Purchasing a home is probably the biggest investment you'll ever make. If you're considering buying a home there are numerous factors to consider so it's important to be as prepared as possible.

A potential buyer will have a better chance of getting an offer accepted by being prepared. By being prepared I refer to being pre-qualified or pre-approved.

Let's look at this from a seller's perspective. Imagine you're a seller in receipt of multiple offers to purchase your property. A complete stranger (buyer) is asking YOU to take your property off the market for at least the next two to three weeks while they apply for a loan. As the seller, let's consider the type of buyer you'd prefer to deal with.

Neither pre-qualified nor pre-approved

This buyer provides no evidence that they can afford to purchase your property. You may wonder how serious they are since they're not at least pre-qualified.

Pre-qualified

This buyer has met with a mortgage broker, made application and has informed the broker regarding their income, expenses, assets and liabilities. The broker may also have seen their credit report. The buyer provided you with a letter from the broker stating an opinion of what the buyer can afford.

Pre-approved

This buyer has provided a broker written evidence of income, expenses, assets, liabilities and credit. This borrower's file has been pre-approved by an automated system or reviewed by an underwriter. This buyer will probably be able to close quickly. They provide you with a letter (pre-approval certificate) from the lender. You're as certain as possible that this buyer can close.

While the rate is important, consider the total cost of your loan including the APR , loan fees, discount and origination points. Also find out how long that quote is good for. In other words, can it be locked in and guaranteed for enough time to close your transaction.

The cost of the mortgage, however, shouldn't be your only criterion. Have confidence that the company you select is reputable and will deliver the loan with the terms and costs they promised. If at the closing table the lender has suddenly increased their profit margin at your expense, you won't have time to start again with a different lender. Ask family and friends for referrals.

Within three business days after the broker or lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you'll pay for your loan. Bring the Good Faith Estimate (GFE) with you when you sign loan documents. If it's very different from what you agreed to, demand answers.

When a mortgage company tells you they have locked your rate, get a written statement detailing the interest rate, the length of the rate lock, and program details. Also never assume your loan is locked. Rates vary daily, and sometimes more than that.

Do not sign a document containing instructions contrary to your verbal agreements--don't! The written contract will override the verbal contract. More importantly, your state may require that contracts for the sale of real property be in writing. Florida's statute of frauds does just that. Do not expect oral agreements to be enforceable.

Buyers and sellers have opposing interests. Sellers want to receive the highest price; buyers want to pay the lowest price. In the standard real estate transaction, the seller pays the real estate commission. When an agent represents both buyer and seller, the agent can tend to negotiate more vigorously on behalf of the seller. As a buyer, you're better off having an agent representing you exclusively. The only time you should consider a dual agent is when you get a price break. In that case, proceed cautiously and do your homework! In Florida you MUST be notified in writing of dual-agency.

Unless you're buying a new home with warranties on most equipment, it's highly recommended that you get property, roof and termite inspections. Inspection reports are great negotiating tools when asking the seller to make needed repairs. When a professional inspector recommends that certain repairs be done, the seller is more likely to agree to do them. Keep in mind however, home inspections aren't a guarantee or warranty. If something major is missed, you'll usually only be able to recoup the cost of the inspection itself.

If the seller agrees to make repairs, have your inspector verify that they are done prior to close of escrow. Do not assume that everything was done as promised.

Start shopping for insurance as soon as you have an accepted offer. Many buyers wait until the last minute to get insurance and do not have time to shop around.

In a perfect world, all real estate transactions close on time. In the world we live in, transactions are often delayed a week or more. Will you have to find interim housing for a week or more? The eviction process takes a little time, so the Sheriff won't immediately remove you, but this type of stress-producing episode can be avoided. How? Terminate your lease one week after your real estate transaction is scheduled to close. That way, if there is a delay in closing your transaction, you have some leeway. This approach might cost a little more, then again, it might not.

People refinance to save money, consolidate debts, pull out equity or change mortgage types (i.e. go from adjustable to fixed).

The answer to the question "Should I refinance?" is a complex one, since every situation is different and no two homeowners are in the exact same situation the following calculation is helpful:

Calculate the total cost of the refinance--example: $3,000

1. Calculate the monthly savings--example: $100/month

2. Divide the result in 1 by the result in 2--in this case 3000/100 = 30 months. This shows the break-even time. If you plan to live in the house for longer than this period of time, it makes sense to refinance.

This example is based on a simple situation. You probably need professional advice as to your overall financial situation. Managing debt is as important, if not more so, than assets.

Whatever you choose to do, consulting with a seasoned mortgage professional can often save you time and money. Call me, I'll be glad to run the numbers for you.

It is important to realize that there is not one interest rate, but many interest rates! When you hear "they raised the rate" it's important to know which one!

· Federal Funds Rate: Rates banks charge each other for overnight loans.

· Federal Discount Rate: Rate New York Fed charges to member banks.

· Libor: London Interbank Offered Rates. Average London Eurodollar rates.

· 6 month CD rate: The average rate that you get when you invest in a 6-month CD.

· 11th District Cost of Funds: Rate determined by averaging a composite of other rates.

· Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.

· Prime rate: The rate offered to a bank's best customers.

· Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).

· Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.

· Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations.

Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.

This leads to a fundamental concept:

· Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).

· Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).

A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the FED increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.

Mortgage rates tend to move in the same direction as overall interest rates. However, in the short term mortgage rates may actually DECREASE after a Fed increase of the discount rate due to investor expectations. Call me, I'll explain!

There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity--typically $1000. If the price of the bond is currently at $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 5 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.

Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair Isaac began pioneering work with credit scoring in the 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrower's credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.

Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower's credit history considering numerous factors such as:

· Late payments- of course!

· The amount of time credit has been established

· The amount of credit used versus the amount of credit available

· Negative credit information such as bankruptcies, charge-offs, collections, etc.

· Number of finance companies on record

There are three FICO scores computed by data provided by each of the three bureaus--Experian, Trans Union and Equifax. Most lenders use the middle score.

How can I increase my score? Good Luck! While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.

· Pay bills on time. Late payments and collections can have a serious impact on your score.

· Do not apply for credit frequently

· Reduce your credit-card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively. Try and keep balances at 75% or less of your limit.

· If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.

What if there is an error on my credit report? If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, your mortgage company may help you correct this problem as well.

A pre-qualification is normally issued by a loan officer, who, after interviewing you, determines the dollar value of a loan you can be approved for. However, loan officers do not make the final approval, so a pre-qualification is not a commitment to lend. After the loan officer determines that you pre-qualify, he/she then issues you a pre-qualification letter. The pre-qualification letter indicates to the seller that you are qualified to purchase the house you are making an offer on.

Pre-approval is a step above pre-qualification. Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is submitted to an underwriter and a decision is made regarding your loan application. Getting your loan pre-approved allows you to close very quickly when you do find a house. A pre-approval can help you negotiate a better price with the seller.

There really is no such thing as a no cost mortgage loan. There are always costs, such as appraisal fees, closing fees, title insurance, state and county taxes (the government always gets theirs), and recording, underwriting and processing charges and on it goes.

As we all know nothing is free. What a no closing cost mortgage means is no direct costs to you, the borrower. The broker is paying the closing costs in exchange for charging a higher interest rate. Brokers receive higher fees from the lender for higher rate loans and can use this premium to pay all or part of your closing costs. This may make sense if you are in a short term situation such as planning to move next year. If you can refinance without costs and save money every month this plan is perfect for you.

This can also work in the opposite direction. You can pay additional costs, namely points, to get your interest rate even lower. The longer you plan on being in the home, the more this is advantageous. For example, let's say on a $100,000 loan you are quoted 5.5% with no points. However for an additional point (1% or $1,000.) you can lower your rate to 5.125% resulting in a monthly savings of $23.30 ($567.79 - $544.49 = $23.30). Dividing $1,000 by $23.3 equals 43 months. You break even at 43 months and every month after that is savings. I'll be glad to run a customized scenario for

There are four components to a rate lock:

1. Loan program.
2. Interest rate.
3. Points.
4. Length of the lock.

Generally, the longer the length of the lock, the higher the points or the interest rate. This is because the longer the lock, the greater the risk for the lender offering that lock.

If a lock expires, most lenders will let you re-lock at the higher of the original price and the originally locked price. In most cases you will not get a lower rate if rates drop.

Lenders can lose money if your lock expires. This is because they are taking a risk by letting you lock in advance. If rates move higher, they are forced to give you the original rate at which you locked. Lenders often protect themselves against rate fluctuations by hedging.

Some lenders do offer free float-downs--i.e. you may lock the rate initially and if the rates drop while your loan is in process, you will get the better rate. However, there is no free lunch--the free float-down is costly for the lender and you pay for this option indirectly, because the lender has to build the price of this option into the rate.

What if the rates drop after you lock?

Most lenders will not budge unless the rates drop substantially (3/8% or more). This is because it is expensive for them to lock in interest rates. If lenders let the borrowers improve their rate every time the rates improved, they spend a lot of time relocking interest rates, since rates fluctuate daily. Also they would have to build this option into their rates and borrowers would wind up paying a higher rate.

If rates have improved significantly, call me and I'll renegotiate.

New-construction rate locks

Most lenders offer long-term locks for new construction. These locks do cost more and may require an up-front deposit. For example, a lender might offer a 180-day lock for 1 point over the cost of a 30-day lock, with 0.5 points being paid up-front, as a non-refundable deposit. Most long-term new-construction locks do offer a float-down--i.e. if rates drop prior to closing, you get the better rate.

Private Mortgage Insurance or PMI is required when you buy a home with less than 20% down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender's losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you might not be able to buy a home without a 20% down payment.

I usually recommend an 80-10-10 or a 80-15-5 loan to avoid PMI in the first place, but this is not always possible.

If you have PMI the decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage-insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. To cancel the PMI on your loan, contact your lender. In most cases, an appraisal will be required to determine the value of your property. You will probably also be required to pay for the cost of this appraisal. Another way of canceling the PMI on your loan is to refinance and to get a new loan without PMI.

Your loan can be sold at any time. There is a secondary mortgage market, FNMA (fannie mae) to name one, in which lenders frequently buy and sell pools of mortgages. This secondary mortgage market results in overall lower rates for consumers.

A lender buying your loan assumes all terms and conditions of the original loan. As a result, the only thing that changes when a loan is sold is to whom you mail your payment. If your loan has been sold, your existing lender will notify you that your loan has been sold, who your new lender is, and where you should send your payments from now on. If there is a screw-up, you are given the benefit of the doubt. No late payments can be charged against you within 60 days of a loan transfer.

If your lender goes out of business, you are still obligated to make payments! Typically, loans owned by a lender going out of business are sold to another lender. The lender purchasing your loan is obligated to honor the terms and conditions of the original loan. Therefore, if your lender goes out of business, it makes little difference with regards to your loan payments. In some cases, there may be a gap between the date of your lender's going out of business and the date that a new lender purchases your loan. In such a situation, continue making payments to your old lender until you are asked to make payments to your new lender.

The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate.

Example: 30-year fixed 8% 1 point 8.107% APR

The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan

The APR is a very confusing number! The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.

If life were easy, all you would have to do is compare APRs from the lenders/brokers you are working with, then pick the easiest one and you would have the right loan. Right? Wrong!

Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not necessarily a better rate. The best way to compare loans in the author's opinion is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. Then delete all fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.

The reason why APRs are confusing is because the rules to compute APR are not clearly defined.

What fees are included in the APR?

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. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!

· Loan-processing fee

· Underwriting fee

· Document-preparation fee

· Private mortgage-insurance

The following fees are SOMETIMES included in the APR:

· Loan-application fee

· Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)

The following fees are normally NOT included in the APR:

· Title or abstract fee

· Escrow fee

· Attorney fee

· Notary fee

· Document preparation (charged by the closing agent)

· Home-inspection fees

· Recording fee

· Transfer taxes

· Credit report

· Appraisal fee

An APR does not tell you how long your rate is locked for. A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock!

Calculating APRs on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APRs.