Mortgage FAQs

It is easy to become overwhelmed at the mere thought of acquiring a mortgage, let alone all of the processes involved in doing so. Getting a mortgage is a long term financial investment, so it is very important that every area is covered - because the decisions that you make today in regards to a mortgage, well, you will be living with them for many years to come. Please remember that we are here to help you, to answer any questions that you may have, and we are available at your convenience.

We have put together this series of facts and common questions to help educate you with the mortgage process.

What is a mortgage?

A mortgage is a loan or lien that consists of what is called PITI:

• Principal - the amount of money borrowed from the lender
• Interest - the fee charged for borrowing the principal
• Taxes - property taxes
• Insurance - Home Owners insurance

These things are combined into what is amortization schedule, or the monthly payment you make to the lender for the mortgage you take out.

What kind of choices do I have for a mortgage?

There are two types of mortgages, fixed rate and adjustable rate mortgages.

Fixed Rate - A fixed rate mortgage has fixed amount of time for the loan period, such as 10, 20 or 30 years. The interest rate for the mortgage is also fixed, meaning that the interest rate that you lock in today will be the interest rate you will pay during the entire loan period. This, however, does not guarantee that your mortgage payment amount will remain the same throughout the term of the loan as home owners insurance rates and property tax rates may change and thus affect the amount due for your installments.

Adjustable Rate - An adjustable rate mortgage, or ARM for short, has an interest rate that fluctuates according to the current interest levels. Your mortgage payments will increase or decrease based on the then current interest rate. Usually adjustable rate mortgages are
capped.

Which type of mortgage should I choose?

The type of mortgage that will work best for you really can vary with each person, and should be discussed with our mortgage professionals.

Some things to consider when choosing the proper mortgage type:

• Your current financial situation
• If / when and/or how much you expect your finances to change in the future
• How long you intend to live in your new home
• Whether it would be bothersome if your mortgage payment changed occasionally

These are only a few factors to consider. You should discuss your options with our mortgage professionals for a more personal evaluation of the most viable option for you.

How much is the down payment?

Not too long ago it was commonplace to have to come up with anywhere between 10%-20% of the property value for the down payment. Many people do not know that these old rules are for the most part not true anymore; depending on your credit history and financial situation you might only be required to come up with 5% down or even less. Contact us today to find out what type of down payment you might qualify for.

Get pre qualified

You should get pre qualified during your search for a mortgage. Pre qualification doesn’t tie you into any particular mortgage rate or program, rather it will give you a general idea of what types of programs are available for you given your financial situation. Getting pre qualified allows a lender to check out your income, any debt you might owe and your credit history to come up with an approximation of what your borrowing limit might be.

Getting Pre-Approved

After pre qualification you should get pre-approved for a loan. This process will verify the information from the pre-qualification process. Getting pre-approved can significantly help you when you are negotiating with a seller. This is because after the pre-approval process you have an exact figure from the lender as to how much you qualify to borrow. Sellers love receiving bids from pre-approved buyers because the seller knows that if you like the offer, you have the financial backing to purchase the home. This can, in many cases, help you to work out a better deal with the sellers.

In addition to having a better position to negotiate with sellers, the pre-approval process will point out any issues on your credit report that will need to be dealt with before moving forward and obtaining the loan.

Escrow - what is it?

Your mortgage payment, or amortization, is comprised of several parts. While you are only making one payment to your lender, there are certain percentages of the payment that are allocated towards specific items. One percentage of your payment goes to the principal, which is the money borrowed from the lender. Another portion of your payment is the interest, or the fee you are paying the lender in order to borrow the money. There are other small percentages of each payment that are allocated for certain things, such as certain taxes and insurances, the lender collects these portions and holds them until a certain period and makes these payments on your behalf with the amount held in escrow.

Will I always have the same mortgage payment with a fixed rate loan?

No. Even if you have a fixed rate loan you are still subject to what is called the escrow analysis. Once a year or possibly more, your lender will analyze your escrow account and adjust the amount taken for escrow from your monthly payment. This analysis my fluctuate your mortgage payments in either direction.

Of course, if you have an adjustable rate mortgage, you can expect that on occasion your payment rate will fluctuate based on its index.

How does the lender come up with the amount I qualify for?

Lenders use what is called the debt-to-income ratio to decide what amount you may be able to borrow from them. In simple terms it is a comparison of your gross income and your expenses as well as debts.

Other factors that influence your maximum loan amount include how much cash you have available for closing costs and the down payment, your credit history as well as your employment history.

Is homeowners insurance a requirement?

Yes, homeowners insurance is required. Most lenders mandate that you have insurance for at least the balance of the loan. Proof of paid homeowners insurance is required at closing.

What is Loan to Value (LTV) ratio?

The loan to value ratio is the amount you borrow compared to the appraised value of the property you are purchasing which is read as a percentage. The higher LTV ratio that you are able to obtain, the less money you must have up front yourself in order to close on a deal. Generally LTV ratios of 90% and above are indicative of a good credit history as well as other criteria that a lender likes to see in a borrower.

What are discount points?

Discount points are fees that are paid by you, the borrower, to the lender, at the time of closing on a mortgage to lower your loan interest rate. Each point can be purchased for 1% of your loan amount, and if there is a financial benefit to purchasing points is largely dependent on how long you plan to remain in your home.

What is an annual percentage rate (APR)?

The APR is the yearly interest rate that is paid on your loan while taking into account the one time fees and closing costs.