Don’t Confuse No-Cost with No-Cash
This is one of the worst mistakes a borrower can make. "No-cash" means the borrower does not have to pay the settlement costs at closing, but the lender doesn’t pay them either. The costs are added to the loan balance, so the borrower pays them over time, with interest. No-cost mortgages don’t eliminate costs; they convert them from costs paid upfront to costs paid over time. Other things the same, no-cost mortgages carry higher interest rates, which may be better for some borrowers, but not for others. At the same time, no-cost mortgages are easier to shop because of their simplicity, so the borrower may get a better deal.
Borrowers Pay a Higher Interest Rate on a No-Cost Mortgage .
The lender finds that rate by estimating the costs for which he would be responsible, and then finding the interest rate that justifies paying those costs.
For example, Jane Doe is borrowing $200,000 on a 30-year fixed-rate loan. The lender’s price schedule on this loan includes the following quotes: 6.25% with zero points, 6% with 1.5 points, and 6.75% with a 2.125-point rebate. Points are upfront payments - one point is 1% of the loan amount. Borrowers pay points to the lender but lenders credit borrowers for rebates.
Assume Jane Doe wants a no-cost loan. The lender calculates that it would cost $4,000 to assume responsibility for the settlement costs Doe would otherwise pay. He thus charges Doe 6.75% for a no-cost loan. The rebate of 2.125 points at 6.75% is $4250 on a $200,000 loan, or enough to cover the $4,000.
No-Cost Loans Are Least Profitable To Borrowers with Long Time Horizons
The benefit of the no-cost loan is the saving in cash outlay at the outset, while the cost is the higher rate. The longer the borrower has the mortgage, the higher the cost. A borrower with a long time horizon who takes a no-cost mortgage only to save cash gets a bad deal.
What is a Loan-To-Value (LTV) ratio? How does it determine the size of the loan?
The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: with a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay $2,500 as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV ratio, the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.
What types of loans are available and what are the advantages of each?
• Fixed Rate Mortgages: Payments remain the same for the life of the loan
• 15-year & 30-year
• Housing cost remains unaffected by interest rate changes and inflation
Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits.
• Balloon Mortgage- Offers very low rates for an initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically)
7/23 and 5/25 Mortgages
These mortgages are extendible balloon mortgages with a one-time rate adjustment after seven years and five years respectively. The extendible feature is available with certain lender caveats, such as no delinquency in the 12 months prior to the requested extension, the property must be owner occupied, and rates at the time of the extension cannot be more than 5% higher than the original note rate.
• Two-Step Mortgage- Interest rate adjusts only once and remains the same for the life of the loan.
• ARMS (Adjustable Rate Mortgages) are linked to a specific index
• Generally offer lower initial interest rates
• Monthly payments can be lower
• May allow borrower to qualify for a larger loan amount
When do ARMS make sense?
An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.
3/1, 5/1, 7/1 and 10/1 ARMS
Adjustable Rate mortgages in which the rate is fixed for the initial three years, five years, seven years and ten years respectively, and will adjust annually after the initial fixed period.
In-depth information on ARM's can be found in the Consumer Handbook published by the Federal Reserve Booard.
What are the advantages of 15 AND 30-year loan terms?
• Loan is usually made at a lower interest rate.
• Equity is built faster because early payments pay more principal.
• In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
• As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
Can I pay off my loan ahead of schedule?
Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.
Are there special mortgages for first time homebuyers?
Yes. Lenders now offer several affordable mortgage options, which can help first-time homebuyers, overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.
How large of a down payment do I need?
There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and possibly repairs and decorating.
What is included in a monthly mortgage payment?
The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).
What factors effect mortgage payments?
The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.
How does the interest rate factor in securing a mortgage loan?
A lower interest rate allows you to borrow more money than a high rate with the same monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate "lock-in" which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage and other fees included in the loan.
What happens if interest rates decrease and I have a fixed rate loan?
If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.
What are discount points?
Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.
What is an escrow account? Do I need one?
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property taxes or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.
After I apply for a loan, what should I expect?
Once your loan application is received, whether you apply online, by phone, or in person, you will get notification that your loan is in process. Within several days you will receive a loan package with a set of loan application documents for your signature. This mailing by e-mail or postal will also include a list of documents needed to complete a conditional loan approval.
Is it safe to transmit my mortgage application to over the Internet?
Security of your personal information is a prime concern. As such, several layers of security are implemented and provide the highest level of encryption available across the Internet. Web pages holding your information are secured using Secure Sockets (SSL) and while completing your mortgage application, your details are transmitted using 128-bit encryption. This ensures that no one on the Internet can view your sensitive personal details.
Can I apply for a purchase loan before I've found my property?
Absolutely! When you apply for a purchase pre-approval you simply assume a maximum purchase price, loan amount, and loan program. Once your loan has been approved you can change any of these variables to match the specifics of your purchase transaction. Please note that most lenders do not lock a loan until a property address has been specified.
On a purchase loan, is there someone who will work with my Realtor?
Yes. Each loan is assigned to one loan officer who works with you until you close, he or she will be able to assist you or your Realtor at any time.
Can I get loan program information over the phone?
Yes. At any time during your loan process you can contact your loan officer if you require assistance.
How quickly will my loan be approved?
Once your application is received, you can expect to receive an answer within 24 hours. The processing of your loan will be related to how complete your application is and how rapidly you submit any required documents to your processor.
Is my interest rate locked in as soon as I apply for a loan?
No, your interest rate is floating. Reports have shown that clients prefer watching the market before they commit to a specific rate. You can request a rate lock after you have returned your package to the loan officer and a processor or underwriter has reviewed your documentation and credit information.
When should I lock my rate?
Most experts recommend watching the market and then locking in. Your loan Officer will work with you to determine the best time to lock your rate based on your situation.
When will I have to pay for something?
Once you apply for a loan, you want to know if you qualify for the product selected. The first step in this qualification is to review your credit. A credit report will be ordered by your loan consultant once you've returned your completed package to their respective offices. Once your credit is approved, an appraisal is ordered on the property. We ask that you make a check payable to us for the Appraisal. We will hold this check in good faith and return it to you at the time of the closing, The Appraiser will be paid out of closing so there is no upfront cost to you.
What about the appraisal?
Lenders / Brokers schedule an appraisal of your property and will use your estimated value as a guideline. If your appraised value is lower than your estimated value, you will be notified right away.
Who handles my closing and where do I sign?
You have the option of choosing your own Closing Attorney. If you have no preference, we will choose one for you. The documents will be signed at the Closing Attorney's Office.
How is my credit score determined?
A credit score is based on information in your credit report, including information about how you have handled debt and credit accounts in the past. Looking at the way millions of consumers manage their credit develops the calculations that make up a credit score. Credit scores have proven over time to be a reliable indicator of whether or not a consumer would repay a loan. A score is determined by summarizing a number of factors in your credit report. These include:
Types of Credit
What’s my score? Is that good or bad?
Credit scores typically used in mortgage lending range from approximately 300 to 900. Generally, the higher your credit score, the less risk of future default you represent to the lender. This is a strong indication that you have successfully managed credit in the past and are likely to repay a mortgage loan.
Keep in mind that your credit score is only one factor that the lender uses to evaluate your mortgage loan application and that the final decision whether or not to approve your mortgage loan is made by the lender after careful analysis of all of the information the lender has collected.
How to determine if you've been late on Credit Payments?
For example, If your bill payment is due on the 1st of each month and you missed it by a few days by paying on the 5th, 16th, 20th but before the following month your payment may not be necessarily late or reported late by your creditor. You are most likely late only if your payment wasn't received until the 1st of the following month (30 days after it is due). Your creditor may assess late fees but this doesn't mean they will report you 30 days late on your credit report.
What is a Bi-Weekly mortgage payment plan?
Prepaying your Fixed-Rate mortgage is a guaranteed way to own your home sooner. But that's not the only reason to consider it. Since every dollar you prepay also reduces the interest you owe, prepayment will save you money-thousands of dollars, in many cases.
Pros and Cons of Homeownership.
The decision to buy a home is a big one and should not be made lightly. If you are planning to buy a home, you probably have good reasons in mind, ranging from the purely personal to the very practical. But homeownership is not for everyone. For one thing, buying a home is a complex, time-consuming, and costly process that sometimes brings unwelcome responsibilities. There are many good reasons for becoming a homeowner, provided you are ready for the increased responsibilities that come with it.
Advantages of Homeownership
If you are planning to buy a home, you probably have good reasons in mind. Some of the major advantages are described below.
A Place to Call Your Own
“Your home is your castle.” Perhaps you are ready to settle down in your community and want to have the feeling of permanence and involvement that comes with owning your own home. Maybe you need more space for your family. Or maybe you want more freedom than you currently have as a renter to change your home to suit your individual taste and needs.
Owning your own home can offer a number of financial advantages, some of which are noted below.
When you are a homeowner, your monthly mortgage payments serve as a type of savings plan. Over time you will accumulate what lenders call “equity,” an ownership interest in your house that you may be able to borrow against or convert to cash by selling the house. On the other hand, renters continually pay rent to a landlord for as long as they rent without the opportunity to build up equity.
Stable Housing Costs
while rents typically increase year after year, the principal and interest portion of most mortgage payments remains unchanged for the entire repayment period. Because of the effect of inflation, you pay the same amount with ever “cheaper” dollars.
Houses typically increase in value over time. It's not unusual for a house that sold fifteen years ago to be valued at much more than its selling price today. This increased value is as good as money in the bank to the homeowner.
Homeowners are eligible for significant tax advantages that are not available to renters. Most important, the interest paid on your home mortgage usually is tax deductible and therefore can save you a substantial amount each year in federal income taxes.
Conforming and Nonconforming Loans.
The term “conforming”, as opposed to “nonconforming”, is sometimes used to explain loans that offer terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are two private, secondary mortgage market companies that buy mortgage loans from lenders, thereby ensuring that mortgage funds are available at all times in all locations around the country.
The most important difference between a loan that conforms to Fannie Mae/Freddie Mac guidelines and one that doesn’t is its loan limit. Fannie Mae and Freddie Mac will purchase loans only up to a certain loan limit (currently $417,000).
So, if your loan amount will be for more than the conforming loan limit of $417,000, you may be asked to pay a higher interest rate on your mortgage. Your mortgage loan may also follow slightly different underwriting requirements, particularly in regard to your required down payment amount. Check with your lender about this if you are taking out a large loan amount. Nonconforming loans are sometimes called jumbo loans.
The closing, also known in some areas as the settlement, is the final step - the act of transferring ownership of the home to you. The closing usually takes place at a financial institution, like a bank or savings and loan, and is designed to ensure that the property is all set to be transferred to you. Each state has its own rules as to what costs must be paid at the closing. Common items to be paid at the closing are: transfer taxes and recordation taxes; title insurance; the site survey fee; loan discount points; attorney fees; and various fees for preparing the legal documents. When talking about closing costs, rather than discussing all of these fees individually, closing costs are talked about as a percentage of the sales price or the loan amount. Although you can try to get the seller to pay some part of the fees, closing costs generally range from 3 percent to 6 percent of the sales price of your home.
Can you deduct points on your income taxes?
In the United States, one side benefit of paying points on a mortgage loan is that they are fully tax deductible for the same tax year as your closing. However, this does not apply to points paid for a refinance loan. For refinances, the IRS requires you to spread out the deduction over the life of the loan. For example, if you paid $5,000 in points for a 30-year refinance loan, you can only deduct 1/30 of the $5,000 each year for 30 years. If you pay off the loan early, though, you can deduct the remaining amount that tax year. Please still consult a tax advisor because of changing tax laws. or go to http://www.irs.gov
Do I need an appraisal of the property? If so, will I receive a copy of it?
Yes. The property is the collateral for the mortgage, therefore an appraisal is almost always required and if a borrower pays for the appraisal he or she is definitely entitled to receive a copy of it.
Why do I need to pay for another policy of title insurance when we already own the property and purchased title insurance when we bought the house?
Before closing your new mortgage, your new lender must be certain that the title to the property will be free and clear, free of prior defects and indebtedness. A new policy is needed to protect the new lender and subsequent investor of your new mortgage. Both a homeowner and prospective lender need to be certain that what is available on the property is what is referred to as a "marketable title". A title company researches the legal history of the property that entails searching public records in the offices of the county recorder. Problems with the title could threaten the mortgage, limit ones use and enjoyment of the property and could result in financial loss. A policy of title insurance protects a homeowner's title and the insurer covers the cost of any legal challenges.