Michael Stockton

The FED announced last week that it would cut it’s overnight lending rate to .25%. This news alone was not necessarily a shock to the market, however in the words of the FED Chairman, Ben Bernanke, the FED would use every tool in its’ arsenal to help stimulate the economy.  One tool is the purchase of mortgage backed securities.  The FED’s announcement to continue to purchase mortgage backed securities caused the bond market to rise rapidly.  This alone will help to continue to drive down mortgage rates. 

Refinancing your mortgage is a big step, but how do you decide when to do it? Here some tips to help you decide when the time is right for you.

The rates are lower This is probably the first reason people decide to refinance because it results in lower monthly payments. Generally, if rates drop 1 percent or more - it’s a good time to refinance.

You need extra money Need to pay college tuition or a high interest credit card? Because refinancing results in lower payments, the money you save can be spent elsewhere.

You want to reduce the term of your loan Many people refinance to save money over the life of their loan. For example, if you currently have a 30-year loan and you refinance to a 15-year loan, after you refinance you may have higher monthly payments but you will pay off your loan quicker.

You want to convert your adjustable loan to a fixed loan If the rates are lower than they were when you got your loan, switching to a fixed rate mortgage can offer more security and stability as well as save you money!

You want to consolidate debt Loans such as second mortgages, credit lines, student loans and credit cards can often be consolidated when you refinance. Plus, consolidating your debt can result in tax savings, since consumer loans are not tax deductible, but a mortgage loan is tax deductible.

1.      What’s the difference between pre-qualification and pre-approval?

      Pre-qualification is a simple process. The buyer is asked specific questions about their income, assets and liabilities.  Based on this information, they are provided with an amount for which they may qualify. This process can be done strictly on a verbal level or electronically over the Internet.

 On the other hand, a pre-approved buyer is one who is actually approved for a loan of a certain amount.  The pre-approval process is much more involved.  The borrower will provide proof of income, assets and liabilities and this information will be verified by the lender.  Because of this verification, pre-approved buyers are much more attractive to sellers than pre-qualified buyers.

 2.      When dealing with borrowers, what concerns lenders the most?When dealing with borrowers, lenders’ main concern is risk.  Lenders proactively manage these risks by requiring four things from a borrower:

       1.Down Payment – statistics have proven that borrowers who put down 10% or more unlikely to default on a loan.

1. Excellent Debt to Income Ratios – borrowers with high debt and low income are a high risk because they are using too much of their income to pay their current debt; e.g. credit card debt, car loans, and so on.  We describe a person with high debt and low income as having a high DTI (debt to income ratio).
2. Job History – long term employment is a good predictor that a borrower will have a steady stream of income, which will not be interrupted by a career change or termination.
3. Excellent Credit – a credit score tells an underwriter a great deal about a borrower.  Lenders take a close look at FICO scores.  FICO stands for Fair Isaac Credit Organization, the organization that developed the formulas used by credit bureaus to calculate credit scores.  (Go to www.myfico.com to learn more.)

 3.      Why do credit scores vary?  And what do lenders like?

The three major credit bureaus are:  Experian, Equifax and TransUnion.  Credit scores will vary from bureau to bureau because each bureau puts different emphasis on different factors; these factors are delinquencies, too many credit cards, balances that are too high, too many recent credit inquiries, tax liens, judgments, bankruptcies, length of credit history, and so on.Credit scores are calculated using a scorecard that allocates points for each of the above factors; however, lenders do not get to see the entire scorecard, all they see are the final scores.  FICO scores can range from 300-850.