lenders charge a fee for rate locks.
Lenders typically require:
Lenders use credit scores to assess creditworthiness. FICO scores range from 350 (high risk) to 850 (low risk). Factors affecting scores include:
An appraisal is a professional assessment of a property's market value, required by lenders to ensure the loan amount does not exceed the property’s worth.
PMI is required for conventional loans with a down payment of less than 20%. It protects lenders in case of default. The best way to avoid PMI is to make a 20% down payment or explore alternative loan options.
This method helps borrowers avoid PMI by structuring the loan as:
Closing is the final step where the property officially transfers from the seller to the buyer. It involves signing documents, finalizing payments, and receiving the keys.