Q: What is the difference between being pre-qualifed and pre-approved?
A: Pre-qualification is normally determined by a loan officer. After interviewing you, the loan officer determines the potential loan amount for which you may be approved. The loan officer cannot issue loan approval, therefore, pre-qualification is not a commitment to lend. After the loan officer determines that you are pre-qualified, he/she then issues a pre-qualification letter. The pre-qualification letter is used when you make an offer on a property. The pre-qualification letter informs the seller that your financial situation has been reviewed by a professional, and you will likely be approved for a loan to purchase the home.
Pre-approval is a step above pre-qualification. Pre-approval involves verifying your credit, down payment, employment history, income, etc. Your loan application is submitted to a lender's underwriter, and a decision is made regarding your loan application. Getting your loan pre-approved allows you to close very quickly when you do find a home. Pre-approval can also help you negotiate a better price with the seller.
Q: What is a rate lock?
A: 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 in period, 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.
Suppose on March 2 you obtain a 15-day lock for a 30-year fixed loan at 8 percent, 2 points. The lock will expire on May 18 (if May 18 is a holiday then the lock is typically extended to the first working day after the 18th). The lender must disburse funds by May 18th, otherwise your rate lock expires, and your original rate-lock commitment is invalid.
When a lock expires, most lenders will let you relock at the higher of the original rate/points or current rate/points. 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.
Q: Should I refinance?
A: The most common reason for refinancing is to save money. Saving money through refinancing can be accomplished in two ways:
1. By obtaining a lower interest rate that causes your monthly mortgage payment to be reduced.
2. 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 interest paid during the life of the loan can be reduced significantly.
People also refinance to convert their adjustable rate loan to a fixed loan. The main reason for doing this 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.
Another reason why homeowners refinance is to consolidate debts and replace high-rate 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 consumer loans are not tax deductible, while a mortgage loan is usually tax deductible.
The answer to the question, "Should I refinance?" is a complicated one, since every situation is different and no two homeowners are in the exact same situation. The conventional wisdom of refinancing only when you can save 2 percent on your rate is problematic. If you are refinancing to lower your monthly payments, the following calculation is more appropriate compared to the 2 percent rule:
1. Calculate the total cost of the refinance--example: $2,000
2. Calculate the monthly savings--example: $100/month
3. Divide the result in 1 by the result in 2--in this case 2000/100 = 20 months. This shows the break-even time period. If you plan to live in the home for longer than this period of time, it likely 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 payment and no conversion option. In this case it is best to refinance a few months before the balloon payment is due.
Whatever you're considering, consulting with a seasoned mortgage consultant can often save you time and money.
Q: Can I use the county tax assessor’s value as the market value for my home?
A: Mortgage companies do not use the county tax-assessor's value to determine whether they will make the loan. They use a market-value appraisal which may be very different from the assessed value.
Q: Is it ok to obtain a second mortgage before I refinance my first mortgage?
A: Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first mortgage, check with your mortgage company to find out if getting a second will cause your refinance transaction to be turned down. There are many programs where you can apply for both a first and second at the same time.
Q: Is it ok to pull cash out of my credit line before I refinance my first mortgage?
A: Many lenders have cash-out seasoning requirements. This means that if you pull cash out of your credit line for anything other than home improvements, they will consider the refinance to be a cash-out transaction. This usually results in stricter requirements and in some cases can break the deal.
Q: Should I choose a lender because they have the lowest rate?
A: While the rate is important, consider the total cost of your loan, loan fees, discount and origination points. A below market or low interest rate quote may indicate some hidden loan requirements, like a prepayment penalty, requirement for escrow impounds, a short 15 day rate lock or requiring a bigger down payment. Make sure the rate quoted is for your specific loan request.
The cost of the mortgage should not be your only criterion. Select a reputable company which will deliver the loan as promised. If in the final hours of the transaction you find that the lender has suddenly increased their profit margin at your expense, you won't have time to start again with a different lender. Ask family and friends for referrals, and interview several prospective mortgage companies.
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