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Frequently Asked
Questions
Hello and welcome to Lender's-Corner! Our
goal is to inform and educate and in this brief FAQ we will review
some important information about the loan process from point of
origin to the hour of closing.
Meet your Mortgage Specialist.
All of our Mortgage Specialists are specially trained
professionals to help you with any mortgage need, situation or
demand that may arise. Unlike other banks, you will be working with
a Mortgage Specialist on a one on one basis. Every time you call
you’ll speak with the same Specialist who will be happy to answer
every question and return every phone call up to the closing date
and beyond.
Can you explain the basics to me?
A mortgage requires you to pledge your home as the lender's security
for repayment of your loan. The lender agrees to hold the title or
deed to your property (or in some states, to hold a lien on your
title or deed) until you have paid back your loan plus interest.
Mortgage Amount and Term: The mortgage amount is the amount of money
you borrow from a lender to pay for your house. The term is the
number of years over which you can pay back the amount you borrow.
The most popular mortgage term is 30 years. By extending payment
over 30 years, you keep your monthly housing costs low. If you can
afford higher monthly payments, you can select a mortgage term that
is shorter. There are 20-year, 15-year, and even 10-year fixed-rate
mortgages available from most mortgage lenders. The longer your
repayment period is, the lower your monthly payments will be, but
the total interest you pay over the life of the loan will be more.
Amortization: Over time, you will repay your mortgage through
regular monthly payments of principal and interest. During the first
few years, most of your payments will be applied toward the interest
you owe. During the final years of your loan, your payment amounts
will be applied primarily to the remaining principal. This type of
repayment method is called amortization.
Fixed or Adjustable Interest Rates: Interest rates are usually
expressed as an annual percentage of the amount borrowed. You can
choose a mortgage with an interest rate that is fixed for the entire
term of the loan or one that changes throughout. A fixed-rate loan
gives you the security of knowing that your interest rate will never
change during the term of the loan. An adjustable-rate mortgage
(called an ARM) has an interest rate that will vary during the life
of the loan, with the possibility of both increases and decreases to
the interest rate and consequently to your mortgage payments.
Down Payment: The down payment is the part of the purchase price the
buyer pays in cash and is not financed with a mortgage. Your down
payment will reduce the amount you'll need to borrow. So, the more
cash you put down, the smaller the size of your loan, and the
smaller the amount of your mortgage payments.
Closing Costs: The closing (or, in some parts of the country,
settlement) is the final step, during which ownership of the home is
transferred to you. The purpose of the closing is to make sure the
property is ready and able to be transferred from the seller. The
closing costs (which vary from state to state) are usually expressed
as a percentage of the sales price or loan amount. Typically, costs
range from 3% to 6% of the price of your home and can include
transfer and recordation taxes, title insurance, the site survey
fee, attorney fees, loan discount points, and document preparation
fees.
Discount Points: In the special vocabulary of mortgage lending,
"points" are a type of fee that lenders charge. (The full term to
describe this fee is "discount points.") Simply put, a point is a
unit of measure that means 1% of the loan amount. So, if you take
out a $100,000 loan, one point equals $1,000. Discount points
represent additional money you can pay at closing to the lender to
get a lower interest rate on your loan. Usually, for each point on a
30-year loan, your interest rate is reduced by about 1/8th (or .125)
of a percentage point.
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. These are the two private,
congressionally chartered 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 $252,700.
If your loan amount will be for more than the conforming loan limit,
the interest rate on your mortgage may be higher or you may have
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.
What types of Fixed Rate Mortgages are there?
When choosing a mortgage the interest rate may be your main
consideration if you expect to stay in your house for a long time.
With a fixed-rate mortgage, you can be sure that your interest rate
will stay the same for the entire life of your loan. Fixed-rate
mortgages are available in a variety of repayment terms, with 15,
20, and 30 years the most common.
30-Year Fixed-Rate: The easiest fixed-rate loan to qualify for, the
30-year mortgage, gives you an excellent opportunity to keep
mortgage payments reasonable by making monthly payments over a long
period of time. This mortgage loan may be ideal if you plan to
remain in your home for years and wish to keep your housing expense
low and use any extra cash for other purposes. This loan also
provides maximum interest deduction for tax purposes.
20-Year Fixed-Rate: For those who want a lower interest rate and
want to own their homes free of debt sooner, this shorter mortgage
amortizes principal and interest over just 20 years, saving a
considerable amount of total interest paid over the life of the
loan.
15-Year Fixed-Rate: This shorter-term mortgage will save you a
significant amount of interest over the life of the loan. By paying
off the mortgage more quickly, you also build up equity in your home
sooner. This may be important if you are approaching retirement or
have other large expenses to cover, such as financing your
children's education. However, the monthly payments you make on a
15-year mortgage will cost you more than those you would make on a
30- or 20-year loan.
What should I know about Adjustable Rate
Mortgages?
With an adjustable-rate mortgage (ARM), the interest rate you pay is
adjusted from time to time to keep it in line with changing market
rates. When interest rates go down, so might your mortgage payments;
but keep in mind that your payments could go up when interest rates
are raised.
ARMs are attractive because they may initially offer a lower
interest rate than fixed-rate mortgages. Since the monthly payments
on an ARM start out lower than those of a fixed-rate mortgage of the
same amount, you can qualify for a larger loan. The chief drawback,
of course, is that your monthly payments may increase when interest
rates rise.
You may want to consider an ARM if:
1. You are confident your income will rise enough in the coming
years to comfortably handle any increase in payments;
2. You plan to move in a few years and therefore are not so
concerned about possible interest rate increases; or
3. You need a lower initial rate to afford to buy the home you want.
An ARM has two "caps" or limits on how large an interest rate
increase is permitted. One cap sets the most that your interest rate
can go up during each adjustment period, and the other cap sets the
maximum total amount of all interest adjustments over the life of
the loan.
For example, a typical ARM that adjusts annually may have a yearly
cap of 2%, meaning that the adjusted interest rate can never be more
than 2% higher than the previous year. And such an ARM may have a
lifetime rate cap of 6%, meaning that the interest rate on your loan
will never be more than 6% over the original rate. So, if you are
looking at an ARM with a current introductory rate of 5%, a lifetime
cap of 6% tells you that the highest interest rate you could ever
pay would be 11%.
Your lender can tell you which ARMs offer a conversion feature that
allows you to convert from an adjustable rate to a fixed rate at
certain times during the life of your loan.
One important thing to know when comparing ARMs is that the interest
rate changes on an ARM are always tied to a financial index. A
financial index is a published number or percentage, such as the
average interest rate or yield on Treasury bills.
The following are the most common types of ARMs:
Treasury-Indexed ARMs: These are tied to the weekly average yield of
U.S. Treasury Securities adjusted to a constant maturity of six
months, one year, or three years. Likewise, the interest rate on
your ARM will adjust once every six months, once each year, or once
every three years, depending on the schedule you choose.
Per-adjustment caps and lifetime rate caps also vary.
Cost of Funds-Indexed ARMs: Indexed to the actual costs that a
particular group of institutions pays to borrow money, the most
popular of this type is the COFi for the 11th Federal Home Loan Bank
District. COFi ARMs can adjust every month, every six months, or
every year, and the per-adjustment caps and lifetime rate caps vary.
LIBOR-Based ARMs: The London Interbank Offered Rate is the interest
rate at which international banks lend and borrow funds in the
London Interbank market. The six-month LIBOR ARM typically has a
per-adjustment period cap of 1% and is offered with either a 5% or a
6% lifetime rate cap.
Initial Fixed-Period ARMs: As protection against rapid interest rate
increases in the early years of your loan, interest rates for these
ARMs don't adjust until several years after you take out the loan.
You can choose from three, five, seven, or 10-year fixed terms. At
the end of your chosen fixed-rate period, your interest rate would
adjust every year.
Two-Step Mortgage®: This special type of ARM provides the benefit of
initial low rates with the stability of longer term financing
because it adjusts only once - either at seven years or at five
years. After that initial adjustment, the mortgage maintains a fixed
rate for the remaining 23 or 25 years of a 30-year mortgage
repayment term. For example, if your initial interest rate were 8%,
you would pay that rate for the first seven (or five) years. Then,
for the remaining 23 (or 25) years, you would pay an interest rate
that is indexed to the value of the 10-year U.S. Treasury security
on the adjustment date. (At the adjustment date, there is no
additional refinancing cost, no forms to complete, and no
re-qualification necessary.) This new rate can never be more than 6
percentage points higher than your old rate. There are no limits on
how much lower the adjusted interest rate can be.
What is a 2/28 ARM?
With 2/28 ARMs, your interest rate is fixed for the first two years
after the note date (the number before the slash refers to the
number of years that the initial rate is fixed), after which the
interest rate can change every year to the index value plus the
margin (subject to the interest rate caps). These programs (often
called "B paper loans") are primarily offered for borrowers with
less-than-perfect credit who don't qualify for an "A paper loan".
They allow you two years to rebuild your credit, at which point you
may refinance at a better rate. 2/28 ARM loans offer an initial
higher interest rate than the fully indexed rate (index plus margin)
during the initial period of the loan and usually have a two year
prepayment penalty.
What is the "APR" or Annual Percentage Rate?
In comparing any type of loan, whether it is a fixed rate loan to a
fixed rate loan, adjustable rate loan to adjustable rate loan or
fixed rate loan to adjustable rate loan, there is one way that can
be used to compare apples to apples and even apples to oranges.
APRs are designed to do just that. APRs are a way to calculate the
annual cost of loans, taking into consideration loan origination
fees (points) and the other costs associated with securing a loan.
The additional costs include appraisal and credit report fees as
well as processing and document fees.
One confusing aspect of APRs is that the APR on 15 year loans will
carry a higher relative rate due to the fact that the points are
amortized over the 15 year term rather than the 30 year term. When a
Regulation Z (Reg Z, the mortgage company’s disclosure of cost for
the loan) is prepared for a buyer/borrower the prepaid interest is
also included in the APR calculation. For our illustrations we will
use only the points, appraisal, credit report, and processing and
document fees.
As a means of protecting consumers from companies who did not
disclose the fees associated with a particularly low start rate on
an adjustable rate loan or below market rate on a fixed rate loan,
APRs give consumers a way to check the true cost of a loan.
One common situation that occurs when a borrower receives a Reg Z,
and a copy of their note, is the column that indicates the amount
financed is less than the loan amount the borrower is actually
financing. It is here that many borrowers leap before they look and
call to find out why they are only receiving a $146,925 loan when
they applied for a $150,000 loan. It is here that APRs enter the
picture.
Let's look at how APRs are calculated. For our illustration we will
assume a 8.50% fixed rate interest. For a 30 year loan the monthly
payments for a $150,000 loan are $1,153.37.
In order to calculate the APR for this loan we subtract $2,250.00
(1.50 points), $275.00 appraisal fee, $50.00 credit report fee,
$500.00 processing, document and other fees. ($150,000 - $3,0750 =
$146,925). The $146,925 is then used as the present value/loan
amount to determine the true cost of this loan. By solving for the
new interest rate for a $146,925 loan with the same payment of
$1,153.37, the APR is calculated as 8.73%.
How does this compare to a 30 year fixed rate loan with a 8.00%
interest rate and 3.50 points? The monthly payment for this loan is
$1,100.65.
In order to calculate the APR for this loan we subtract $5,255.00
(3.50 points), $275.00 appraisal fee, $50.00 credit report fee,
$500.00 processing, document and other fees. ($150,000 - $6,075 =
$143,925). The $143,925 is then used as the present value/loan
amount to determine the true cost of this loan. By solving for the
new interest rate for a $143,925 loan with the payment of $1,100.65
the APR is calculated as 8.44%.
Can I have mine with no closing costs?
Of course! Please keep in mind that other fees such as: title
insurance, tax and insurance escrows, closing attorney’s fees, and
state required tax stamps and recording fees still apply.
Are there any out of pocket expenses?
The real estate appraisal is the only out of pocket expense.
Typically we will order an appraisal with a state certified and
licensed appraiser in your area. The appraiser is an independent
contractor retained to determine what the “fair market value” of
your property is. You will pay the appraiser directly upon the
mutually appointed day of appraisal inspection. Charges for this
service may vary: please check with your Mortgage Specialist.
What happens after I fax in all my paperwork?
Shortly after your first contact with us, you should receive a
disclosure package stating specifically in black and white the loan
program which we have proposed to you. We are required by state and
federal law to send this “non-binding” disclosure package to you. We
only ask that you sign where highlighted and return it to us, as
recognition of your receipt.
How much is my house worth?
After the appraiser inspects your property, it may take a few days
for the appraiser to put a final figure on your property. As soon as
we receive the appraisal from the appraiser we will contact you.
How come it’s taking so long?
In general the loan approval process could take anywhere from 2-4
weeks to close once we receive the appraisal and submit the loan to
the appropriate underwriter for approval. Once the underwriter
receives your appraisal and all of your information they will
calculate, review, and verify all of the information as well as do a
thorough appraisal review. Once they’re done they’ll send over a
conditional approval. The “conditional approval” will contain
stipulations that will have to be met in order to receive a “clear
to close”. Usually these “stipulations” will be nothing more than a
more recent pay stub or the bank may ask for some valuation
supporting information from the appraiser. Once all of the final
“stipulations” are met we will be able to close the loan.
How will I know whether or not my loan is
approved?
Once we have your loan approved, your Mortgage Specialist will
contact you with the details.
How soon can we close?
Once all final stipulations are cleared and we receive the clear to
close from the lender, we will be able to close your loan. This
process could take as long as seven days, as the lenders are
extremely busy and they close loans in the order that they are
cleared. Usually, it won’t take more than 72 hours to receive the
clear to close once all final stipulations are met.
How will my credit cards bills be paid off?
After the 3 day right of recession has passed we will issue all
checks and pay offs. As far as the credit cards and debts that we
are paying off as part of the loan, we will issue checks made out to
your specific creditors with the specified pay off amounts and send
the checks directly to you. As far as any liens, taxes or mortgages
are concerned; those pay offs will go directly to the creditor…i.e.:
City of Newport, Ameriquest Mortgage, Washington Mutual, etc..,
Where do I send my first payment?
Within 30 days of the closing date, you should receive a “first
payment letter” from the appropriate lender. Simply follow the
enclosed instructions.
Any additional
questions should be directed to your Mortgage Specialist.
Thank You and Good Luck!
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