Frequently Asked Questions (FAQs)
The following questions are often asked by people interested in purchasing or refinancing a home. The answers may help you determine your next step.
- What is a mortgage?
- What is a "Loan to Value" (LTV) ratio?
- How does an LTV ratio determine the size of your loan?
- What are the types of loans and their advantages?
- What are Adjustable Rate Mortgages (ARMs)?
- What does APR mean?
- What is a credit score?
- Is it possible to pay off my loan ahead of schedule?
- What costs are included in a monthly mortgage payment?
- What aspects affect the mortgage payment amount?
- How does the interest rate affect securing a
mortgage loan? - What can I do if interest rates decrease and I
have a fixed rate loan? - What are discount points?
- What is an escrow account and do I need one?
What is a mortgage?
A mortgage is a loan obtained to purchase real estate. The "mortgage" loan is a legal claim on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.
What is a "Loan to Value" (LTV) ratio?
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.
How does an LTV ratio determine the size of your loan?
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to payout of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require mortgage insurance policy.
What are the types of loans and their advantages?
The following types of loans are available for purchase and refinance.
- Fixed Rate Mortgages: Loan payments do not change over the life of the loan.
- Types:
- 15-year
- 30-year
- Advantages:
- Predictable
- Housing cost remains unaffected by interest rate changes and inflation
- Adjustable Rate Mortgages (ARMs): Loan payments will increase or decrease on a regular schedule with the changes in interest rates.
- Types:
- Balloon Mortgage: Offers extremely low rates for a short period of time (usually 5, 7, or 10 years); afterwhich, the balance becomes due or you must refinance (refinancing is does not occur automatically)
- Two-Step Mortgage: Adjusts the interest rate one time, then remains the same for the life of the loan
- Interest rate links to a specific index or margin
- Advantages:
- Lower initial interest rates
- Lower monthly payments possible
- Larger loan amount possible for the borrower
What are Adjustable Rate Mortgages (ARMs)?
An ARM loan increases or decreases the loan payments on a regular schedule with changes in interest rates. Payment increases are subject to limits specified in the loan contract.
What does APR mean?
APR stands for Annual Percentage Rate. It is indicated in your "Truth in Lending Disclosure Statement" form is a means of protecting consumers from companies that do not disclose the fees associated with an interest rate quote. The Annual Percentage Rate indicated on your "Truth in Lending Disclosure Statement" form is not the interest rate you were quoted in the loan interview process with your loan officer. The Annual Percentage Rate is calculated by including the base interest rate that your loan officer quoted to you plus any other add-on loan fees and costs as disclosed on your "Good Faith Estimate". An example of add-on loan fees and costs would be points, appraisal, escrow, title, credit report and/or underwriting fees. The total is then converted to an Annual Percentage Rate. The Annual Percentage Rate is simply a way to determine the annualized cost of your loan..
What is a Credit Score?
A credit score is the overall rating based on your credit history. Lenders use this information to determine how credit worthy you are. The higher the number, the lower the risk.
There are thre main credit bureaus: Equifax, TransUnion, and Experian. Your creditors report information on your accounts to these bureaus, who compile it all into one report. Your credit scores are largely based on the following factors (in order of importance):
- Your past and current payment history with respect to late payments, delinquencies and bankruptcies. The fewer the late payments, the better your score. Note that a recent late payment hurts your score more than one from several years ago.
- Your outstanding debt (including credit card balances, installment loan balances, etc.) compared against the credit limits. Using a large percentage of your available credit makes you a greater credit risk in the lender's view.
- Length of time you've had your credit accounts and how often you use them.
- New inquiries for credit have a greater impact than on individuals who lack a long-established credit history.
- The types of credit you currently have: credit cards, installment loans, or mortgage loans.
Other factors with influence on your credit profile include a comparison of your present income to your present level of debt, your employment history, and the length of time you've lived at your current residence.
Basically, as long as you keep your credit account balances low and make your payments on time, you should maintain a healthy credit score.
Is it possible to pay off my loan ahead of schedule?
Yes. You can pay off your loan ahead of schedule by sending in extra money each month or making an extra payment at the end of the year. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal.
Generally, lenders allow you to prepay your loan, although a "prepayment penalty"may be assessed. Check with your lender for details.
What costs are included in a monthly mortgage payment?
The monthly mortgage payment generally includes the loan principal and interest. However, amny lenders will also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).
What aspects affect the mortgage payment amount?
Aspects affecting the amount of your payments include:
- amount of the down payment.
- size of the mortgage loan.
- interest rate.
- length of the repayment term.
- payment schedule.
How does the interest rate affect securing a mortgage loan?
Lower interest rates allow you to borrow more money than high rates with the some monthly payment amount. Because interest rates can fluctuate daily (even multiple times during the day), ask your lender to "lock-in" the rate you feel comfortable with based on recent trends. Your lender should be willing to work with you on this. Locking in the rate guarantees that rate for a specified period of time--generally long enough to finalize the loan.
A lender must disclose the Annual Percentage Rate (APR) of a loan. The APR expresses the cost of a mortgage loan in terms of a yearly interest rate. The APR is usually higher than the interest rate because it includes the cost of points, mortgage insurance, and other fees associated with the loan.
What can I do if interest rates decrease and I have a fixed rate loan?
If interest rates drop significantly, you might investigate refinancing. Experts tend to agree that if you plan to be in your house for at least 18 months and you can obtain a rate 2% less than your current one, refinancing is an intelligent choice. However, refinancing may, involve paying the same points and closing fees as the original loan plus origination and application fees.
What are discount points?
Discount points are essentially prepaid interest. Each point equals 1% of the total loan amount. This allows you to lower your interest rate
Generally, on a 30-year mortgage, each point paid lowers the interest rate by 1/8th 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.
If you plan to stay in a home for some time, discount points can be advantageous. Lowering the interest rate 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 and do I need one?
An escrow account is an account used 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. This account is established by your lender.
Having an escrow accounts set up for your loan ensures that money will always be available for insurance and tax payments. However, if you use an escrow account, make sure you are not penalized for late payments as it is the lender's responsibility to make those payments.
