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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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