It is often said that you should refinance when mortgage rates are 1/2% lower
than the rate you currently have on your loan. Refinancing may be a viable option
even if the interest rate difference is less than 1/2%. A modest reduction in
the loan rate can still trim your monthly payment. For example, the monthly
payment (excluding taxes & insurance) would be about $770 on a $100,000
loan at 8.5%. If the rate were lowered to 7.5%, the monthly payment would be
about $700, a savings of $70. The significance of such savings in any scenario
will depend on your income, budget, loan amount and the change in interest rate.
Your trusted lender can help calculate the different scenarios.
Points are costs that need to be paid to a lender in order to receive mortgage
financing under specified terms. A point is a percentage of the loan amount
(1 point = 1% of the loan amount). One point on a $100,000 loan would be
$1,000. Discount points are fees that are used to lower the interest rate on
a mortgage loan (you are discounting the interest rate by paying some of this
interest up-front). Lenders may express other loan-related fees in terms of
points. Some lenders may express their costs in terms of basis points (hundredths
of a percent). 100 basis points = 1 point (or 1% of the loan amount).
If you plan on staying in the property for at least a few years, paying discount
points to lower the loan's interest rate can be a good way to lower your required
monthly loan payment (and possibly increase the loan amount that you can afford
to borrow). If you only plan to stay in the property for a year or two, your
monthly savings may not be enough to recoup the cost of the discount points
that you paid up-front. Ask your lender how long it would take for your monthly
savings to recoup the costs of the discount points.
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 home buyers to compare different
types of mortgages based on the annual cost for each loan. The APR is designed
to measure the "true cost of a loan." It creates a level playing field
for lenders. It prevents lenders from advertising a low rate and hiding fees.
Because different lenders calculate APRs differently, a loan with a lower APR
is not necessarily a better rate. The best way to compare loans is to ask lenders
to provide you with a good-faith estimate of their costs on the same type of
program (e.g. 30-year fixed) at the same interest rate. You can then delete
the fees that are independent of the loan such as homeowners insurance, title
fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender
that has lower loan fees has a cheaper loan than the lender with higher loan
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.
The following fees are generally included in the APR:
- Origination Points
- Discount Points
- Processing Fee
- Underwriting Fee
- Document Preparation Fee
- Private Mortgage Insurance
The following fees are normally not included in the APR:
- Appraisal Fee
- Credit Report Fee
- Escrow Fee
- Attorney Fee
- Title Examination Fee
- Document Preparation Fee (charged by the closing agent)
- Recording Fee
- Transfer Taxes
- Home Inspection Fee
Due to the nature of interest rate movements, mortgage rates can change dramatically
from the day you apply for a mortgage loan to the day you close the transaction.
If interest rates rise sharply during the application process, it could make
a borrower's mortgage payment larger than he/she previously thought. To protect
against this uncertainty, a lender can allow the borrower to 'lock-in' the loan's
interest rate, guaranteeing the borrower the prevailing loan rate for a specified
period of time (often 30-60 days). A lender may or may not charge a fee for
this service.
Mortgage Loan Resources 
