The use of APR was required as of the Truth In Lending Act, the purpose being to help prospective borrowers understand the cost difference between rate offers. 

APR, unlike the interest rate, offers a look at the true cost of financing by combining both the interest rate you'll pay over the life of the loan, plus the upfront closing costs paid to borrow the money.  These two costs are calculated together into one rate.

In acquiring a mortgage, there are various closing costs.  Only closing costs charged in connection with borrowing money are included in the APR calculation. 

APR is not a perfect calculation of the true cost of financing.  This is because you will have the opportunity to prepay your loan.  The APR is only exactly accurate if you borrow for the full term of the loan.  So when considering rate offers, make sure you consider how long you will hold your mortgage.  The shorter you hold your mortgage, the less you want to pay upfront.  I'm happy to go through specific examples with you.

1. What the market is doing.  The market for interest rates moves on a minutely basis and most interest rates rise and fall with the sale of mortgage-backed securities.  More on this at a later time.

2. Your credit score.  Mortgage rate pricing adjusts on 20-point intervals, the higher your credit score, the better the rate you'll get.  This has the greatest effect on conventional loans.

3. Your down payment.  Simply, the greater the percentage your down payment, the better a rate you will receive, all the way down to a 40% down payment.

4. Your loan amount.  Different loan programs have differerent pricing, and are often determined by the amount borrowed.

5. Your lock term.  The longer you "lock" your rate prior to closing, the higher the rate will be.  Most home buyers lock for a 30 day term.

6. The type of property. Whether it's a single family, condo, or cooperative unit.  Single family properties have slightly better pricing. 

First off, what is a refinance?  A refinance (refi) is where you take out a new loan, with new terms, and use that money to pay off your old loan.  You are "re-financing" your home.

You would refinance for the following two reasons:

1. To save money.  You would do this by refinancing into a new, lower rate and dropping your payments, or look at additional options.  By reducing the term on your mortgage, you would save significant amounts of interest by paying your loan for fewer years.  By switching from a 27 year to a 15 year term, you might be increasing your payment, but you'd be maximizing your savings by doing so. 

2. To cash out funds for other uses.  You might want to cash out a higher amount than your current loan for several reasons.  You could consolidate debt, finance home improvements, or cash out for other investments.  In all cases, you would have to disclose the purpose of the cash-out funds. 

To protect against losses on low-down-payment loans, lenders require mortgage insurance for any loan-to-value higher than 80%.  This is applicable for all conforming conventional Fannie/Freddie loans.  In case of default, a mortgage insurer would pay a claim to the holder of the mortgage.  Because of the cost of foreclosure, a mortgage insurance claim helps reduce the negative financial impact of a default. 

In addition to mortgage insurance for conforming conventional loans, there are two other types of mortgage insurance – required MI for FHA and VA loans.

• PMI

PMI, short for Private Mortgage Insurance, is the type of insurance found on conforming conventional loans.  Typically private companies will provide the MI.  They will individually set their own product guidelines, pricing, and make approval decisions. 

• MIP

MIP, short for Mortgage Insurance Premium, is the type of insurance required for FHA (Federal Housing Administration) loans.  No matter the down payment other than  15 year fixed rate in some cases, MIP is required.  For most loan terms and down payments, MIP is paid in both an upfront premium and an annual premium.  This annual premium is actually paid monthly by the borrower. 

• Funding Fee

The Funding Fee is for all VA loans.  Unless the veteran is exempt from the fee (usually if disabled while on duty or if it’s a surviving spouse from a veteran who is KIA), the fee is typically financed into the loan amount.  For the funding fee, there is no monthly payment.  A first-time use veteran with 0% down will pay a 2.15% funding fee.  Subsequent use, or if the veteran is part of the reserves rather than active duty, will increase the funding fee.

On an FHA loan:

You are required to pay the annual mortgage insurance premium for at least five years.  After five years, whenever your loan reaches 78% of the original sales price or appraised value, whichever is lower, the mortgage insurance is canceled.

On a conventional loan:

Annual Premiums:  Annual premiums must be paid for a minimum of two years no matter what.  After two years, there are two ways to cancel mortgage insurance by contacting your servicer (they are the ones who instruct the MI companies to cancel the policies).

When the borrower’s loan amount reaches 78% based on the original sales price or appraisal, whichever is lower, by law the mortgage insurance must be canceled.

When you believe your loan is 80% or less due to an increase in value in their home, you may order an appraisal at your own expense and appeal to your lender for mortgage insurance removal.  The lender may deny the request for cancelation if:

-You have a second mortgage.
-The property has declined in value and does not have 20% equity.
-You had a payment late by 30 days or more within the year preceding the cancellation date, or late by 60 days or more within the previous two years.

Source: http://www.mtgprofessor.com/a%20-%20pmi/how_do_i_cancel_pmi_(ii).htm

1. Pre-qualification: A pre-qualification is the first step and answers the following questions:

• What is the best loan type for me?
• How much money will I need to put down?
• What kind of payments should I expect at the sales prices I am interested in?
• How much cash total will I need to buy?

And any additional questions that you would have.

2. Pre-approval: A pre-approval is something that you will typically need to put an offer on a property.  A seller, before they take their home off the market, will want to know that you are already approved for financing.  This will require enough information to run credit, and documents that prove your income and assets.

3. Contract: Shop for a home and write an accepted offer: Once you have an accepted offer (a ratified contract) with all terms agreed to, at that point you can lock in your rate.  You'll need to sign a series of documents that we are required to disclose to you.

4. Appraisal: In addition to reviewing your creditworthiness, we have to do an appraisal to make sure the property is worth the price you are paying for it.

5. Underwriting: After receiving the appraisal, we underwrite your loan.

6. Closing: Following underwriting approval, we prepare the documents you'll sign to borrow from us as well as purchase the property from the seller.  Congratulations!

Here is the most common type of calculation for adjustable rates:

In order to calculate your new ARM rate, you must add the margin plus the index.  The margin is the bank's profit, and the index we tie our ARM rates to is the 1-year libor.  The 1-year libor (London interbank offered rate) is today at 1.07.  Our margin is 2.25.  If your adjustable rate adjusted today, the new rate would be:

2.25 (Margin) + 1.07 (Index) = 3.375% (rounded to nearest .125%)

One more calculation you need to look at, though, is the initial adjustment cap and the lifetime adjustment cap.  For the first adjustment, the initial adjustment cap will govern how much your rate can increase or decrease.  For all subsequent adjustments, only the lifetime adjustment cap will apply.

The initial adjustment cap will vary and you should look at your terms of your loan in your note, but most lifetime adjustment caps are 5%.  So if your start rate is 4%, and the lifetime cap is 5%, then the ceiling of your rate is 9%. 

I'm happy to answer any questions about the calculation of your own adjustable rates.  Most of you will find if you have a rate adjusting nowadays, you'll see your rate go down because the 1-year LIBOR is very low.