The Application Process

Whether you walk into a bank, you apply for your loan on the Internet, or a mortgage officer meets you in your home, all lenders require an actual application. The form is standardized and known as the ''1003'' which is the Fannie Mae designation for this form.

The lender will want to verify certain information about the borrower(s) and will require additional information on the property. Borrower information will include verification of income and employment, assets, and credit history of the applicants. Some of this information will be provided by you, the applicant, as part of your application process. For example, you will be requested to provide copies of W-2 forms for 2 years, pay stubs, and bank statements for asset verification. Other information, such as your credit history, will be obtained directly from the credit bureaus even if you have a current credit report on hand. The lenders will always verify this information independently.

For the property itself, the lender will order an appraisal and a legal description of the property, such as a title report. Certain lenders will work with certain appraisal companies, so if you have an old appraisal it may not necessarily be accepted by the new lender. Even if the loan is to be made with a relatively large down payment, the lender still wants the property appraised. In the case of a purchase, other inspections may also be done, but are separate from the appraisal for the loan.

The Approval Process

During the ''processing'' and/or ''underwriting'' period, your credit, assets, income and other determinants are checked and compiled. At the end, your loan is either approved with conditions or approved without conditions or declined. Sometimes a loan is labeled suspended which while sounding harsh, is simply another way of saying that the lender requires more information to decide. Don't be alarmed if your loan is suspended, this is not necessarily a step towards being declined. Usually you can submit additional documents and turn a suspension into an approval.

Conditions are further documentation or checks that the lender needs to finalize your loan before funds can be dispersed. Many borrowers become frustrated by conditions that surface at the end of a loan transaction and can't understand why they are being raised so late. This is because the loan may go through several review processes prior to actual funding, and the final conditions are added on sometimes as late as after the loan documents have been signed. Just work with the lender and remember, the process is not perfect and the lender is simply trying to meet conditions imposed by other sources on them. Since most loans these days are sold and serviced by other parties, the lender must verify that the loan will be salable upon close. Whether or not you are serviced by your original mortgage lender or a new party shouldn't matter, your payment will simply be made to the new institution. No other terms of your loan can be changed after you have signed your final loan documents.

When all conditions are met, your loan documents are drawn up and forwarded to the place of settlement or closing. You sign everything and in some states the lender reviews the package one last time.

TIP: Do not make any adverse changes to your financial ''picture'' during this delicate time between approval and when funds are dispersed. Believing the ''approval'' is the final stage or that the lender won't find out about the change in debt or income or other factors can lead to real headaches. Innocent mistakes range from applying for a new department store credit card to purchasing a refrigerator for the new house, to buying two new Mercedes Benz sedans, to quitting a job to go full time into a new business. These changes will at least force an explanation to be given and at worst may cause your loan not to fund and the approval to be withdrawn. Often a lender obtains another credit report and calls your employer one last time before funding the loan.

Simultaneous to funds being dispersed, an instrument is recorded at the county recorders office to give the lender security to your property. This last step varies from state to state.

The Lock Process

Sometime before your loan documents are drawn, you will ''lock in'' a rate for your loan with the mortgage source. The purpose of the lock is to allow you a loan at the ''locked-in'' rate if the loan closes before the lock period expires, even if rates are higher at the time of funding. This could be offered at the application, upon approval, or anywhere in between. Most multi-lender sources give you the choice of when to lock. Typically the shorter the time period between your lock and the actual closing the cheaper the interest rate or points.

To summarize, there are many ways to approach your home financing process beginning with the source that you choose to borrow from. The advantages of working with a broker or multi-lender platform on the Web are substantial and account for the shift away from banks and direct lenders. Understanding the loan process can minimize the likelihood of frustration during the loan transaction. Remember to work with a source that has established itself as a company with integrity that cares for the borrower throughout the experience.

The rule widely published years ago was to only refinance if you could lower your mortgage interest rate by at least two percentage points. This general rule of thumb was a simple way to analyze the refinance, allowing consumers to consider the rough costs of refinancing. That rule no longer holds true in today's market, because you can refinance your mortgage for no closing costs, or no points.

When a refinance costs you nothing, any savings in the rate is pure gravy. ''No-Closing Cost'' refinances are just one of the ''2% rule'' breakers. We'll discuss these and other reasons to consider refinancing in this article.

Here are some of the most popular reasons to refinance:

• Lower your monthly mortgage payment to improve cash flow
• Switch from an Adjustable Rate Mortgage (ARM) to a fixed rate loan
• Switch from a fixed rate loan to an Adjustable Rate Mortgage (ARM)
• Free up tax-deductible cash
• Eliminate Mortgage Insurance (MI)

''No Closing Cost'' Loans

Any loan where the lender pays all of your closing costs (like title & escrow fees, appraisal, lender's fees, etc.), is commonly referred to as a ''no-cost'' loan. A true ''no-closing cost'' loan differs from both a ''no lender fee'' loan or a loan in which the lender adds the closing costs to the amount financed. A ''no lender fee'' loan, sometimes advertised by banks, usually will not cover the title, escrow, and other outside charges you may need to complete the refinance.

With a true ''no-closing cost'' loan, you can refinance for any incremental drop in your interest rate since the transaction costs are zero. Even in a declining rate market, where you believe rates may continue to fall, a no-cost loan will make sense. Should rates continue to decrease you will have invested nothing in the loan costs, and can simply refinance at any time. Some borrowers refinance every year or less!

No cost loans will always carry a slightly higher rate than a loan that does not pay your costs. In general, a no cost loan is the better strategy if you plan to keep your loan for the next two and a half to three years. Longer than that, you should consider paying the costs yourself to get a lower rate. Over time, the lower rate will save you more money. And if you plan to keep the loan for four to five years, it often makes sense to pay points to get an even lower rate.

Lower Your Monthly Mortgage Payment

One of the most common reasons for refinancing is to lower the monthly payment. The analysis here is simple. Ask your mortgage source what the costs involved are (all costs, not just the lender's fees). Verify this by asking what loan amount the new payment is based on. Then take the cost of the refinance and divide by your monthly savings to determine the ''break-even'' point in time. As long as you plan to keep that loan for some time longer than the break-even point, it's advantageous to refinance.

Even with a loan that includes costs, at times it may make sense to lower your payment by wrapping the costs into the new loan balance. Just be aware that the costs are increasing your principal balance owed and still do the analysis above. By following this strategy of increasing your mortgage balance, you are borrowing against your home's equity.

Of course with a no cost refinance, the break-even is immediate since you are reducing your payments without investing in the closing fees or increasing your outstanding loan balance.

Sample Analysis

Let's assume that your original loan was for $200,000 and your interest rate is 8.0%, with payments of $1,469.21. Perhaps you've had the loan for 3 years and the balance is paid down to approximately $194,500. After talking to a mortgage source, you are quoted 7.75% with payments of $1,409.51. ''Why, that's a savings of almost $60/month'' they tell you. But what about the closing costs? Remember to ask if there are any costs, and if so, how are they paid? By the lender or will they be included in the amount financed? We'll show you how to make the right decision.

In this example, the lender is proposing to include the $2,000 in closing costs into the new loan balance of $196,500. At 7.75% the new loan will give you a lower payment, but it is still worthwhile to consider the costs that are being financed. While the payment is lower than your current loan, you must also keep in mind that the loan period is being extended by stretching the larger loan balance out over a new 30 year term.

In this example, with a savings of approximately $60 per month, recouping the closing costs will take 34 months, which is explained in the table below. In this current interest rate market, you should be able to keep your break-even point at 24 months or less. Try a different mortgage, look for lower costs, or monitor the market until rates improve slightly.