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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