Frequently Asked Questions
What is an APR (on the Truth in Lending)?
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.
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Example:
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30-year fixed
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8%
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1 point
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8.107% APR
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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. The best way to compare loans in the author's opinion is to ask
lenders to provide you with a good-faith estimate of their costs on the same
type of program (e.g. 30-year fixed) at the same interest rate. Then delete all
fees that are independent of the loan such as homeowners insurance, title fees,
escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that
has lower loan fees has a cheaper loan than the lender with higher loan fees.
The reason why APRs are confusing
is because the rules to compute APR are not clearly defined.
What fees are included in the
APR?
The following fees ARE generally
included in the APR:
- Points - both discount points and origination
points
- Prepaid interest. The interest paid from the
date the loan closes to the end of the month. Most mortgage companies assume
15 days of interest in their calculations. However, companies may use any
number between 1 and 30!
- Loan-processing fee
- Underwriting fee
- Document-preparation fee
- Private mortgage-insurance Appraisal fee
- Credit-report fee
The following fees are SOMETIMES
included in the APR:
- Loan-application fee
- Credit life insurance (insurance that pays off
the mortgage in the event of a borrowers death)
The following fees are normally NOT included in
the APR:
- Title or abstract fee
- Escrow fee
- Attorney fee
- Notary fee
- Document preparation (charged by the closing
agent)
- Home-inspection fees
- Recording fee
- Transfer taxes
An APR 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.
What are the most common mistakes when buying or refinancing a house?
I f you're like most people, purchasing
a home is the biggest investment you'll ever make. Because of the numerous
factors to consider when purchasing a home, it's important to prepare as best
you can. Some common home-buying principals are presented here for your
consideration. By keeping them in mind, you'll help create a successful and more
enjoyable experience.
- Looking for a home without being pre-approved.
Imagine you're a seller in receipt of multiple offers to
purchase your property. A complete stranger (buyer) is asking you to take your
property off the market for at least the next two to three weeks while they
apply for a loan. As the seller, lets consider the type of buyer you'd prefer to
deal with.
- Neither pre-qualified nor pre-approved
This buyer provides no evidence that they can afford to
purchase your property. You may wonder how serious they are since they're not at
least pre-qualified.
This buyer has met with a mortgage broker (or lender) and
discussed their situation. The buyer has informed the broker regarding their
income, expenses, assets and liabilities. The broker may also have seen their
credit report. The buyer provided you with a letter from the broker stating an
opinion of what the buyer can afford.
This buyer has provided a broker written evidence of income,
expenses, assets, liabilities and credit. All information has been verified by a
lender. As a result, much of the paperwork for this buyer's loan has been
completed. This buyer will probably be able to close quickly. They provide you
with a letter (pre-approval certificate) from the lender. You're as certain as
possible that this buyer can close.
As a potential buyer, you can see that being pre-approved
will give you the best chance of getting your offer accepted. This is critical
in a competitive situation.
- 2.Making verbal agreements.
If you're asked to sign a document containing instructions
contrary to your verbal agreements, don't! For example, the seller
verbally agrees to include the washing machine in the sale, but the written
purchase contract excludes it. The written contract will override the verbal
contract. More importantly, your state may require that contracts for the sale
of real property be in writing. Do not expect oral agreements to be enforceable.
- 3.Not receiving a Good Faith Estimate.
Within three business days after the broker or lender
receives your loan application, you must receive a written statement of fees
associated with the transaction. This is both the law and the best way to
determine what you'll pay for your loan. Bring the Good Faith Estimate (GFE)
with you when you sign loan documents. You should not be expected to pay fees
which are substantially different from those contained in your GFE.
4.Buying a home without professional inspections.
Unless you're buying a new home with warranties on most
equipment, it's highly recommended that you get property, roof and termite
inspections. This way you'll know what you are buying. Inspection reports are
great negotiating tools when asking the seller to make needed repairs. When a
professional inspector recommends that certain repairs be done, the seller is
more likely to agree to do them. If the seller agrees to make repairs, have your
inspector verify that they are done prior to close of escrow. Do not assume that
everything was done as promised.
- 5.Signing documents without reading them.
Whenever possible, review in advance the documents you'll be
signing. (Even though some specifics of your transaction may not be known early
in the transaction, the documents you'll sign are standard forms and are
available for review.) It's unlikely that you'll have sufficient time to read
all the documents during the closing appointment.
- 6.Not allowing for delays in the transaction.
In a perfect world, all real estate transactions close on
time. In the world we live in, transactions are often delayed a week or more.
Suppose you asked your landlord to terminate your lease the day your purchase
transaction was scheduled to close. A day or two before your scheduled closing
date, you discover your transaction is delayed a week. In a perfect world, no
one is inconvenienced and your landlord is willing to work with you. More
likely, however, your landlord is inconvenienced and angry. Will you be thrown
out? Will you have to find interim housing for a week or more? The eviction
process takes a little time, so the Sheriff won't immediately remove you, but
this type of stress-producing episode can avoided. How? Terminate your lease one
week after your real estate transaction is scheduled to close. That way, if
there is a delay in closing your transaction, you have some leeway. This
approach might cost a little more, then again, it might not.
Refinancing with your existing
lender without shopping around.
Your existing lender may not have the best rates and
programs. There is a general misconception that it is easier to work with your
current lender. In most cases, your current lender will require the same
documentation as other companies. This is because most loans are sold on the
secondary market and have to be approved independently. Even if you have made
all your mortgage payments on time, your existing lender will still have to
verify assets, liabilities, employment, etc. all over again.
- Not doing a break-even analysis.
Determine the total cost of the transaction, then calculate
how much you will save every month. Divide the total cost by the monthly savings
to find the number of months you will have to stay in the property to break
even. Example: if your transaction costs $2000 and you save $50/month, you break
even in 2000/50 = 40 months. In this case you'd refinance if you planned to stay
in your home for at least 40 months. If you are refinancing considering
switching from an adjustable to a fixed loan, or from a 30-year loan to a
15-year loan, the analysis becomes much more complex.
Not knowing if your loan has a
prepayment penalty clause.
If you are getting a "NO FEE" home-equity loan,
chances are there's a hefty prepayment penalty included. You'll want to avoid
such a loan if you are planning to sell or refinance in the next three to five
years.
- Getting a home-equity line to pay off your credit cards when your spending
is out of control!
When you pay off your credit cards with an equity line, don't
continue to abuse your credit cards. If you can't manage the plastic, tear it
up!
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 one's monthly mortgage
payment to be reduced.
- By reducing the term of the loan, thus saving money over the life of the
loan. For example, refinancing from a 30-year loan to a 15-year loan might
result in higher monthly payments, but the total of the payments made during
the life of the loan can be reduced significantly.
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. Even the conventional wisdom of refinancing only when
you can save 2% on your mortgage is not really true. If you are refinancing to
save money on your monthly payments, the following calculation is more
appropriate than the rule of 2%:
- 1.Calculate the total cost of the refinance末example: $2,000
- 2.Calculate the monthly savings末example: $100/month
- 3.Divide the result in 1 by the result in 2末in this case 2000/100 =
20 months. This shows the break-even time. If you plan to live in the house
for longer than this period of time, it makes sense to refinance.
Sometimes, you do not have a choice末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.
You can use our "should I refinance" calculator to get a better idea. Click
here to go there now.
What is a FICO Score?
A FICO score is a credit score
developed by Fair Isaac & Co. Credit scoring is a method of determining the
likelihood that credit users will pay their bills. Fair, Isaac began its
pioneering work with credit scoring in the late 1950s and, since then, scoring
has become widely accepted by lenders as a reliable means of credit evaluation.
A credit score attempts to condense a borrowers 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 to be
acceptable.
Credit scores are calculated by
using scoring models and mathematical tables that assign points for different
pieces of information which best predict future credit performance. Developing
these models involves studying how thousands, even millions, of people 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 numerous 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-offs, collections, etc.
There are really three FICO
scores computed by data provided by each of the three bureaus末Experian,
Trans Union and Equifax. Some lenders use one of these three scores, while other
lenders may use the middle score.
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.
What if there is an error on my credit report?
If you see an error on your
report, report it to 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, your mortgage company may also be able to help you.
What is the difference between pre-qualifying & pre-approval?
A pre-qualification is normally issued by a loan
officer, who, after interviewing you, determines the dollar value of a loan you
can be approved for. A pre-qualification is not a commitment to
lend. After the loan officer determines that you pre-qualify, he/she then issues
you a pre-qualification letter. This pre-qualification letter is used when you
are making an offer on a property. The pre-qualification letter indicates to the
seller that you are qualified to purchase the house you are making an offer on.
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, you are then issued a pre-approval certificate. Getting your
loan pre-approved allows you to close very quickly when you do find a house. A
pre-approval can also help you negotiate a better price with the seller!
Can my loan be sold? What happens if my lender goes out of business?
There is a secondary mortgage market in which lenders
frequently buy and sell pools of mortgages. This secondary mortgage market
results in lower rates for consumers. A lender buying your loan assumes all
terms and conditions of the original loan. As a result, the only thing that
changes when a loan is sold is to whom you mail your payment. If your loan has
been sold, your existing lender will notify you that your loan has been sold,
who your new lender is, and where you should send your payments from now on.
Typically, loans owned by a lender going out of business are
sold to another lender. The lender purchasing your loan is obligated to honor
the terms and conditions of the original loan. If your lender goes out of
business, it makes little difference with regards to your loan payments. If your
lender goes out of business, you are still obligated to make payments! In some
cases, there may be a gap between the date of your lender's going out of
business and the date that a new lender purchases your loan. In such a
situation, continue making payments to your old lender until you are asked to
make payments to your new lender.
What type of loans do you offer & how do I know which one is right for me?
Loan Types
Basically, there are two different categories of loans, Conventional and
Government. Below you will find a list of the various programs that fall under
these categories along with a description and a list of features and benefits
for each program.
Conventional Loans
Conforming: Conforming loans have
terms and conditions that adhere to Fannie Mae and/or Freddie Mac guidelines
regarding maximum loan amount, borrower credit, income, down payment, and
suitable properties. Fannie Mae and Freddie Mac, together, are the largest
purchasers of home loan mortgages in the United States.
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Loan
Name
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Key Features
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Fixed Rate
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- Most popular loan.
- Fixed payment over life of loan (typically 15 or 30 years).
- As little as 5% down.
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Fixed Period Arm
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- Fixed rate for 3, 5, 7 or 10 years, then adjusts annually based on
financial index.
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Basic Arm
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- As little as 5% down.
- Rate adjustments each 6 months or 1 year.
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Non-conforming:
Non-conforming loans are loans which have terms that go outside the guidelines
set forth by Fannie Mae and Freddie Mac. Examples: Jumbo Loans (over $275,000),
Foreign National, No Income/No Asset Loans and No FICO programs.
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Loan
Name
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Key Features
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Jumbo
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- Loans over $275,000.
- Wide variety of program options.
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Stated Income
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- No income or employment verification required.
- Available for salaried or self-employed borrowers.
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No Asset
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- Loan amount of up to $1 million.
- No income or employment verification.
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Affected Credit
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- Allows those with "less than perfect" credit to obtain a
home loan.
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A second loan
secured by a piece of property.
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Loan
Name
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Key Features
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Debt Consolidation
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- Fixed monthly payment.
- Reduces monthly expenditures.
- Interest may be tax deductable.
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Home Improvement
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- Allows borrower to make improvements to the home which in turn may
add value.
- Can be used in conjunction with a debt consolidation loan.
- Interest may be tax deductable
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Home Equity
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- Allows you to access the equity in your home.
- Interest may be tax deductable
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HELOC
(Home Equity Line of Credit)
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- Combines your down payment, a 1st and 2nd mortgage (equity loan or
line of credit) so you can achieve 20% down to avoid mortgage
insurance.
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Government Loans
FHA: A loan insured by the Federal
Housing Administration open to all qualified home purchasers. While there are
limits to the size of FHA loans (loan amounts set by the county), they are
generous enough to handle moderately priced homes almost anywhere in the
country.
VA: These loans are made by a lender,
such as a mortgage company, savings and loan or bank. VA's guaranty on the loan
protects the lender against loss if the payments are not made, and is intended
to encourage lenders to offer veterans loans with more favorable terms. The
amount of guaranty on the loan depends on the loan amount and whether the
veteran used some entitlement previously. With the current maximum guaranty, a
veteran who hasn't previously used the benefit may be able to obtain a VA loan
up to $203,000 depending on the borrower's income level and the appraised value
of the property. The local VA office can provide more details on the guaranty
and entitlement amounts.
Farmer's Home Administration Loan: A
home mortgage insured by the Department of Agriculture for home buyers in rural
and/or agricultural areas.
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