Mortgage Frequently Asked Questions
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Q. How do I know how much house I can afford?
A. Generally speaking, you can purchase a home with a value of two to three times your annual household income. The amount that you are able to borrow will also depend upon your employment history, credit rating, assets and liabilities, and the amount of down payment you are able 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.
Q. What is the difference between a fixed-rate loan and an adjustable-rate loan?
A. 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.
Q. How is an index and margin used in an ARM?
A. 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).
Q. How do I know which type of mortgage is best for me?
A. 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.
Q. What does my mortgage payment include?
A. 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.
Q. How much cash will I need to purchase a home?
A. 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
Q. What are points and do I need to pay them?
A point represents a percentage point of the loan amount, thus, one point is 1% of the loan amount. Points represent pre-paid interest paid at closing for the purpose of obtaining a lower interest rate. If points are not paid, a higher interest rate may be given.
Q. When refinancing, do I need to purchase title insurance again?
Yes. The need to reissue title insurance on a refinanced mortgage is to insure the lender for the amount that you are re-financing. The original title policy purchased when you bought the house remains in effect for the borrower.
Q. What is PMI?
PMI stands for Private Mortgage Insurance and is required on any loan that exceeds 80% of the value of the home. PMI is paid monthly and is added to your monthly payment. PMI is insurance protection for the lender in the event of borrower default.
Q. Why is the Annual Percentage Rate (APR) on the Truth-In-Lending Disclosure different than my interest rate?
The Annual Percentage Rate and the interest rate are not the same. The APR is the cost of the loan after taking into account various loan charges. Interest represents just one of these charges. Other charges which are used in calculating the APR are discount points, origination fees, PMI, pre-paid interest and other credit costs. The APR is calculated by spreading these charges over the life of the loan, resulting in a rate higher than the interest rate shown on your note. If interest was the only charge associated with your loan, the APR and the interest rate would be the same.
Q. What is title insurance?
Title insurance assures the borrower and the lender that the mortgage is a valid first lien protected against hidden, as well as known, defects in the title as insured.
Q. When can I lock in my interest rate?
An interest rate may be locked in at the time of application or you may choose not to lock (float) the interest rate up until 5 days prior to settlement. There is different lock in periods depending upon when your settlement is scheduled. Click here for more information about long term rate locks.