Frequently Asked Questions (FAQ)
Right now, we are generally recommending fixed rate loans. The future interest rates are impossible to predict, but given how low rates are currently we feel that the most likely direction for rates to head is higher. However, since adjustable rate loans have a fixed period (for example a 5/1 ARM will have a fixed rate for five years and then subject to adjustment thereafter) they may be a fit for borrowers that have a high degree of confidence that they will not stay in the home or loan beyond the fixed time frame.
APR is intended to display the total cost to borrow over the loan amortization period. The APR includes the interest charges, fees associated with origination of the loan, and on-going fees such as mortgage insurance. Because of the importance of considering all costs, we recommend that borrowers not only focus on the interest rate but the APR as well.
From a lending perspective, the value of the property is the lesser of the sales price (in the case of a purchase transaction) or the appraised value. There are many internet sites that can provided an estimated value, and those can be helpful, but they should not be relied upon beyond obtaining a “ballpark estimate”.
Definitely, but generally the better credit profile you have the better terms you will get. Although you don’t have to have perfect credit, there are some credit profiles that will not be acceptable to lenders but we do encourage all borrowers to check their options with a lender.
If you are buying your first home, you should generally expect to pay 1.45% of the purchase price toward annual property taxes. Regarding property insurance, the best way to get an estimate is to contact your insurance agent as these rates can vary widely (however, if you need a quick estimate you can use $35 per $100,000 of home value as an annual amount).
If you are moving, you are should use what you are paying currently as a percent of the market value of the home as your starting point.
If you are refinancing, you should use what you are paying currently.
Additional information… These amounts typically only increase over time and are collected both at closing to cover pending amounts due and then monthly thereafter. Once you have applied for and been approved for a loan, we will work with your insurance agent to finalize the insurance premium and we will work with the title company to finalize the property tax amount.
There is not a pre-set timeframe for when the escrow portion of your monthly payment changes. At least yearly, the servicer will perform an analysis of the amounts needed to pay for property taxes and insurance coverage and determine if enough money is being collected to meet those needs. Based on this analysis your payment could be increased or decreased. The servicer will provide adequate notification to allow you to adjust your payment.
Your ability to qualify for the loan depends on a wide range of factors, here is a bit of text from the U.S. Government Agency called the Consumer Financial Protection Bureau.
Lenders are required to verify and document that … the consumer has a reasonable ability to repay the loan, considering such factors as the consumer’s income or assets and employment status (if relied on) against:
The mortgage loan payment
Ongoing expenses related to the mortgage loan or the property that secures it, such as property taxes and insurance you require the consumer to buy
Payments on simultaneous loans that are secured by the same property
Other debt obligations, alimony, and child-support payments. The rule also requires you to consider and verify the consumer’s credit history.
In addition to the above, the lender must have a reasonable expectation that the income that is being relied upon to support the approval will continue for the foreseeable future.
First let’s define two key terms, those are “Floating” and “Locked”. Before you apply for a loan you are neither floating nor locked, you are just in a pre-application state. When you have applied for a loan but have not asked us to lock your rate, you are floating – this means that the rate available to your particular loan scenario will continue to change, just as the stock and bond markets change. Once you ask us to lock your rate, and we confirm back to you that we have successfully locked your rate, then the only reason your rate will change is if your loan scenario changes or if you have selected a product that includes an adjustment feature (such as an ARM / Hybrid ARM product).
More about why a locked rate would change:
Something that impacts the rate, changes before closing: For example, at the time of rate lock the property value is estimated such that you would be borrowing 80% of that value, but later in the process the appraisal comes in lower and based on that value you would be borrowing a higher percentage – that new percentage could affect your locked rate. It is important to note that in this example you are still not impacted by changes in the market – you are still locked to the day/time price base of your lock.
The product includes an adjustable rate feature: If the product that you select has an adjustable rate feature, it will adjust per the terms of that product. For example, if you had a “5-year ARM” the interest rate can adjust after five years.
Now that we have covered Floating and Locked, we can provide some insights into how rates are determined. Generally, rates can be thought of in terms of “Base Rates”, “Adjusters”, “Points”, and “Fees”.
Base rates: Base Rates are the primary driver of the rate as it reflects the broader financial markets impacts, product terms, revenue and cost assumptions, and interest rate management (the cost of “locking a loan” and other similar costs).
Adjusters: Adjusters are primarily associated with risk attributes of the specific transaction (either positive or negative). For example, loans with lower credit scores will typically be priced higher because of an “Adjuster” but would share the same “Base Rate” as a similar loan with a different credit score.
Points: Basically, this reflects an amount of money that you pay to get a lower rate. If you choose to pay “points” you are exchanging cash today for a lower rate for the term of your loan.
Fees: There are always fees associated with a loan, in some cases these fees can be paid by taking a higher interest rate rather than having to pay for them with cash up-front. Additionally, for refinances the fees can be rolled into the loan, increasing the loan amount but eliminating out of pocket cost to you.
These components define the “cost of borrowing” and the timing and amount of future cash flows that are used in determining your APR (annual percentage rate).
You would want to refinance to improve your current situation where that improvement exceeds the costs. The improvement(s) could be:
A lower payment
A lower interest rate
Change to a fixed rate
Get access to cash to make a purchase or pay down higher rate debt
To the extent that any of these improvements exceeds the cost of the refinance transaction, then it would be beneficial to refinance.
The costs of a refinance can be in the form of cash paid to the lender, an increase in your loan balance, and/or included in the interest rate that you select. How the costs are paid does matter, but what matters most is to include all of the costs as you consider the value of the improvement to your current situation against those costs.
Of course! We would do this anyway, but it also happens to be a Federal Regulation that all lenders will (or had better) follow.
It is the appraiser’s responsibility to adequately research the local real-estate market and to determine which comparable sales best represent the value characteristics of the subject property. A comparable sale is a property that has recently sold and is like the subject property in most respects, including size, location and amenities. Value of subject property is determined after all factors and market adjustments are taken into consideration.
A “Point” is equal to one percent of your loan amount, so one point of a $100,000 loan is $1,000. A related term is “basis points (bps)” which is equal to 1/100th of a point. These terms are generally used in discussing options with a borrower regarding the ability to “pay points” at the time the loan closes in exchange for a lower rate.
Alternatively, a borrower could get a cash credit at closing in exchange for a higher rate.
The trade-off typically comes down to fitting the needs of the borrower (out of pocket cash vs. on-going monthly payment) and the time horizon (the shorter the time horizon the less impactful the monthly payment). This is an important conversation to have with your Loan Officer – we can help with this decision!
It is not considered a fee – but, we understand that it might feel that way! Pre-paid interest is actually just the amount of interest that “covers” the cost of having access to the Lender’s funds prior to the loan starting generate interest income for the Lender. Here is an example, let’s say that you close your loan on the 15th of June. Your loan won’t start to generate interest for the lender until July 1st (and your payment won’t be due until August 1st). That leaves a period of time, 15 days, where the lender has lent money and is not generating interest – and that is why there is Pre-paid Interest – to cover that period of time.
Closing costs include:
Underwriting fee: This varies based on what lender we determine is the best fit for your needs
3rd party service costs: Appraisal, title insurance fees, inspections, warranty, survey, etc.
Other costs and prepaids: Prepaid Interest, hazard insurance and property tax escrows
Closing cost estimates are specific to each loan scenario, and fees do change from time to time based on market conditions. We will provide fee and cost estimates with every loan pricing result. Additionally, once you apply for a loan you will receive an official Loan Estimate (which is a legally required disclosure document) that also summaries the fees and costs. Finally, before closing your loan you’ll also receive a Closing Disclosure (a similar legally required disclosure to the Loan Estimate) which will show the finalized fees, costs, and prepaids.
Purchase: One option is for the seller of the home to contribute to the closing costs through a “seller credit”. This should be considered in the broader negotiation of the home sales contract, and Realtors® are experts in this negotiation. If this is included in your sales contract, that is great! If not, that is fine too – you have a couple of other options. One is to pay these costs “out of pocket”. The other is to take a slightly higher interest rate in exchange for the lender covering some or all of these costs. This trade (cash now for a higher monthly payment) is an important conversation to have with your Loan Officer, we can help with this decision!
Refinance: You have a couple of options regarding your closing costs when refinancing. One is to pay these costs “out of pocket”. The other is to take a slightly higher interest rate in exchange for the lender covering some or all of these costs. This trade (cash now for a higher monthly payment) is an important conversation to have with your Loan Officer, we can help with this decision!
Your monthly payment consists of the following components:
Principal & Interest: All the loans that we offer are “fully amortizing” loans. This means that as you make each monthly payment, you are paying both interest and a portion of the principal. This is typically the largest component of your monthly payment.
Escrows: Most loans collect monthly for real estate taxes and home owners (and flood if applicable) insurance. This ensures that the company that is collecting your payments has the funds on-hand when these amounts are due.
Mortgage Insurance (MI): Certain loan scenarios require mortgage insurance to be paid monthly. All loans that require MI will have this amount in the monthly payment.
And, you can always pay more each month than the stated monthly payment amount, and when you do the extra will be applied directly to the principal of the loan.
If your 1st Lien mortgage is greater than 80% of your home’s appraised value, mortgage insurance is usually required. The mortgage insurance premium is typically included in your monthly mortgage payment. The cost of MI is in relation to the layer of risk in equity, so a 97% Loan to Value requires a higher cost than an 85% LTV. However, you can choose to pay the Premium as a one-time upfront cost or accept a slightly higher interest rate (.125% or .25%), and utilize Lender Paid MI. This would avoid having to include in monthly payment. This an important conversation to have with your Loan Officer, we can help with this decision!