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How do I know which type of mortgage is best for me?
There
is no simple formula to determine the type of mortgage that is best for
you. This choice depends on a number of factors, including your current
financial picture and how long you intend to keep your house. Provident
Partners Mortgage, Inc. can help you evaluate your choices and help you
make the most appropriate decision.
How do I know how much house I can afford?
Generally
speaking, you can purchase a home with a value of two or three times
your annual household income. However, the amount that you can borrow
will also depend upon your employment history, credit history, current
savings and debts, and the amount of down payment you are willing to
make. You may also be able to take advantage of special loan programs
for first time buyers to purchase a home with a higher value. Give us a
call, and we can help you determine exactly how much you can afford.
How much cash will I need to purchase a home?
The amount of cash that is necessary depends on a number of items. Generally speaking, though, you will need to supply:
- Earnest Money: The deposit that is supplied when you make an offer on the house
- Down Payment: A percentage of the cost of the home that is due at settlement
- Closing Costs: Costs associated with processing paperwork to purchase or refinance a house
What is the difference between pre-qualifying and pre-approval?
A
pre-qualification for a specific loan dollar amount is based on a
review of basic financial information you supply to us. No verification
of this information is performed. The pre-qualification means that if
the information you supplied to us is accurate, subject to verification
of credit, appraisal of the property, and the lenders underwriting
criteria for the loan amount, you should be able to receive a loan as
described in the pre-qualification letter or document. This is not a
final approval. A pre-qualification is not a commitment to lend.
However, a pre-qualification letter indicates to you and the seller
that in the opinion of the loan officer you are qualified to purchase
the house you are making an offer on. The broker would need more loan
information to get you a
Pre-approval is a step above
pre-qualification. Pre-approval involves verifying your credit, down
payment, employment history, etc. Your loan application is submitted to
an underwriter and a decision is made regarding your loan application.
If your loan is pre-approved, the lender will loan you money on the
basis that you requested subject to: a satisfactory appraisal (both as
to value and type of product); your financial condition remains as
stated on your application and satisfying any underwriting conditions
from the lender.
Getting your loan pre-approved allows you to
close very quickly when you do find a house. A pre-approval can help
you negotiate a better price with the seller, since being pre-approved
is very close to having cash in the bank to pay for the house!
Why are the advantages of a mortgage broker versus a thrift or a mortgage banker?
First
we need to define the terms. A thrift is your typical neighborhood bank
- mutual savings banks and savings-and-loan institutions offering
savings accounts, mortgages and other financial products and services.
Mortgage bankers work for a single lender and are in the sole business
of lending money. Mortgage brokers, on the other hand, are middlemen
who, by state law, work on behalf of borrowers. Brokers counsel
borrowers on the loan options available from different wholesalers and
then research a number of lending sources - commercial banks, thrifts
and mortgage bankers - to find appropriate loans to meet the specific
needs of borrowers they represent. Mortgage brokers do not add any net
cost to the lending process because they perform functions that would
otherwise have to be done by employees of the lender. When a broker
processes the paperwork on a loan, it costs less for the lender to make
the loan. Therefore, lenders often discount loans to brokers. The
borrower pays no additional cost and benefits from the broker's
service. By state law, the broker's fee and the discount the lender
offers the broker must be disclosed to the borrower. The broker has
access to typically many more mortgage loan programs that average to
save you money.
What does my mortgage payment include?
For most homeowners, the monthly mortgage payments include three separate parts:
- Principal: Repayment on the amount borrowed
- Interest: Payment to the lender for the amount borrowed
- Taxes
& Insurance: Monthly payments are normally made into a special
escrow account for items like hazard insurance and property taxes. This
feature is sometimes optional, in which case the fees will be paid by
you directly to the County Tax Assessor and property insurance company.
What is the difference between a fixed-rate loan and an adjustable-rate loan?
With
a fixed-rate mortgage, the interest rate stays the same during the life
of the loan. With an adjustable-rate mortgage (ARM), the interest
changes periodically, typically in relation to an index. While the
monthly payments that you make with a fixed-rate mortgage are
relatively stable, payments on an ARM loan will likely change. There
are advantages and disadvantages to each type of mortgage, and the best
way to select a loan product is by talking to us.
How is an index and margin used in an ARM?
An
index is an economic indicator that lenders use to set the interest
rate for an ARM. Generally the interest rate that you pay is a
combination of the index rate and a pre-specified margin. Three
commonly used indices are the One-Year Treasury Bill, the Cost of Funds
of the 11th District Federal Home Loan Bank (COFI), and the London
InterBank Offering Rate (LIBOR).
What are credit scores?
A
credit score (such as FICO - developed by Fair Isaac & Co and used
by Experian, or BECON ? developed and used by Equifax or EMPIRICA ?
developed and used by Trans Union) or credit scoring is a method of
determining the likelihood that a credit user (you) will pay their
bills. Fair Isaac began its pioneering work with credit scoring in the
late 1950?s. Since then scoring has become widely accepted by lenders
as a reliable means of credit evaluation. A credit score attempts to
condense a borrower?s credit history into a single number. Fair, Isaac
& Co. and the credit bureaus do not reveal how these scores are
computed. The Federal Trade Commission has ruled this practice to be
acceptable.
Credit scores are calculated by using scoring models
and mathematical tables that assign points for different pieces of
information that best predict future credit performance. Developing
these models involves studying how thousands, even millions, of people
that have used credit. Score-model developers find predictive factors
in the data that have proven to indicate future credit performance.
Models can be developed from different sources of data. Credit-bureau
models are developed from information in consumer credit-bureau reports.
Credit scores analyze a borrower's credit history considering many factors such as:
Late payments
The amount of time credit has been established
The amount of credit used versus the amount of credit available
Length of time at present residence
Employment history
Negative credit information such as bankruptcies, charge-off?s, collections, etc.
There
are really three credit scores computed by data provided by each of the
three bureaus??Experian, Trans Union and Equifax. Some lenders use one
of these three scores, while other lenders may use the middle score and
still others may use all three.
How can I increase my score?
While
it is difficult to increase your score over the short run, here are
some tips to increase your score over a period of time.
Pay your bills on time. Late payments and collections can have a serious impact on your score.
Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
Reduce your credit card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.
If
you have limited credit, obtain additional credit. Not having
sufficient credit can negatively impact your score. (Normally lenders
like to see you have at least five (5) lines of credit not including
utilities (such as telephone, gas and electric companies) and oil
company credit cards.
What if there is an error on my credit report?
If
you see an error on your report, to rectify it, you must contact the
credit bureau. The three major bureaus in the U.S., Equifax
(1-800-685-1111), Trans Union (1-800-916-8800) and Experian
(1-888-397-3742) all have procedures for correcting information
promptly. Alternatively, we as your mortgage company may help you
correct this problem as well. Understand this process takes time, must
be done in writing, and may require proof depending on the nature of
the error.
Why are interest rates different from day to day and one source to another?
Interest
rate movements are based on the simple concept of supply and demand. If
the demand for credit (loans) increases, so do interest rates. This is
because there are more buyers, so sellers (those who loan the money)
can command a better price, i.e. higher rates. If the demand for credit
reduces, then so do interest rates. This is because there are more
sellers than buyers, so buyers can command a lower better price, i.e.
lower rates. When the economy is expanding there is a higher demand for
credit, so rates move higher, whereas when the economy is slowing the
demand for credit decreases and so do interest rates.
This leads to a fundamental concept:
Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).
Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).
A
major factor driving interest rates is inflation. Higher inflation is
associated with a growing economy. When the economy grows too strongly,
the Federal Reserve increases interest rates to slow the economy down
and reduce inflation. Inflation results from prices of goods and
services increasing. When the economy is strong, there is more demand
for goods and services, so the producers of those goods and services
can increase prices. A strong economy therefore results in higher real
estate prices, higher rents on apartments and higher mortgage rates.
Mortgage
rates tend to move in the same direction as interest rates. However,
actual mortgage rates are also based on supply and demand for
mortgages. The supply/demand equation for mortgage rates may be
different from the supply/demand equation for interest rates. This
might sometimes result in mortgage rates moving differently from other
rates. For example, one lender may be forced to close additional
mortgages to meet a commitment they have made. This results in them
offering lower rates even though interest rates may have moved up!
There
is an inverse relationship between bond prices and bond rates. This can
be confusing. When bond prices move up, interest rates move down and
vice versa. This is because bonds tend to have a fixed price at
maturity??typically $1000. If the price of the bond is currently at
$900 and there are 10 years left on the bond and if interest rates
start moving higher, the price of the bond starts dropping. The higher
interest rates will cause increased accumulation of interest over the
next 10 years, such that a lower price (e.g. $880) will result in the
same maturity price, i.e. $1000.
Do I need flood insurance?
Most
lenders will not lend you money to buy a home in a flood hazard area
unless you pay for flood insurance. Some government loan programs will
not allow you to purchase a home that is located in a flood hazard
area. Your lender may charge you a fee to check for flood hazards. You
will be notified if flood insurance is required. If a change in flood
insurance maps brings your home within a flood hazard area after your
loan is made, your lender or service may require you to buy flood
insurance at that time.
What are your rates?
The
first question customers usually ask when calling a mortgage company or
lender is "What are your rates?" Because of the number of mortgage
programs available and the various rate and point combinations, most
mortgage companies have rate sheets that are 5-10 pages long.
Getting
a rate quote is just a small part of shopping for a mortgage and
usually not the best way to select a lender. Customer service,
professional staff, convenience, and flexibility are some of the key
attributes to selecting the best lender for your needs.
In helping you assess a rate, you will need to provide answers to a few basic questions like:
What is your purchase price?
What loan amount are you looking for or what loan amount do you want to finance?
Do you prefer a fixed rate or an adjustable rate mortgage?
How long do you plan to live in the house?
How many points are you willing to pay?
The
purchase price or the value of your home affects the rate because it
affects the size of the loan. For example, Jumbo Loans, currently over
$417,000, have a higher rate. Similarly, smaller loans have a higher
rate or cost more because it costs the same and takes the same effort
to do $35,000 loan as it does a $200,000 loan. Lenders and brokers need
to make or charge a certain minimum amount of money to cover overhead,
per loan (transaction) cost and make a profit.
The type of loan
(fixed or variable) affects the rate because it affects the lenders?
income and inflation risk. For example, with a fixed rate loan, if
rates go up the lender could lend out money at a higher rate than they
are currently loaning it to you, and therefore earn more money. With a
variable rate loan since the rate the lender can charge you changes
regularly their income remains consistent with their current income
opportunities. Therefore with variable rate loans they give you a
better rate since they know that if rates go up they can charge you
more.
The length of time you will own a house affects both the
type of loan you may want and the amount of points it may make sense to
pay. For example, if you are going to keep a house for a short period
of time (let?s say 3 years), you may be better off with a variable rate
loan (e.g. a 3/1 ARM ? fixed for 3 years and varies once a year every
year there- after until the loan is paid off). Why? Because typically
the 3/1 ARM has a lower rate associated with it than a 30 year fixed
rate loan and since you will sell the house in 3 years you would not be
affected by higher rates which may exist at that time. On the other
hand, if you expect to live in the house for 30 years you might be
willing to pay some points to receive a lower interest rate now. The
lower interest rate would save you money every month over the life of
the loan. The total savings in this situation should be greater than
the cost of points, giving consideration to the amount that the point
money could earn if invested (saved) after taxes.
Does zero points really mean zero points?
Points
are a cash payment as part of the charge for the loan, expressed as a
percent of the loan amount; e.g., "2 points" means a charge equal to 2%
of the loan balance. Points can be used to "buy down" the rate on a
loan or to help fund closing costs. For example, a 30-year fixed loan
may be available at a retail price of :
8.0% with 2 points or
8.25% with 1 point or
8.5% with 0 points or
8.75% with -1 point or
9% with -2 points
On
a $200,000 loan, the loan officer can offer you 8.25% with 1 point
($2,000) cash at closing or a higher rate of 8.75% with a cost of -1
point, which is a $2,000 credit towards your closing costs. The basic
idea of the zero-fee loan is that you pay a higher rate in exchange for
cash up front, which is then used to pay the closing costs. You will
pay a higher monthly payment??so the money is really coming from future
payments that you will make.
The best way to decide whether you
should "buy down" and pay points or not is to perform a break-even
analysis. This is done as follows:
Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000
Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month
Divide
the cost of the points by the monthly savings to come up with the
number of months to break even. In the above example, this number is
40 months. If you plan to keep the house for longer than the break-even
number of months, then it makes sense to pay points; otherwise it does
not.
The above calculation does not take into account the tax
advantages of points. When you are buying a house the points you pay
are usually tax-deductible, so you may realize some savings
immediately. On the other hand, when you get a lower payment, your tax
deduction reduces! This makes it a little difficult to calculate the
break-even time taking taxes into account. In the case of a purchase,
taxes definitely reduce the break-even time. However, in the case of a
refinance, the points are NOT tax-deductible, but have to be amortized
over the life of the loan. This results in fewer tax benefits or none
at all, so there is little or no effect on the time to break even.
If
none of the above makes sense, use this simple rule of thumb: If you
plan to stay in the house for less than 3 years, do not pay points. If
you plan to stay in the house for more than 5 years, pay 1 to 2 points.
If you plan to stay in the house for between 3 and 5 years, it does not
make a significant difference whether you pay points or not.
Should I refinance?
The most common reason for refinancing is to save money. Saving money through refinancing can be achieved in two ways:
By obtaining a lower interest rate that causes the monthly mortgage payment to be reduced.
By
reducing the term of the loan you actually save money over the life of
the loan. For example, refinancing from a 30-year loan to a 15-year
loan can significantly reduce the total of the payments made during the
life of the loan.
People also refinance to convert their
adjustable loan to a fixed loan. The main reason behind this type of
refinance is to obtain the stability and the security of a fixed loan.
Fixed loans are very popular when interest rates are low, whereas
adjustable loans tend to be more popular when rates are higher. When
rates are low, homeowners refinance to lock in low rates. When rates
are high, homeowners prefer adjustable loans to obtain lower payments.
A
third reason why homeowners refinance is to consolidate debts and
replace high-interest loans with a low-rate mortgage. The loans being
consolidated may include second mortgages, credit lines, student loans,
credit cards, etc. In many cases, debt consolidation results in tax
savings, since consumers loans are not tax deductible, while a mortgage
loan is tax deductible.
The answer to the question "Should I
refinance?" is a complex one, since every situation is different and no
two homeowners are in the exact same situation. However, if you are
looking to save money, try this calculation:
Calculate the total cost of the refinance (Example: $ 2,000)
Calculate the monthly savings (Example: $100 per month)
Divide
the total cost of the refinance (#1) by the monthly savings (#2). This
is the "break even" time. If you own the house longer than this, you
will save money by refinancing. (Example: 2,000 / 100 = 20 months to
break even)
Sometimes, you do not have a choice??you are forced
to refinance. This happens when you have a loan with a balloon
provision, but with no conversion option. In this case it is best to
refinance a few months before the balloon comes due.
Whatever you choose to do, consulting with a seasoned mortgage professional can often save you time and money.
What is an Annual Percentage Rate (APR)?
The
annual percentage rate (APR) is an interest rate that is different from
the note rate. It is commonly used to compare loan programs from
different lenders. The Federal Truth in Lending law requires mortgage
companies to disclose the APR when they advertise a rate. Typically the
APR is found next to the rate.
Example:
30-year fixed at 8% note rate and 1 point = 8.107% APR
The
APR does NOT affect your monthly payments. Your monthly payments are a
function of the interest rate and the length of the loan.
The
APR is a very confusing number! Even mortgage bankers and brokers admit
it is confusing. The APR is designed to measure the "true cost of a
loan." It creates a level playing field for lenders. It prevents
lenders from advertising a low rate and hiding fees.
If life
were easy, all you would have to do is compare APRs from the
lenders/brokers you are working with, then pick the easiest one and you
would have the right loan. Right? Wrong!
Unfortunately,
different lenders calculate APRs differently! So a loan with a lower
APR is not necessarily a better rate. An APR also does not tell you how
long your rate is locked for. A lender who offers you a 10-day rate
lock may have a lower APR than a lender who offers you a 60-day rate
lock!
Calculating APRs on adjustable and balloon loans is even
more complex because future rates are unknown. The result is even more
confusion about how lenders calculate APRs.
Do not attempt to
compare a 30-year loan with a 15-year loan using their respective APRs.
A 15-year loan may have a lower interest rate, but could have a higher
APR, since the loan fees are amortized over a shorter period of time.
Finally,
many lenders do not even know what they include in their APR because
they use software programs to compute their APRs. It is quite possible
that the same lender with the same fees using two different software
programs may arrive at two different APRs!
Conclusion :
Use
the APR as a starting point to compare loans. The APR is a result of a
complex calculation and not clearly defined. There is no substitute to
getting a good-faith estimate from each lender to compare costs.
Remember to exclude those costs that are independent of the loan.
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