posted: Jan. 30, 2004 @ 12:35a
Here is a first draft of a Mortgage FAQ. I tried to lay things out in the order of the mortgage process. It has a way to go, but this should get the ball rolling anyway. Please contribute to fill in the blanks, or correct any errors, of which I am sure there are many. Right now the info is more geared for newbies, but hopefully as it grows, we can get some better nuggets of widsom in here.
Credit Score, Inquiries.
Credit scores play a significant role in your ability to get a mortgage. The first step when looking for a mortgage should be to check your own credit. You want to know what is on there, and what your score is before you apply for any mortgage. The more you put down, or equity you have in a home, the less a mortgage lender is concerned about credit score. Hard inquiries can bring your credit score down, but don't be afraid to shop around. All mortgage inquiries within a 30 day period should be counted as one inquiry.
When looking to purchase a home, you can get a lender to pre-approve your mortgage. This means that the lender has approved a mortgage for you, for a specified amount. This looks very favorable to the home seller, as your offer will not be contigent upon financing. Thus if a seller is presented with two similar offers, in which one is pre-approved (perhaps with a lower offer amount) and the other isn't pre-approved, the pre-approved buyer would look more appealing to the seller. This is because the seller knows you the pre-approved buyer can get the financing needed, so the offer wouldn't be contingent upon buyer obtaining financing. The point being, getting pre-approved costs nothing (or close to nothing), and it adds value to your offer.
Pre-qualification should not be confused with pre-approval. Being pre-qualified, adds little if any value to a purchase offer. Being pre-qualified means that somebody ran some rough numbers and you SHOULD be able to qualify for a loan for a specified amount. However, there is no commitment from a lender like there is with a pre-approval.
Good Faith Estimates (GFE).
(point out that GFE’s can be manipulated to make it look like they have fewer closing costs. i.e. using only 1 day of pre-paids.)
Points? Origination Fees, Discount Fees.
What are Closing Costs?
No closing cost loan?
The no closing cost loan works by giving you negative buy-down points. So by in exchange for a higher interest rate, money is rebated back to you, in the amount to cover the closing costs. This is a great tool for re-financing. Your rate may be .5% higher, but it cost you nothing to do it. If rates drop further, do it again. Frequent re-financing would be cost prohibitive if you were paying closing costs each time.
No out of pocket cost?
This simply means that the lender is taking some of the equity in your home to pay closing costs. For example, if you owe $80k on a mortgage, and you re-fi it, your new loan will be $83k (assuming $3k in closing costs). Less scrupulous brokers or lenders may try to make it sound like the mortgage wont cost you anything, but in reality you are just paying for it with your home equity instead of out of pocket. Not to be confused with the no closing cost loan.
Interest Rate vs. APR
The interest rate is simply the percentage of the loan amount that you are charged per year to finance the loan. The Annual Percentage Rate, or APR, starts with the interest rate and then adds in other costs such as points and other fees that, along with interest, are called "finance charges". Generally, APRs are higher than Interest Rates because all finance charges, not just interest, are used to calculate the APR. The APR for ARM's is a little tricky, because it needs to take into acount the adjustments the interest rate will take in the future. To do this, they calculate what the interest rate would adjust to based on todays index rate. This usually results in a downward adjustment. Thus for ARM's, it is not uncommon to see an APR that is lower than the interest rate.
Title Insurance & Title Companies.
Title Insurance essentially guarantees the lender (and buyer) that the title is clean and free of any liens, although the borrower is the one that has to pay it. If re-finance a home, you will need to purchase title insurance each time. Some title companies may offer a discount if you have financed the home being re-financed with them in the recent past. This is because they have already done most of the leg work on the title search for the previous mortgage. It may not be a bad idea to ask about this if you are going to re-fi.
Final loan documentation papers are usually signed at the title company. Finding a good title company that is on top of things, can make things go smoothly, while a unorganized title company can add un-needed stress to the process.
What are rates based on?
The over-simplified answer is bonds. Typically if the stock market is doing well, the bond market goes negative, and visa-versa. For example, if the stock market is rallying, investors take their money out of their safer bonds, and stick them in the stock market. There is now less money in the bond market, so interest rates rise to equalize the supply and demand.
Down Payment How Much/PMI?
Ideally lenders would like to see a minimum of 20% down. That way if you default, they have no problem recouping their money. However they will let you put less the 20% down, and then charge you to insure their additional risk. This is referred to as Private Mortgage Insurance (PMI). See this thread for more details: PMI Thread
PMI is worthless, and should be avoided at all costs. The simplest way around PMI (if required), is to break your mortgage up into two loans. A primary loan for 80%, and a second loan for the remaining amount. Lenders also have a PMI’less mortgage, which will allow you to borrow over 80%, without paying PMI, but at a higher rate. In every instance of this that I have seen, it is a joke. The rates are always MUCH higher, and the rate does not go down after you reach 80% LTV.
What is a ARM, variable rate mortgages?
What is a Balloon mortgage?
Interest Only Mortgage?
(Doesn’t the question answer itself? <img src="i/expressions/face-icon-small-wink.gif" border=0>
(mention that you can’t put a variable rate second on top of an interest only ARM, at closing time anyway).
What is a lock?
(insert something about standard lock term, drawbacks about purchasing longer lock terms.)
What is the difference between a Broker and a Lender?
Mortgage brokers can offer more products than one particular bank because brokers can select the best product for specific scenarios. Banks can only offer products that are available to them, which might not necessarily be the best for the customer; however, they sometimes can offer better rates for lower loan amounts and sometimes can process the loan faster.
Often, a broker can get a better loan from a lender, than an individual can. For example, if you walk into a Wells Fargo and apply for a mortgage, the rate will likely be higher than most quotes on bankrate.com, plus higher fees. However, there is a chance that if you go with a broker, and get a rate of say .5% better, the loan will get sold to Wells Fargo anyway.
Early Loan Payoff.
Investment Property Loans?
Hard Money Loans?
Acronyms and Definitions:
Amortization: The rate at which a loan is paid back.
LTV = Loan To Value. This is the ratio of the loan, to the value of the home. If you owe $80k on a house worth $100k, your LTV is $80k/$100k = 80%.
Karl's Mortgage Calculator
Realtor.com Mortgage Library as suggested by tivo1.