points | pre-qualification vs. pre-approval | should I refinance? | what is APR?

What is a FICO score?

A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method most Lenders will use to determine the likelihood that credit users will re-pay their bills. A credit score attempts to condense a borrower's credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.
Credit scores analyze a borrower's credit history using 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
• Employment history
• Negative credit information such as bankruptcies, charge-offs, collections, etc.

There are basically 3 scores computed by data provided by each of the three bureaus--Experian, Trans Union and Equifax. Most Lenders will use the middle score.
What if there is an error on my credit report? If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly.

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POINTS OR NO POINTS

The best way to decide to pay points or not is to follow this simple analysis.
1. Calculate the cost of the points--- Example: 1 point on a $100,000 loan is $1,000.
2. Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month
3. 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 20 months. If you plan to keep the house for longer than the break-even number of months, then it makes sense to pay points; otherwise it does not.
4. The above calculation does not take into account the tax advantages of points. When you are buying a house the points you pay are tax-deductible, so you realize some savings immediately. However, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all, so there is little or no effect on the time to break even.
If you have a hard time making sense of the above formula, use this as a guide: If you plan on staying in your current home for less than 3 years, do not pay points. If you plan on staying there for more than 5 years, then pay either 1 or 2 points. If you plan to stay there for 3-5 years only it doesn't make a great difference one way or the other.

What is the difference between pre-qualifying and pre-approval?

A pre-qualification is issued by a loan officer, who, after speaking with you, determines the dollar value of a loan you can be approved for. However, a pre-qualification is not a commitment to lend. After it has been determined that you pre-qualify, the loan officer then issues you a pre-qualification letter. This pre-qualification letter is used when you are making an offer on a property. The pre-qualification letter indicates to the seller that you are qualified to purchase the house you are making an offer on, not an approval to buy!

A pre-approval is a step above. Pre-approval involves an application, verifying your credit, down payment, employment history, etc. Your loan application is submitted to a bank or lender and an actual underwriter, or in most cases, is submitted into automated underwriter which makes a decision regarding your loan application. If your loan is approved, you are then issued a pre-approval certificate. Getting your loan pre-approved allows you to close very quickly when you do find a house. A pre-approval will help you negotiate a better price with the seller, since a pre-approval is very close to having cash in the bank to pay for the house!

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Should I refinance?

Most people refinance to save money. Saving money through refinancing can be achieved in two ways:
1. By obtaining a lower interest rate which results in lower monthly mortgage payments.
2. By reducing the term of the loan, and hopefully the rate as well, saving you money over the life of the loan.
3. As an example, refinancing from a 30-year loan to a 15-year loan might result in slightly higher monthly payments, but the total of the payments paid over the term of the loan will be significantly less.

People also refinance to convert their adjustable loan to a fixed loan. The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are 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.

A third reason why homeowners refinance is to consolidate debt to replace high-interest loans with a low-rate mortgage. The debt being consolidated usually includes second mortgages, credit lines, student loans, credit cards, etc. In most cases, debt consolidation results in tax savings, since consumer loans are not tax deductible, while a mortgage loan is tax deductible. A brief call to your tax advisor would help to decide how much if any you would be able to save by consolidating your debt.

"Should I refinance?" is a complex question. Every situation is different and no two homeowners are in the exact same situation. If you are refinancing to save money on your monthly payments, try the following calculation: Calculate the total cost of the refinance--example: $2,000
1. Calculate the monthly savings--example: $100/month
2. Divide the result in 1 by the result in 2--in this case 2000/100 = 20 months. This shows the break-even time. If you plan to live in the house for longer than this period of time, it makes sense to refinance.

Sometimes, you do not have a choice. There are situations where you may have a balloon option payment with no conversion option. In this case it is best to start the process a few months before the balloon comes due.

Whatever you choose feel free to contact a mortgage consultant at Discount Funding, who might be able to save you time and money. Make a few phone calls, check out a few web sites, and spend some time to understand the options available to you.

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What is an Annual Percentage Rate (APR)?

The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. 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.

The APR does "NOT AFFECT YOUR MONTHLY PAYMENTS." Your monthly payments are a function of the interest rate and the length of the loan.

The APR is a very confusing number! Mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It helps prevent lenders from advertising a low rate and hiding fees, sometimes known as bait and switch.

Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not necessarily a better rate. The best way to compare loans from different lenders is to ask for a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. Do not pay to much attention to the "fixed" fees that should be standard from all parties involved, such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the fees associated with the loan, typically found under category 800. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.

The reason APRs are confusing is that the rules to compute an APR are not clearly defined.

The following fees ARE generally included in calculating an APR:

• Points - both discount points and origination points- if you are looking for a no point loan there should be no charges next to any of the above items.
• Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
• Loan-processing fee
• Underwriting fee
• Document-preparation fee
• Private mortgage-insurance
  

The following fees are SOMETIMES included in the APR:

• Loan-application fee
• Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)

The following fees are normally NOT included in the APR:

• Title or abstract fee
• Escrow fee
• Attorney fee
• Notary fee
• Document preparation (charged by the closing agent)
• Home-inspection fees
• Recording fee
• Transfer taxes
• Credit report
• Appraisal fee

An APR is not an indication how long your rate is locked for. A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock!

Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time.

Many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs!

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IN SUMMARY!

The APR is a result of a complex, and not clearly defined calculation. It is in your best interest to get a good-faith estimate from each lender to compare costs. Remember to exclude those costs that are independent of the loan.