What is the Difference Between Prequalification and Pre - Approval?
An in depth explanation to help serious house hunters in their mortgage search.
1.What is the difference between pre-qualification and pre-approval?
Prequalification takes about an hour and is conducted by a licensed loan originator or broker working for a particular lender. To obtain prequalification, applicants need to provide an application and have their credit pulled. Once this information is obtained and reviewed by the lender an applicant will be awarded prequalification status. Although this can be helpful for buyers to know where they stand it does not necessarily lock in their rate or guarantee a particular loan at a given price point.
Pre-approval is different than prequalification in that your information has been underwritten by an authorized Underwriter. Mortgage lenders often provide in-house Underwriters because they can approve you for a home loan quickly and efficiently. Upon receiving a valid pre-approval, your next step is finding the right home for the right price. Once you find that home, and it appraises for the agreed upon price or higher, you should be able to close your loan in a short period of time.
To get pre-approved for a home loan be sure to fill out your mortgage application in its entirety, by leaving parts blank or incomplete you will only make the process harder on yourself. You will also need to provide certain documents concerning your assets, income, and employment.
In order to ensure your home purchase goes as seamlessly as possible consumers are better off applying for a pre-approval because it helps them truly have an idea as to what their budget is and protects them from hidden surprises once they find a house and apply for the loan. If you have a pre-approval in hand it shows your real estate agent and the seller that you are a serious home buyer; in this market it is extremely important to the sellers that their prospective buyers have been pre-approved.
2.Is it still worth refinancing in the current market?
The rule of thumb used to be that if you could lower your interest rate by one point or more then it is worthwhile for you to refinance. Now, this is not necessarily the case. In today's market it might make sense for you to refinance even if you can lower your rate by only one quarter or one half percent. If the lender can pay your closing costs as well as give you a lower interest rate than your current one it might be time to take a serious look at refinancing. If the new rate saves you enough money on your monthly principal and interest payment, it may make sense to refinance even though the new interest rate would allow you to save less than one point.
I want to refinance to secure a lower interest rate, what do I need to know?
Refinancing to save money is like making an investment, and when you lower your monthly payment by locking in a lower interest rate it is the return on your investment. Before you refinance for a lower interest rate you need to know how much it will cost to refinance, how much you will save per month, and then decide if your savings are large enough to justify the closing costs of the loan. Some consumers can qualify for "No cost" refinances that will immediately impact their savings while others can save thousands of dollars a years by lowering their interest rate by even one half percent. Look for a mortgage with few or no points, even if it has a slightly higher rate.
What's the smartest plan when it comes to keeping my home equity loan open or closed when refinancing my first mortgage?
If you currently have a Home Equity Line of Credit and are considering refinancing your first mortgage, you must review your current personal situation to come up with the best plan of action. You have to determine if you need the access to the line of credit for emergencies or other items.
When refinancing your first mortgage it may make sense to "roll in" and pay off the Home Equity Line of Credit (HELOC). Although the Line of Credit appears quite appealing today due to a low interest rate and interest only payments, HELOC's do have the downside of being an adjustable rate mortgage, in most cases. These adjustable rate mortgages are usually tied to the Prime Rate and can adjust monthly. Most HELOC's have very high lifetime interest rate caps and can become quite a financial burden if you are highly leveraged on the credit. With today's incredibly low fixed rate first mortgages, it may be the right time to pay off and close the adjustable HELOC's for fixed payments and peace of mind.
3.Is the lowest mortgage rate always the best one to take?
Not necessarily. Let's use an example. Let's assume you have two quotes on a $200,000, 30 yr. fixed rate mortgage. One rate is 5.25% with no points, no closing costs and the other is 5.0% with no points, and $3000 in closing costs. The payment on option one would be $1104.41. The payment on option two is $1073.64. That is a difference of $30.77 on your monthly payment. So you have to consider the following. Should I pay $3000 now at the closing to save $30.77 a month? Well, $3000 divided by $30.77 is approximately 98. This means that it will take 98 months or 8.1 years to break even on your investment of $3000 in closing costs. If you were my client, I would suggest that you look at the higher rate and keep the $3000 in your pocket! Statistically, the likelihood of you moving, or at a minimum, doing something different with your mortgage within the next 8 years is extremely high. So why invest in the closing costs if you never break even?