The links below will lead you to all of the information you’ll need to become fully informed about the mortgage process.
The questions and answers presented on this website are for informational purposes only. You should consult your Attorney, Real Estate Agent or Lender for answers to questions you may have related to loan programs available for your situation in your local area.
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.
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.
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.
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.
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.
An origination fee is the fee charged to cover the application for, and processing of, a mortgage provided by the mortgage broker.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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 below 80%.
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.
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.
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/.