Q. What are "points"?
A. Points are also called origination fees. These fees are charged by the lender to pay for certain expenses incurred in connection with the processing of the real estate loan. One point is equal to one percent (1%) of the amount of the loan.
Q. What is private mortgage insurance (PMI)?
A. Private mortgage insurance protects the lender from loss due to payment default by the borrower. It is used with conventional financing only. It may be paid in a lump sum at the time of settlement or in monthly installments as part of the mortgage payment. PMI is typically required when the amount of your loan exceeds 80% of the subject property's value. This type of insurance should not be confused with mortgage life, credit life, or disability insurance which is designed to pay off a mortgage in the event of the borrower's disability or death.
Q. What is the difference between a fixed-rate and an adjustable-rate mortgage?
A. A fixed rate mortgage is a rate based on an interest rate which stays the same for the life of the loan (usually 15 to 30 years), resulting in payment which remain the same for the life of the loan. An adjustable rate mortgage, on the other hand, is a mortgage rate determined by a
changing interest rate based upon a predetermined time interval (usually in relation to a specific index), and payments fluctuate accordingly.
Q. What is APR (Annual Percentage Rate)?
A. APR stands for annual percentage rate and reflects the interest rate charge on the loan plus other finance charges including, for example, private mortgage insurance premiums, points and other financing costs you pay when obtaining the loan.
Q. What is LTV (Loan-to-Value)?
A. Loan to value, or LTV as it is commonly referred to, is the ratio of Loan Amount to the Value of a property. For example, a loan of $100,000 on a property valued at $300,000 is at an LTV of 33%. LTV considerations become important in several situations.
Q. Purchase Loans
A. When a property is purchased, the down payment is critical to the lending decision. When the down payment is less than 20%, i.e. the LTV is greater than 80%, a lender will generally require mortgage insurance. This requirement also means that the loan will usually require an additional level of approval, from a Private Mortgage Insurance Company. Mortgage insurance coverage, or PMI, is a premium or fee which is included in the monthly mortgage payment. It can range from .22% to almost 1% of the loan amount annually, with the exact coverage determined by the loan type, insurance company, and LTV. Mortgage insurance payments are not tax deductible.
An alternative to obtaining PMI is to structure the purchase transaction to include a first and second mortgage, thus bypassing the need to have the additional mortgage insurance premium.
Q. What is Title Insurance?
A. Title Insurance is an insurance policy, issued by a Title Insurance Company, which insures a home owner against claims made due to errors or omissions that were not disclosed up front. The premiums are determined primarily by the value of the property.
Q. What is Mortgage Insurance?
A. Mortgage insurance gives protection to lenders by spreading a portion of the risk involved in lending money on homes to a separate, private company. Through this process, borrowers can get into a home at a substantially lower down payment. In most instances, mortgage insurance premiums are charged if the loan amount is greater than 80% of the total value of the home.
Q. What is pre-qualifying?
A. Pre-qualifying is the process through which a potential borrower gives information about himself/herself to a loan officer for the purpose of calculating the dollar amount of a particular loan for which they can qualify.
Q.
What is the difference between locking or floating my interest rate?
A. When the borrower chooses to "lock-in" the interest rate, the lender takes the risk of interest rates increasing during the period of time from lock-in to loan closing. The down side is if interest rates fall, the borrower is locked in at the higher interest rate. The benefit is the security of knowing the interest rate is locked in if interest rates should increase.
When floating the interest rate for any amount of time, the borrower takes the risk of interest rates increasing during the period from application to the time of lock-in. The downside to this, of course, is if interest rates increase during this time, the borrower is subject to the then current higher interest rates. The benefit would then be if interest rates went down, the borrower would have the option of a lower interest rate than if locked in previously.
Q. What is an ARM loan and how does it work?
A. ARM stands for Adjustable Rate Mortgage whereby your interest rate changes periodically. This period can vary from 1 month to as long as 10 years! Initially you will get a very competitive rate with an ARM (the so-called teaser rate). Depending on your program, your interest rate will be adjusted after a predetermined period. Your rate will be determined by adding two key figures: the index plus the margin. The index is the fluctuating value in this equation. Your index may be the 1 Year T-Bill or other. Your margin is fixed for the life of the loan, and determined at time of lock (2.5, 2.75 etc.). Most loans, not all, will have periodic and lifetime rate caps to protect you from wild increases (or decreases).
Q. What is the appraisal?
A. The appraisal is a statement of property value made by an independent, professional appraiser. It is done to insure that the value of the property is sufficient to secure the loan in the even that the borrower fails to repay the loan in accordance with the provisions of the mortgage contract. The value is set based on the home itself and on recent comparable sales of homes close to the subject property. The appraisal does not necessarily detect or discuss defects in the property or the title to the property.
Q. Why do interest rates rise and fall so frequently?
A. Because mortgage bankers sell their loans into the securities secondary market, they are affected by all of the worldwide economic issues. If the market foresees a rise in the inflation rate, long-term rates, i.e., mortgage rates will rise.
Q. What is an FHA or VA mortgage?
A. Federal Housing Administration (FHA) or Veteran's Administration (VA) mortgages are loans insured by the respective governmental agencies. FHA programs enable lenders to arrange financing for the borrower with a minimal down payment. Similarly, VA programs (available to veterans only) can be made to a borrower who has little or no down payment. When borrowing under these programs, you will pay a Mortgage Insurance Premium (FHA) or a Funding Fee (VA) to insure the mortgage. This is similar to private mortgage insurance on a conventional loan. These insurance premiums may be paid out-of-pocket at the time of closing or financed by increasing the mortgage amount.
Q. What is Escrow?
A. Escrow has a few meanings. An Escrow Company is a neutral party in a real estate transaction which is responsible for concurrently satisfying the instructions of all related parties (buyer, seller, lender etc.). When a loan is "escrowed" the borrower pays their property taxes and insurance along with their monthly mortgage payments. These monies are placed in an account held by the lender which in turn pays the taxes and insurance on behalf of the borrower when they are due.
Q. What is the loan origination fee?
A. This fee covers the lender's administrative costs in processing the loan. It is often expressed as a percentage of the amount borrowed.
Q. What is negative amortization?
A. Most loans are designed to amortize, i.e. reduce, to a zero balance by the end of their loan term. Therefore each payment contains a portion of interest (primarily interest at the beginning) and a portion of principal. These loans are referred to as "no neg." or not having the possibility for negative amortization. Negative amortization is used to describe loans that have payment adjustment caps instead of interest rate adjustment caps.
Q. How does negative amortization occur?
A. Negative amortization loans calculate two interest rates. The first is called the payment rate the second is the actual interest rate. The payment rate is typically capped at 7.5% of the previous payment. The true interest rate is calculated as simply the index plus the margin without periodic caps. Borrowers are given a choice of which rate to pay. Thus advertisers of negative amortization loans often refer to these loans as "payment option" loans. While it is true that the borrower has a payment option, which offers flexibility, the borrower will also be subject to the true interest rate.
Q. Risk Considerations
A. The risk associated with a negative amortization product is that the interest rate calculation does not have a periodic cap and therefore can increase to the lifetime cap. The lifetime cap would only be reached if the fixed rates were to increase substantially.
Q. When to Consider a Negative Amortization Product
A. Negative amortization loans can be useful if the borrower is primarily concerned with cash flow. If the borrower only pays the payment rate, the overall mortgage payment over time can be relatively low. This type of product can be a temporary strategy if income is expected to be reduced for a period of time, or if the hold period is short term to minimize cash outflow. Using the money saved on your mortgage payments for paying credit cards is a great way to lower your overall debt. |
