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How
can I compare two different loan offers?
You should compare the simple
interest rate, the APR, any fees and any discount
points paid. In order to compare two loans you
should obtain a GFE (Good Faith Estimate) from
both lenders. Some lenders may advertise low mortgage
interest rates, however they have higher origination
and processing fees that raise their APR to the
same or higher levels than a lender advertising
a slightly higher simple interest rate.
What is a fixed rate mortgage?
A fixed rate mortgage has a fixed
interest rate which is valid for the life of the
loan. A fixed rate mortgage features a payment
that will stay the same for the entire term of
the loan be it 10, 15, 20 or 30 years.
What
is an ARM - Adjustable Rate Mortgage?
An adjustable rate has an interest
rate that varies over the initial predefined term
of the loan. Different programs feature different
terms (in years) of the variation period - normally
from 1-7 years with 3 and 5 year ARM's being the
most common.
An Arm typically will begin at an interest rate
that is lower than interest rates available for
fixed rate mortgages of equal term. Each adjustment
period (normally every 6 or 12 months) the interest
rate is adjusted based on an index plus a margin.
The index is normally a widely published financial
indicator such as the LIBOR which fluctuates up
and down with the financial markets. The margin
is typically 2-3%, therefore if at the time of
adjustment the LIBOR was at 3% and the programs
margin was 2% the prevailing mortgage interest
rate would be 5%.
ARM's also have caps which limit the maximum
amount the loan may vary during each adjustment
period and the maximum it may adjust over the
life of the loan, e.g. CAPS of 2 & 6 means
that the interest rate may vary 2% each adjustment
and a maximum of 6% over the life of the loan.
Arm's will adjust each adjustment period until
the initial term expires and then become fixed
for the remaining term of the loan. For example
a 3 year ARM with an adjustment period of 1 year
would adjust after 1 year, 2 years and then finally
at three years would make a final adjustment and
then remain fixed for the remaining life of the
loan.
Because the interest rate will fluctuate your
monthly mortgage payment will also change. Typically
people who anticipate that their income will increase
over the initial period of the mortgage or people
who do not plan to stay in the home much longer
than the initial term of the loan are most interested
in ARM's.
You should ask each lender
for the specific parameters (rate, index, margin,
CAPS and term) of any ARM you are offered.
What is APR - Annual Percentage Rate?
APR is an interest rate that
reflects the total cost of financing a loan. It
is a combination of the simple interest rate,
any discount points, and the fees paid to a lender
when getting a mortgage.
The APR is an important parameter when comparing
loan offers from different lenders who may have
widely different fees they apply to their loan
offers. A lender who offers a low, simple interest
rate but has a much higher APR has fees which
are adding costs to your financing. Simply put,
the higher the APR over the interest rate offered,
the higher the fees.
Other factors that affect APR are the loan size
and the term of the loan. A mortgage with a 15
year term will have a higher APR than a 30 year
mortgage, even if the rate and fees are the same.
Also, a $100,000 mortgage will have a higher apr
than a $200,000 mortgage, with the same rate and
fees. Make sure the loan term and the loan sizes
on the two different offers are the same so you
can more accurately assess which one is right
for you.
What
is a mortgage broker?
A mortgage broker is a licensed
independent contractor that offers a selection
of loan programs from various lenders they have
established relationships with.
Mortgage brokers can offer you a large selection
of products available from different lenders.
Usually banks have a limited selection of their
own programs, which may or may not fit your needs.
The mortgage broker takes your application and
processes your loan for submission to a lender
for underwriting and approval of funding for the
loan.
What
is an origination Fee?
An origination fee is the fee
charged to cover the application for, and processing
of, a mortgage provided by the mortgage broker.
What is LTV (Loan-to-Value) mean?
Loan to Value is a ratio determined
by the loan amount divided by the property value.
For example, if a home has a property value of
$100,000 and the loan amount is $90,000 the LTV
is 90%.
LTV is used to define the maximum loan percentage
available for each particular loan program. Lenders
have different LTV parameters for different loan
programs. Also the LTV available will depend on
your personal credit situation. Higher LTV ratios
are available for people with higher credit ratings.
What
are discount points as applied to a mortgage?
Discount points are a percentage
of the loan used to buy down or reduce the interest
rate of the loan. One point equals one percent
of the loan amount.
Some lenders also refer to the origination fee
in points. For example, a lender who charges one
point as an origination fee means that you will
pay 1% for the broker to write the loan.
Why are mortgage interest rates so unstable?
Mortgage loans are sold on the
secondary mortgage market which fluctuates every
day along with the worlds financial markets. For
example, as mortgage bonds fluctuate up and down
so will the available mortgage interest rates.
What
documents will I need to supply to apply for a
mortgage?
At a minimum you will need your
last 2 years W2's and your last three pay stubs.
Often your last three months bank statements are
also required. A copy of the executed sales agreement
for your home. In the event you are self employed
you may be required to supply your last two years
income tax returns.
What does pre-qualifying mean?
Pre-qualifying means that the
borrower has discussed a loan with a loan officer
and supplied information about their employment
and debt situation. Together they can finally
calculate an estimate of the loan amount the borrower
may qualify for.
What does mortgage pre-approval mean?
Pre-approval involves completing
a loan application and being approved by a lender
for for a maximum loan amount. Typically, real
estate agents will request home shoppers to be
pre-approved before showing them homes. This is
a way for real estate agents to be certain to
show you homes in a price range you can afford.
What
is the difference between "locking in an
interest rate" and "floating an interest
rate"?
When applying for a mortgage
you may be quoted a simple interest rate that
is available at that moment. In order to be insured
the rate you are quoted is available at your closing
time, the lender must lock in the interest rate
for a term for as long as they predict it may
require to process your loan. The longer it takes
to go to closing the higher the interest rate
lock in will cost. Typical lock periods are 30-45
days. Alternatively, especially if you think interest
rates are trending lower you may choose to allow
the interest rate to float and except whatever
the prevailing interest is once you are closer
to your closing date.
When
can I lock in an interest rate?
This varies depending on the
lender. Typically if you do not have a purchase
agreement in place lenders will require you to
pay a fee to lock the rate in. However, many lenders
will lock the rate for free once you have a sales
agreement and complete the 1003 uniform residential
loan application.
What
are closing costs?
Each lender may have different
costs which apply to their programs or local lending
market. Closing costs or the fees applied to make
the loan may consist of some or all of the following:
1. Settlement and or attorney fees
2. Underwriting fee
2. Pre-paid: property taxes, mortgage interest,
homeowners
insurance and private mortgage
insurance
3. Loan origination fee
4. Appraisal fee
5. Credit report fee
6. Messenger fees
7. Title recording fee
8. Survey fee if needed
9. Title insurance
10. Payment to escrow account for real estate
taxes and homeowners
insurance if applicable
11. Documentation preparation fees
What
are escrows?
Escrows are the pre-payments
of real estate taxes and homeowners insurance
held in an escrow account. Escrows accounts make
the annual payments to the appropriate parties
by the lender.
Can
I avoid escrows?
In most cases, if your down payment
is 20% or more lenders will not require you to
pay escrows. Some programs only require 15%. Ask
the lender what the requirements are for the loan
product you're interested in.
How
long does it take to get approved for a loan?
Depending on your personal credit
situation and the lender in question approval
sometimes can be achieved within 24 hours. Usually,
it requires 7-10 business days in most mortgage
application situations.
Can
I roll my closing costs into the loan amount?
Normally, most lenders will not
allow you to roll in your closing costs when purchasing
a new home. However, most will allow a roll in
of closing costs when refinancing an existing
mortgage.
How
long will it take for a lender to close my loan?
Some lenders can go to closing
within 7 days. However, an average of 30 to 60
days is required. The length of time is dependant
on a number of factors. For example, whether there
is a current appraisal available for the property,
how busy mortgage processors are at the time of
loan request, and the length of time needed to
process the title.
What is PMI - Private Mortgage Insurance?
PMI is insurance which protects
the lender in the event you do not pay. PMI allows
borrowers to obtain higher loan amounts with lower
down payments. PMI is typically required when
the LTV is 80% or more. Check with each lender
to insure what their PMI requirements may be.
How can I avoid Private Mortgage Insurance?
PMI is typically required if
the Loan to value is 80% or higher. Many lenders
will allow you stop paying PMI once you have either
paid down your loan below 80% LTV, or your property
has increased in value to the point were the new
Loan To Value ratio is less than 80%. You will
be required to have the home appraised to prove
the new market value of your home if it has increased.
Some lenders also offer loan programs such as
an 80/20 were you have a first mortgage for 80%
LTV and then a second mortgage for the remaining
20% at a higher interest rate.
Check with each lender
to be certain that the PMI can be cancelled once
the LTV is bellow 80%.
When
should refinancing be considered?
Refinancing varies for every
situation and may or may not be practical depending
on how long you intend to stay in the home. When
you refinance, you will pay closing costs once
more and these closing costs will have to be recouped
before you will reap the benefit of obtaining
a lower interest rate. Divide the closing costs
of the loan by the monthly savings on your mortgage
payment to determine how long it would be before
you benefit. If you plan on staying longer than
this - then it probably makes sense to refinance.
What
is a hard money private equity loan?
Hard money private equity loans
are loans made by private investors using their
own money to fund the loan. Because the loan will
not be sold on the secondary mortgage market the
private lender can be more flexible with their
requirements for loan approval. With this flexibility
comes disadvantages, the price of higher interest
rates and perhaps a shorter term for the loan.
Hard money private equity loans are used by borrowers
who may not be able to acquire a mortgage through
conventional lending institutions.
What
is a reverse mortgage?
A reverse mortgage is offered
to homeowners who already own their home and have
reached an age were they want to withdraw the
equity they have accumulated in their home. The
money can be taken as a lump sum, as monthly payments
or used like a line of credit. Typically this
type of loan is re-paid when the last surviving
borrower no longer resides in the home for more
than 12 months. The home is then sold to repay
the loan. reverse mortgages are not available
from all lenders. You should check with each lender
to learn the specifics of the reverse mortgage
programs they may have available. You as the homeowner
are still responsible to pay all homeowner taxes,
homeowners insurance and general repair of the
home. More information about revere mortgages
is available at the AARP website at http://www.aarp.org/revmort/.
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