When should I refinance?

It's generally a good time to refinance when mortgage rates are 2% lower than the current rate on your loan.  It may be a viable option even if the interest rate difference is only 1% ar less.  Any reduction can trim your monthly mortgage payments.  Example: Your payment, excluding taxes and insurance would be about $770 on a $100,000 loan at 8.5%.  If the rate were lowered to 7.5%, your payment would then be $700, now you're saving $70 per month.  Your savings depends on your income, budget, loan amount, and interest rate changes.  Your trusted lender can help you calculate your options

What are points?

A point is a percentage of the loan amount, or 1 point =1% of the loan, so one point on a $100,000 loan is $$1,000.Poinys are costs that need to be paid to a lender to get mortgage financing under specified terms.  Discount points are fees used to lower the interest rate on a mortgage loan by paying some of this interest up=front.  Lenders may refer to costs in terms of basic points in hundredths of a percent, 100 basis points = 1 point, or 1% of the loan amount.

Should I pay points to lower my interest rate?

Yes, if you plan to stay in the property for at least a few years.  Paying discount points to lower the loan's interest rate is a good way to lower your required monthly loan payment, and possibly increase the loan amount that you can afford to borrow.  However, if you plan to stay in the property for only a year or two, your monthly savings may not be enough to recoup the cost of the discount points that you paid up-front.

What is APR?

The annual percentage rate (APR) is an interest rate reflecting the cost of a mortgage as a yearly rate.  This rate is likely to be higher than the stated note rate or advertised rate on the mortgage because it takes into account points and other credit costs.  The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.  The APR is designed to measure the "true lending cost of a loan."  It creates a level playing field for lenders.  It prevents lenders from advertising a low rate and hiding fees.

The APR does not affect your monthly payments.  Your monthly payments are strictly a function of the interest rate and the length of the loan.

Because APR calculations are affected by the various different fees charged by lenders, a loan with a lower APR is not neccessarily a better rate.   The best way to compare loans is to ask lenders to provide you with a Loan Estimate of their costs on the same type of program (ie: 30 year fixed) at the same interest rate.  You can then delete the fees that are independent of the loan such as homeowner insurance, title fees, escrow fees, attorney fees, etc.  Adding up the loan fees for each Loan Estimate and compare the Lender loan costs.

  • Points - both discount points and origination points
  • Pre-paid interest.  The interest paid from the date the loan closes to the end of the month.
  • Loan processing fee
  • Underwriting fee
  • Document preparation fee
  • Private mortgage insurance 
  • Escrow fee

The following fees are normally not included in the APR:

  • Title or abstract fee
  • Borrower Attorney fee
  • Home inspection fee
  • Recording fee
  • Transfer fee
  • Credit report
  • Appraisal fee

What does it mean to lock the interest rate?

Mortgage rates can change from the day you apply for a loan to the day you close the transaction.  If interest rates rise sharply during the application process, it can increase the borrower's mortgage payment unexpectedly.  Therefore, the borrower has the option to "lock-in" the loan interest rate, guaranteeing that the rate for a specified time period, often 30 - 60 days, sometimes at fee. 

Helpfully links:

  1. Determine your down payment” Consumer Financial Protection Bureau. Accessed on March 7, 2024.

  2. What is private mortgage insurance?” Consumer Financial Protection Bureau. Accessed on March 7, 2024.

  3. Get to know the types of mortgage loans” Fannie Mae. Accessed on March 7, 2024.

  4. Let FHA loans help you” U.S. Department of Housing and Urban Development. Accessed on March 7, 2024.

  5. USDA Housing Loans Offered with Zero Money Down” U.S. Department of Agriculture. Accessed on March 7, 2024.

  6. Purchase loan” U.S. Department of Veterans Affairs. Accessed on March 7, 2024.