Refinancing is typically a good option when mortgage rates are at least 2% lower than your current loan rate. Even if the difference is only 1%, it can still reduce your monthly payments. For instance, if you're paying $770 monthly on a $100,000 loan at 8.5%, a reduction to 7.5% would bring your payment down to $700, saving you $70 per month. The extent of savings depends on your loan details, income, and budget, so consult a lender to explore your refinancing options.
If you plan to move within a few years, refinancing may not be the best option due to the upfront fees, such as application and origination costs. For example, if you spend $1,000 to refinance but save $50 per month, it would take over 20 months to recover that cost. However, some lenders may offer "no-cost" loans with slightly higher rates, depending on your situation.
The cost of refinancing can range from $250 to $350 for an application fee. Additionally, you might pay an origination fee of about 1% of your loan amount. Other costs, such as title search and lender fees, can add up to 2-3% of the total loan amount. If you don't have the funds to cover these expenses, consider lenders that offer "no-cost" loans with higher interest rates.
In mortgage terms, a point refers to 1% of the loan amount. For example, one point on a $100,000 loan is $1,000. Points are paid upfront to secure a loan, and discount points can be used to lower the interest rate on your mortgage. A "point" may also refer to 100 basis points, which is 1% of the loan value.
Paying discount points can be a good option if you plan to stay in your home for several years, as it reduces your monthly payments. However, if you plan to move soon, the upfront cost of the points may not be worth the savings.
Locking in an interest rate guarantees that rate for a specified period, typically 30-60 days. This can protect you from rising rates during the loan application process, though it may come with a fee.
If interest rates are expected to be volatile, locking in your rate may help you avoid potential increases. However, if you're flexible with your budget and the possibility of higher payments, you might opt to let the rates "float" and see if they decrease.
Even with a poor credit history, securing a home loan is possible. Lenders may charge higher interest rates and require larger down payments (20%-50%) to offset the risk associated with your credit score.
If you've been late on credit card payments less than three times in the past year, and the payments were no more than 30 days late, you may still qualify for a reasonable interest rate. Lenders may accept certain explanations like illness or job changes.
When selecting a lender, consider these two factors:
