It's generally a good time to refinance when mortgage rates are at least 1 to 2% lower than the current rate on your loan. Any reduction can trim your monthly mortgage payments. Example: Your payment, excluding taxes and insurance, would be about $770 on a $100,000 loan at 8.5%; if the rate were lowered to 7.5%, your payment would then be $700, saving you $70 per month. Your savings depends on your income, budget, loan amount, and interest rate changes.

A point is a percentage of the loan amount. 1 point = 1% of the loan. One point on a $100,000 loan is $1,000. Points are costs that need to be paid to a lender to get mortgage financing under specified terms. Discount points are fees used to lower the interest rate on a mortgage loan by paying some of this interest up-front.

Yes, if you plan to stay in the property for a least a few years. Paying discount points to lower the loan's interest rate is a good way to lower your required monthly loan payment, and possibly increase the loan amount that you can afford to borrow. However, if you plan to stay in the property for only a year or two, your monthly savings may not be enough to recoup the cost of the discount points that you paid up-front.

The annual percentage rate (APR) is an interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan. The APR is designed to measure the "true cost of a loan" by creating a level playing field for lenders. It prevents lenders from advertising a low rate with hiding fees.

The following fees are generally included in the APR:

• Points - both discount points and origination points
• Pre-paid interest. The interest paid from the date the loan closes to the end of the month.
• Loan-processing fee
• Underwriting fee
• Document-preparation fee
• Private mortgage-insurance
• Escrow fee

The following fees are normally not included in the APR:

• Title or abstract fee
• Borrower Attorney fee
• Home-inspection fees
• Recording fee
• Transfer taxes
• Credit report
• Appraisal fee

Mortgage rates can change from the day you apply for a loan to the day you close the transaction. If interest rates rise sharply during the application process it can increase the borrower’s mortgage payment unexpectedly. Therefore, a lender can allow the borrower to "lock-in" the loan’s interest rate guaranteeing that rate for a specified time period, often 30-60 days, sometimes for a fee.

Below is a list of documents that are required when you apply for a mortgage. You may be required to provide additional documentation.

Your Property

• Copy of signed sales contract including all riders
• Verification of the deposit you placed on the home
• Names, addresses, and telephone numbers of all realtors, builders, insurance agents, and attorneys involved
• Copy of listing sheet and legal description if available

Your Income

• Copies of your pay-stubs for the most recent 30-day period and year-to-date
• Copies of your W-2 forms for the past two years
• Names and addresses of all employers for the last two years

(If Self-Employed)

• Provide full tax returns for the last two years along with year-to-date profit and loss statement
• K-1's for all partnerships and S-Corporations for the last two years

(If you will use alimony or child support to qualify)

• Provide divorce decree/court order stating amount, as well as, proof of receipt of funds for last year

Source of Funds and Down Payment

• Sale of your existing home - provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold
• Provide copies of bank statements for the last 3 months
• Stocks and bonds - provide copies of your statement from your broker or copies of certificates

Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts is collected from your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. Your credit score helps creditors predict how likely it is that you will repay a loan and make the payments when due.

Your score will fall between 350 (high risk) and 850 (low risk).

Credit scoring models generally evaluate the following types of information in your credit report:

• Have you paid your bills on time? Your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy.
• What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
• How long is your credit history? A brief credit history may have an effect on your score, but can be offset by other factors, such as timely payments and low balances.
• Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at inquiries for your credit report. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted.
• How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. Under some scoring models, loans from finance companies may negatively affect your credit score.

To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It can take some time to improve your score significantly.

An appraisal is an estimate of a property's fair market value. It's a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The appraisal is performed by an appraiser. They're typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.

On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage, lenders usually require you get private mortgage insurance (PMI) to protect them in case you default on your mortgage. Sometimes, you may need to pay up to 1 year's worth of PMI premiums at closing which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or consider other loan programs.