| pre-qualification vs. pre-approval
| should I refinance? |
what is APR?
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:
amount of time credit has been established
amount of credit used versus the amount of credit
of time at present residence
credit information such as bankruptcies, charge-offs,
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
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
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
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
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!
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!
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
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
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
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.
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
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.
What is an Annual Percentage
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.
APR does "NOT AFFECT YOUR MONTHLY PAYMENTS."
Your monthly payments are a function of the interest
rate and the length of the loan.
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
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
- 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
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!
following fees are SOMETIMES included in the APR:
life insurance (insurance that pays off the
mortgage in the event of a borrowers death)
following fees are normally NOT included in the
or abstract fee
preparation (charged by the closing agent)
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
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.