Answers to common questions from Massachusetts homebuyers, homeowners, and real estate professionals about mortgages, refinancing, credit, and closing.
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It may make sense to refinance when a new loan helps you reach a specific financial goal and you plan to keep the home long enough to recover the cost of refinancing. There is no single rate difference that makes a refinance right for everyone.
Common reasons homeowners refinance include:
A simple way to evaluate a refinance is to find your break-even point: divide the total cost of the refinance by your monthly savings to see how many months it takes to recover the cost. Your loan officer can walk through options based on your income, budget, loan balance, and how long you plan to stay in the home.
A point equals 1% of your loan amount, so one point on a $100,000 loan is $1,000. Discount points are an optional upfront cost you can pay to lower your interest rate. Lenders sometimes describe pricing in basis points, where 100 basis points equals one point, or 1% of the loan amount.
Paying points can make sense if you plan to keep the loan long enough for the monthly savings to exceed the upfront cost. To estimate your break-even point, divide the cost of the points by the monthly payment savings. If you expect to sell or refinance before reaching that point, paying points may not be worth it.
The annual percentage rate (APR) shows the yearly cost of a mortgage, including the interest rate plus certain lender fees and points. Because it includes those costs, the APR is usually higher than the loan's interest rate. It is designed to help you compare loan offers on a more equal basis.
The APR does not determine your monthly payment. Your principal and interest payment is based on the interest rate, loan amount, and loan term.
A lower APR does not always mean a better loan for your situation. The best way to compare offers is to request a Loan Estimate from each lender for the same loan type, term, and interest rate, then compare the loan costs in Section A (Origination Charges) and the total closing costs.
The fees included in the APR generally are:
Fees that are normally not included in the APR:
A rate lock guarantees your interest rate for a set period while your loan is processed, protecting you if rates rise before closing. Mortgage rates can change daily between application and closing. Lock periods commonly range from 30 to 60 days, and longer locks may be available, sometimes for a fee. If your lock expires before closing, you may need to extend it.
Most mortgage applications require proof of income, assets, debts, and details about the property. Every situation is unique, so your lender may request additional documents. Responding quickly to requests helps keep your loan on schedule.
For the property you are buying:
If you are a W-2 employee, lenders typically ask for:
If you receive alimony or child support you want to use to qualify, provide the divorce decree or court order showing the amount and proof of receipt. If you receive Social Security, disability, or VA benefits, provide your award letter.
Self-employed borrowers and those with commission, bonus, interest, dividend, or rental income typically provide:
Some loan programs use bank statements or other alternative documentation to qualify self-employed borrowers. Ask your loan officer which options fit your situation.
Lenders need to verify where your down payment and closing funds come from. Typical documents include:
Large or unusual deposits may need a written explanation and supporting documents.
Your lender will review your credit report for most debts, but be prepared to provide:
Lenders use your credit report and credit score to estimate how likely you are to repay a loan on time. Scoring models look at your payment history, how much you owe compared to your credit limits, the length of your credit history, recent applications for credit, and the types of credit you use.
FICO scores are the most widely used credit scores in mortgage lending. Most FICO scores range from 300 to 850, and higher scores indicate lower risk.
Because your credit report affects your score, review it for errors before you apply. You can get free credit reports from Equifax, Experian, and TransUnion at AnnualCreditReport.com. These free reports may not include your credit score.
The most reliable ways to improve your credit score are to pay every bill on time, pay down credit card balances, and avoid opening new credit before and during your mortgage process. Scoring models vary, but most weigh these factors:
Improving a score significantly takes time. A loan officer can review your credit report and point out which changes may have the biggest impact before you apply.
An appraisal is an independent estimate of a property's market value, completed by a licensed or certified appraiser. Lenders typically require an appraisal to confirm the home is worth at least the loan amount. The appraiser considers the home's condition, size, features, location, and recent sales of comparable homes nearby. Some loans may qualify for an appraisal waiver or alternative valuation.
Private mortgage insurance (PMI) is usually required on a conventional loan when your down payment is less than 20% of the purchase price. It protects the lender if the loan goes into default and is typically added to your monthly payment. You can generally request to cancel PMI once your loan balance reaches 80% of the home's original value, and it ends automatically at 78% if your payments are current. FHA, VA, and USDA loans have their own mortgage insurance or funding fee rules.
80-10-10 financing combines a first mortgage for 80% of the purchase price, a second mortgage for 10%, and a 10% down payment. Because the first mortgage is only 80% of the price, this structure can help buyers avoid private mortgage insurance without putting 20% down.
The second mortgage usually carries a higher interest rate than the first, so compare the total cost against a single loan with PMI. Variations such as 80-15-5 may be available with a smaller down payment. Availability and terms vary by lender.
Closing is the final step in buying a home: you sign your loan documents, your remaining funds are delivered, and ownership transfers to you when the deed and mortgage are recorded.
In Massachusetts, closings are conducted by a licensed attorney, who examines title, prepares or reviews the closing documents, disburses funds, and records the deed and mortgage at the county Registry of Deeds. The closing attorney often represents the lender, so many buyers also hire their own attorney to review the Purchase and Sale Agreement and represent them at closing. Signing usually takes about an hour. Before closing, you should:
Once the deed is recorded, you receive the keys.