When Should I Refinance?

Refinancing often makes sense when mortgage rates drop at least 2% below your current rate. In some cases, refinancing may still help even if rates drop by 1% or less, since any reduction can lower your monthly payment.

Example:
On a $100,000 loan at 8.5%, your monthly payment (excluding taxes and insurance) is about $770. If the rate drops to 7.5%, your payment falls to about $700. That change saves you $70 per month.

Your actual savings depend on factors such as your income, budget, loan balance, and the size of the rate reduction. A trusted lender can help you calculate whether refinancing benefits your situation.

What Are Mortgage Points?

A point equals 1% of the loan amount. For example, one point on a $100,000 loan costs $1,000. Lenders charge points as part of the cost of securing a mortgage.

Discount Points

Borrowers use discount points to lower their interest rate by paying interest upfront. Lenders may also describe points in terms of basis points, where 100 basis points equal 1 point (or 1% of the loan amount).

Should I Pay Points to Lower My Interest Rate?

Paying points usually makes sense if you plan to stay in the home for several years. Discount points reduce your interest rate and lower your monthly payment. They may also allow you to qualify for a larger loan.

However, if you plan to sell or refinance within a year or two, the monthly savings may not offset the upfront cost. In that case, paying points may not be worthwhile.

What Is an APR?

The Annual Percentage Rate (APR) reflects the total yearly cost of a mortgage. It includes the interest rate plus points and certain lender fees. Because of this, the APR usually appears higher than the advertised interest rate.

APR helps borrowers compare mortgage offers by showing the true cost of the loan. It also prevents lenders from advertising low rates while hiding fees.

APR and Monthly Payments

APR does not affect your monthly payment. Your payment depends only on the interest rate and loan term.

A lower APR does not always mean a better deal. Fees vary by lender, so borrowers should request a Good Faith Estimate for the same loan type and interest rate. Remove non-loan fees like insurance or title costs, then compare total loan-related fees.

Fees Included in the APR

• Discount and origination points

• Prepaid interest

• Loan processing fees

• Underwriting fees

• Document preparation fees

• Private mortgage insurance (PMI)

• Escrow fees

Fees Usually Excluded from the APR

• Title or abstract fees

• Borrower attorney fees

• Home inspection fees

• Recording fees

• Transfer taxes

• Credit report fees

• Appraisal fees

What Does It Mean to Lock an Interest Rate?

Mortgage rates can change between application and closing. If rates rise, your monthly payment may increase unexpectedly.

To avoid this risk, lenders offer rate locks. A rate lock guarantees your interest rate for a set period, usually 30 to 60 days. Some lenders charge a fee for this service.

Documents Needed for a Loan Application

Every borrower’s situation differs, but most lenders request the following documents. Providing them quickly helps speed up approval.

Property Information

• Signed purchase contract and riders

• Proof of earnest money deposit

• Contact information for real estate professionals

• Listing sheet and legal description

• Condo documents (if applicable)

Income Verification

• Pay stubs from the last 30 days

• W-2 forms from the past two years

• Employer information for the past two years

• Explanation for employment gaps

• Copy of work visa or green card (if applicable)

Self-Employed or Variable Income

• Two years of full tax returns

• Year-to-date profit and loss statement

• K-1 forms for partnerships or S-corporations

• Business tax returns (if ownership is 25% or more)

Other Income Sources

• Divorce decree and proof of alimony or child support

• Award letters for Social Security, disability, or VA benefits

Assets and Down Payment

• Bank statements from the last three months

• Investment account statements

• Gift affidavit and proof of funds (if applicable)

• Sale contract for current home (if selling)

Debts and Obligations

• List of current debts and balances

• Mortgage or rent history for the past two years

• Court orders for alimony or child support payments

How Do Lenders Judge Credit?

Lenders use credit scoring systems to evaluate how likely you are to repay a loan. These systems analyze your payment history, debt levels, account types, and credit age.

The most common scores come from FICO, which range from 350 (high risk) to 850 (low risk). Lenders rely heavily on these scores when approving loans.

Because credit reports influence scores, borrowers should review them for accuracy before applying.

How to Improve Your Credit Score

While scoring models vary, most consider the following factors:

Payment History

Late payments, collections, and bankruptcies can significantly lower your score.

Credit Utilization

High balances compared to credit limits can hurt your score.

Credit History Length

Longer credit histories generally help, especially when paired with timely payments.

New Credit Applications

Too many recent applications may lower your score, though some inquiries do not count.

Credit Mix

A balanced mix of credit types often helps, while excessive credit cards may hurt.

To improve your score, pay bills on time, reduce balances, and avoid taking on new debt.

What Is an Appraisal?

An appraisal estimates a property’s market value. Lenders require appraisals to ensure the loan amount does not exceed the home’s value.

A licensed appraiser evaluates the property’s condition, location, and features before issuing a report.

What Is Private Mortgage Insurance (PMI)?

Lenders usually require PMI when a borrower makes a down payment of less than 20%. PMI protects the lender if the borrower defaults.

Borrowers may need to prepay PMI at closing, which can cost several hundred dollars. A 20% down payment or alternative loan programs can help avoid PMI.

What Is 80-10-10 Financing?

80-10-10 financing helps borrowers avoid PMI. The structure includes:

• An 80% first mortgage

• A 10% second mortgage

• A 10% cash down payment

Borrowers who can only afford 5% down may use 80-15-5 financing. However, this option often comes with higher interest rates and fees due to increased lender risk.

What Happens at Closing?

Closing finalizes the transfer of property ownership from the seller to the buyer. This process may involve attorneys, lenders, agents, and escrow or title representatives.

Before closing, buyers should complete a final walk-through to confirm repairs and included items.

In many states, a title or escrow company handles the settlement. Once funds are disbursed, the seller receives payment, and the buyer receives the keys.