Mortgage Basics


A mortgage is a long-term loan, usually backed by the equity (value) of your home. You pay interest on a mortgage, and the interest rate varies depending on your credit and the type of mortgage you get. Some mortgages have fixed rates, usually for a 15 or 30 year term, others have a rate that adjust after a shorter fixed-rate period.

Different lenders offer different rates, so it pays to shop around. We are a mortgage broker; we do this for you and therefore, can offer better rates than you can find yourself. We also help you work through your options.

Mortgage Closing Costs


Closing costs are fees you pay to complete the transaction of securing your mortgage and buying your home. These include legal fees, taxes, realtor's fees (if any) and a variety of fees your lender will charge you to process the loan, including "points." Some closing costs are negotiable, and can be waived all together.
 

Adjustable Rate Mortgages (ARM)


An ARM is an adjustable rate mortgage - a loan whose rate is fixed for a period of time (1, 3, 5, or 7 years), and then varies according to federal interest rates. ARM's usually offer a lower rate then fixed rate mortgages, nd are generally a better deal for homeowners who plan on selling their house within 5 years.

Beware ARMs with "balloon payments," which require you to make a large lump sum payment when the fixed rate period comes to an end.

With all mortgages, your interest rate will vary depending on your credit.

Mortgage Points (Discount Points)
 

Points are prepaid interest your pay your mortgage lender to reduce the interest rate of your loan - the lender gets their money upfront, and thus you save over the long run. A rule of thumb is it usually takes five years of interest savings to recoup the cost of paying one point on your mortgage. Some points are 100% tax deductible, which makes paying points on your mortgage more attractive.

ARM Mortgage vs. Fixed Rate Loan

A Fixed-Rate Mortgage or Fixed Rate Loan applies the same interest rate toward monthly loan payments for the life of the loan. Fixed-Rate Loans are more straightforward and easier to understand than Adjustable Rate Mortgages (ARMs) or ARM mortgages. They are also more secure for the buyer, and are popular with first-time homebuyers looking for home mortgage loans. Since the lender takes a higher risk, fixed-rate mortgages generally have higher interest rates than ARM mortgages. For example, a lender of home mortgage loans can offer a 30-year fixed rate loan to a homebuyer at a 7.0% interest rate. The fixed rate loan is locked in to the 7.0% interest rate, even if the market interest rate rises to 9.0%. Conversely, if the market interest rate decreases to 5.5% for home mortgage loans, you, as the borrower, will continue to pay the 7% interest rate.



Fixed-Rate Loan benefits include:
No change in monthly principal and interest payments regardless of fluctuations in interest rates.
More stability may give you "peace-of-mind"

Fixed-Rate Loan disadvantages include:
Higher initial monthly payments compared to those of adjustable rate mortgages
Less flexibility
An adjustable rate mortgage, which may qualify as a second mortgage loan, does not apply the same interest rate toward monthly payments for the life of the loan. Throughout the life of that loan, the homebuyer's principal and interest payment for second mortgage loans will adjust periodically based on fluctuations in the interest rate.

For example, a lender of second mortgage loans could offer a 30-year adjustable rate mortgage loan to a homebuyer at an initial 6.5% interest rate. During an adjustment period for the ARM Mortgage loan, the market interest rate could rise to 8.0%, resulting in a significantly larger interest payment. Similarly, the market interest rate could decrease to 6.0%, resulting in lower interest payments.


ARM Mortgage benefits include:
Initial payments lower due to lower beginning interest rate, usually about 2 percentage points below the fixed rate
Ability to qualify for a higher loan amount due to lower initial interest rates
Lower interest payments if the interest rate drops over time
Interest rate caps limit the maximum interest payment allowed for the loan

ARM Mortgage disadvantages include:
Initial lower interest rate and monthly payments are temporary and apply to the first adjustment period.
Typically, the interest rate will rise after the initial adjustment period.
Higher interest payments if the interest rate rises over time

FAQ's

How much will my credit history affect my ability to get a mortgage?
Many home buyers are worried about this issue. In fact, your credit report is often an essential part of the loan decision process. Maintain a good credit report by always paying your debts on time. If there are any discrepancies, you will be required to explain and possibly document them.


What does my mortgage payment include?
For most homeowners, the monthly payments include three separate parts: a payment on the principle of the loan (that is the amount borrowed); a payment on the interest; and payments into a special account (called an escrow account) that your lender maintains to pay for things like your hazard insurance and property taxes. These elements are called PITI (Principle-Interest-Taxes-Insurance).


Are there just two kinds of mortgages rates: fixed and adjustable?
You could say that, because all mortgages rates fall into one of these two categories - that is, the interest rate you pay is either the same (fixed) for
the life of the mortgage, or it can change (adjust) over the life of the mortgage. But within these two broad categories, there are many different kinds of mortgages, designed to fit people in different financial situations, and many of them are especially for first time homebuyers.


How do I know which type of mortgage rate is best for me?
There isn't a simple answer to this question. The right type of mortgage rate for you depends on many different factors:

    Your current financial picture
    How you expect your finances to change
    How long you intend to keep your home
    How comfortable you are with your mortgage payment changing from time to time


What is Private Mortgage Insurance?
Private Mortgage Insurance is a type of guaranty that helps protect lenders against a loss due to foreclosure. This insurance protection is provided by
private mortgage insurance companies. It allows lenders to accept lower down payments than you would normally be allowed. In effect, it substitutes for the borrower's equity that would be available to cover a lender's losses in the unfortunate event of foreclosure.


If I have a good credit rating and meet the required monthly mortgage payments, am I obligated to have private mortgage insurance?
Even when you have an excellent credit record and the capability to meet mortgage payments, some lenders require private mortgage insurance as a matter of policy for any loan with a down payment of less than 20%.


How small can my down payment be?
Private mortgage insurance makes it possible for you to obtain a mortgage with a down payment as low as 3 to 5 percent. Such mortgages are increasingly in demand in today's home market because potential homeowners, especially first-time homebuyers, are not able to accumulate the 20 percent down payment that would be required without insurance.


How are rates determined?
National mortgage rates are determined by the secondary market and other financial indicators. These rates can change daily or even more than once within the same day. The changes are based on may different economic indicators in the financial markets.

Individual mortgage rates are determined by a variety of factors including, but not limited to: your credit score, length of employment, gross monthly income, debt to income ratio (DTI), loan to value ratio (LTV), whether the loan is a fixed rate or ARM, whether the loan has a prepayment penalty or not, and whether or not you can provide full documentation for your employment history and rental/mortgage history for the past 24 or 48 months.
 

Why is my rate higher than the advertisements I see offering 5.5% or some similar low rate?
What you are seeing are advertisements meant to persuade you into selecting a particular lender. Remember, the scenarios that are associated with these rates are not true for the majority of borrowers: credit scores above 700, a DTI under 30%, and large down payments creating very low LTV's. We work with all types of borrowers and will get you the best possible rate based on your individual situation.
 

What is a Debt to Income Ratio (DTI) and a Loan to Value Ratio (LTV)?
Your DTI is a ratio computed by dividing your monthly recurring obligations (i.e. credit card payments, loan payments, etc.) by your gross monthly income. Most lenders require a DTI of less than 45% to qualify for a home loan. For example, you make $3000.00 per month and have monthly obligations totaling $1200; 1200/3000 = 40%.

Your LTV is a ratio on a purchase is computed by dividing your loan amount by the purchase price of the property. On a refinance, the LTV is computed by dividing the loan amount by the appraised value of the property.

What is the difference between APR and interest rate?
The APR (annual percentage rate) reflects the cost of your mortgage loan as a yearly rate. It also incorporates the cost to obtain the loan, such as: discount fees, loan origination fee, prepaid interest, and mortgage insurance, if required. The APR allows you to compare, in addition to the interest rate, the total cost of financing your loan, among various lenders. The interest rate is the actual note rate.


What is the difference between "locking in" an interest rate and "floating"?
If you are concerned that the interest rates may rise during the time your loan is being processed, you can "lock in" the current rate for a short time, usually 30 or 60 days. When you "lock in" to an interest rate, you are guaranteed that rate for that agreed upon length of time. The benefit is the security of knowing the interest rate is fixed if interest rate should increase. If you are locked in and rates decrease, you will not usually get the benefit of the decrease in interest rates. If you choose to "float", your interest rate will fluctuate with the market and will be subject to both upward and downward trends in the market. The benefit to floating a rate is if interest rates were to decrease you would have the option of locking into a lower rate. Most lenders will allow you to lock in your rate once you have found a property and as late as up to five business days before closing. Rate locks and fees will vary.


What is Title Insurance?
Title insurance provides the lender, and the buyer (if you purchase owner's coverage), with coverage for losses resulting from specific title defects listed in the policy. In cases where land and property have changed hands over time, there is always the possibility an error has occurred. If an error has occurred, it's possible that someone else may be in title to or have an interest in the property. It's also possible that improvements encroach on property lines or that other similar problems may exist. In these scenarios, if you do not have title insurance you could lose your investment in your home. Lenders require "lender's coverage" to protect their investment and it only protects the lender. Owner's coverage is optional and provides separate coverage for the borrower.


Does the lender require title insurance for all transactions?
Yes, a Mortgagee's Title Insurance Policy or Title Guaranty will be required for all mortgage transactions; Purchase and Refinance.


What is an escrow account?
An escrow account is typically established at the time you close your mortgage loan. This account is held by the lender for the future payments of recurring items relating to the mortgaged property, such as real estate taxes and insurance premiums, as they become due. Lenders usually require you to pay an initial amount for each of those items to start the reserve account at the time of closing.


Are there any limitations on how much lenders can collect from a borrower for the borrower's escrow account?
Lenders and servicers are required to follow the standard set forth in the Real Estate Settlement Procedures Act (RESPA) and applicable state law. RESPA and some states set limits on the amount which can be collected by the lender or servicer to pay for escrow items, such as property taxes and insurance, and place a cap on the amount of the reserve. Reserves are funds that a servicer may require a borrower to pay into an escrow account to cover unanticipated disbursements which will need to be made before the borrower's payment is available in the escrow account. There are limits on the additional amounts that can be collected as reserve.


Can I have my mortgage payments deducted automatically from my checking or savings account each month?
Typically, after closing your mortgage loan, you will have the option of enrolling in an automatic mortgage payment program. You may be asked to provide an authorization form with a voided check or saving account slip attached to set up the draft. The payment is typically debited on a pre-set day each month.



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