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Frequently
Asked Questions
I've developed a list of
questions that are commonly asked by my customers. Just click on the
question below to go to my comments on that question. Thanks for
looking. If you have questions not covered here, please call or
email me, or fill out my
EZ Mortgage Inquiry form; it's confidential and I'll contact you at the
time you request. I'll be glad to help.
Whenever you're
available I'm available.
Should I refinance?
Should I Pay Points?
What's My Credit Score?
What is a Rate Lock?
Does it Cost to Lock in a Rate?
When is a Rate Locked?
What is
Private Mortgage Insurance?
Why should I use a mortgage broker? Won't that cost me
more money?
Why do
lenders use mortgage brokers?
What are points?
What is
an Annual Percentage Rate (APR)?
What is Prepaid Interest?
What is an escrow
account?
The most common reason for refinancing is to
save money.
Saving money through refinancing can be achieved in two ways.
1.
By obtaining a lower interest rate that causes one's monthly mortgage payment
to be reduced.
2.
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––example: $2,000
2.
Calculate the monthly savings––example: $100/month
3.
Divide the result in 1 by the result in 2––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.
Whatever you choose to do, consulting with a seasoned mortgage professional can
often save you time and money. Make a few phone calls, check out a few web
sites, crunch on a few calculators and spend some time to understand the options
available to you.
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The best
way to decide whether you should pay points or not is to perform a break-even
analysis. This is done as follows:
1.
Calculate
the cost of the points. Example: 2 points on a $100,000 loan is $2,000.
2.
Calculate
the monthly savings on the loan as a result of obtaining a lower interest rate.
Example: $50 per month
3.
Divide
the cost of the points by the monthly savings to come up with the number of
months to break even. In the above example, this number is 40 months.
If you plan to keep the house for longer than the break-even number of months,
then it makes sense to pay points; otherwise it does not.
4.
The above
calculation does not take into account the tax advantages of points. When
you are buying a house the points you pay are tax-deductible, so you realize
some savings immediately. On the other hand, when you get a lower payment,
your tax deduction reduces! This makes it a little difficult to calculate
the break-even time taking taxes into account. In the case of a purchase,
taxes definitely reduce the break-even time. However, in the case of a
refinance, the points are NOT tax-deductible, but have to be amortized over the
life of the loan. This results in few tax benefits or none at all, so
there is little or no effect on the time to break even.
If none
of the above makes sense, use this simple rule of thumb: If you plan to stay in
the house for less than 3 years, do not pay points. If you plan to stay in
the house for more than 5 years, pay 1 to 2 points. If you plan to stay in
the house for between 3 and 5 years, it does not make a significant difference
whether you pay points or not.
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What's My Credit Score?
Your
credit score is one of the most important factors in getting a mortgage loan.
A few points, in some cases, can mean the difference between getting and not
getting a loan, or the difference between the best rates and higher rates.
Below will help you understand some of the factors that affect your credit.
First, a
credit score is a numerical method of rating an individual’s “creditworthiness”.
Scores can range from approximately 300 to 850, with higher scores being lower
credit risks. Fair Isaac Company (FICO) developed a formula for
calculating credit scores, which is used by each of the 3 major credit
bureaus—Experian, Equifax, and TransUnion. Each of the 3 bureaus stresses
different factors, so a FICO score from Experian will rarely be exactly the same
as Equifax or TransUnion, but a majority of the time the scores will be similar.
Because of the variation in the scores, some lenders rely solely on one bureau’s
FICO score, while others rely on the middle of the three scores.
Fair
Isaac Company considers the scoring formula to be proprietary information, and
refuses to release the exact formula for determining credit scores.
However, it is generally accepted that the factors listed below are the most
influential on your credit score:
1. Payment
History:
This takes into account then number of late payments you have on your credit
report, to all creditors you have, including mortgage, credit cards, auto loans,
and sometimes even cellular phone companies. The late payments are broken
down into several categories—30 days late, 60 days late, or 90+ days late.
A single late payment will not kill your credit score, but several can. A
very delinquent debt (90+ days) will also negatively affect your score.
2. Amounts
Owed:
This
category is one of the most confusing. The total outstanding debt to all
debtors considered, as well as your total available credit limits, and the
number of credit lines available. This may be oversimplifying, but having
a few credit lines, with low balances, is much better for your credit score than
having several credit lines with high balances.
3. Length
of Credit History:
This is the simplest factor. The longer you’ve had credit, the better.
The longer your credit lines have been established, the better. The
average “age” of all open credit lines is the major factor.
4. New
Credit:
This looks at you recent history to view the number of credit lines that have
been recently opened. Typically, having several recently opened credit lines
lowers your score, as well as having too many inquiries on your credit.
5. Types
of Credit Use:
This looks for a “healthy” credit mix. The score will consider your mix of
credit cards, retail accounts, installment loans, finance company accounts and
mortgage loans. It is not necessary to have one of each, and it is not a
good idea to open credit accounts you don't intend to use.
Some
things you can do to improve your credit score:
-
Keep an eye on your credit. Periodically check your credit score at sites such
as FreeCreditReport.com.
Check for any inaccuracies, and notify the
appropriate credit bureaus if any are on your record.
-
Have a
few credit lines, with low balances. Don’t max out your credit cards.
-
Don’t
open too many lines of credit in a short amount of time.
-
Don’t
try to clean up your credit by closing unused lines of credit, or opening new
lines of credit. Doing so may have adverse negative affects.
-
ALWAYS
PAY YOUR BILLS ON TIME! If you will be applying for a mortgage
loan/refinance loan, history on your previous mortgage is critical.
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What is a Rate Lock?
A rate
lock is a lender's commitment to give you an interest rate for a specified
period of time. "Locking In" the terms of the loan guarantee that if rates
go up, that you will have the rate at time of locking. The loan must be
completed within the lock period, if for some reason your loan is not completed
before the lock expires, the terms of the loan will either be those at the time
of closing or at the time of the lock, whichever is higher.
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Does it Cost to Lock in a Rate?
There is no lock in fee for loans locked for a
period of 30, 45 or 60 days. If you require extended locks, please be sure
to call me.
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When is a Rate Locked?
Once your loan application is submitted, you are
eligible to lock in your interest rate. Your rate lock is officially
locked when acknowledged by phone, FAX, e-mail, or US mail. Rates can be
locked until 4 p.m. on business days.
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What is Private Mortgage Insurance?
Private Mortgage Insurance (PMI) is required when the down payment is less than
20% of the purchase price. PMI protects the lender against losses in case
of default (foreclosure) by the borrower.
Why
should I use a mortgage broker? Won't that cost me more money?
Mortgage brokers represent
you, the borrower, in obtaining financing from a variety of lending sources.
If mortgage brokers are middlemen between you and the lender, how can they save
you money? Don't you have to pay extra for using a mortgage broker?
The bottom-line answer is NO.
Independent surveys have
shown that mortgage brokers do NOT cost you more than direct lenders. In
most cases, they are able save you money. Mortgage brokers increase
competition in the market place, resulting in lower rates for everyone.
Since mortgage brokers obtain their funds from a variety of sources, they allow
you access to a large number of lenders. When you apply for a loan with me
you are, in effect, applying for loans with the leading enders we represent!
Some of the advantages to
using the services of a mortgage broker such as myself over going directly to an
institutional lender are:
-
I
can provide financing which is customized to your
needs. A direct lender has a limited number of their own loan programs
to offer and their loan agent can only sell you their loan programs. In
contrast, I represent many lenders and hundreds of different loan programs
that can be custom tailored to your specific borrowing needs and not be
limited to the constraints of one particular lender.
-
I
act as advocate and intermediary for you. I
will often step in to negotiate terms and conditions which are more favorable
to you than the terms you would normally receive by working directly with the
lender.
-
I
do most of the work for the lender and therefore, the lender gives me a
"discounted" wholesale rate on the loan. That rate is then marked up to a
retail price which is often the same price the lender would charge you to go
to them direct. The result is a better loan program for you without an
additional cost or even lower cost!
There are numerous
competitive lenders that only accept loans from mortgage brokers. You can
only gain access to these competitive lenders and their programs by using a
mortgage broker like myself. These "wholesale only" lenders frequently
price their loans more aggressively in your favor than institutional retail
lenders.
I work for you, always.
On the occasion where a loan is declined by the
intended first lender of choice, or when that lender imposes unacceptable
conditions, then I can re-package the file and easily submit the loan to another
lender within a day or two. This is because we process a package that is
generic to all lenders with whom we work. If you went directly to a lender
and subsequently wanted or needed to switch lenders, you would need to start all
over with your new lender and you would lose 2-3 weeks in processing time.
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Why
do lenders use mortgage brokers?
The bottom line is that
lenders use mortgage brokers because they save the lenders time and money.
The mortgage broker, does all the legwork of finding customers, pre-qualifying
them, and compiling and submitting their loan package. As a result,
lenders are able to offer discounted pricing.
Mortgage brokers offer
the lenders an alternative to branch offices. Since personal contact with the
customer is usually required, my office at Goldwater Mortgage Company
serves as a lender's branch office. This saves the lender tremendous
amounts of time and money.
Mortgage brokers act as a
matching service - they match the right customers with the right lenders. I
know what each lender is looking for and submits loans that a particular lender
is likely to approve. This saves the lender a lot of time and expense
since they approve a higher percentage of loans.
Mortgage brokers generate
about 50% of all loans. In fact, lenders have established wholesale
divisions and have account representatives on staff just to service their
mortgage brokers. There is a lot of competition between wholesale lenders
to get broker-generated business. My relationship with these lenders gives
me a competitive edge in getting you a competitive loan!
Mortgage brokers are
responsible for all the sales and marketing required to find customers.
Lenders in effect have a large sales force with little overhead cost.
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What are points?
Points are loan fees that
are paid to lenders and mortgage brokers. 1 point = 1% of the loan amount.
There are two different types of points: origination points and discount points.
Origination points are charged by a mortgage company as a fee to process and
approve your loan, while discount points are used to buy down the rate of
interest, and typically are passed through to the investor to secure that lower
interest rate.
What is an Annual Percentage
Rate (APR)?
The annual percentage rate (APR) is an interest rate that reflects the cost of
your mortgage loan as a yearly rate and
is different from the actual note rate.
It is commonly used to compare loan programs from different lenders. The
Federal Truth in Lending law requires that mortgage companies disclose the APR
when they advertise a rate. For example:
30-year fixed with 8% interest and 1 point =
8.107% APR.
The APR does NOT
affect your monthly payments. Your monthly payments are calculated by your
note interest rate and the length of your 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 then hiding fees that increase your costs. The
APR rate is generally higher than the rate stated on your mortgage note because
the APR includes other costs, such as origination fee, loan discount points, and
pre-paid interest. The APR allows you to compare, in addition to the
interest rate, the total cost of financing your loan, among various lenders.
Unfortunately,
there is no uniform method of calculating APRs and the rules for computing APRs
are not clearly defined, so different lenders calculate APRs differently!
In general, the following fees are usually included in the calculation of the
APR: discount and origination points; pre-paid interest (most companies assume
15 days of interest in their calculations, but some may use any number between 1
and 20); loan processing fee; underwriting fee; document preparation fee;
private mortgage insurance costs; appraisal fee; and credit report fee.
Sometimes, the loan application fee and credit life insurance costs may also be
included in the APR calculation.
In general, the
following fees are usually NOT included in the calculation of the APR: title or
abstract fee; escrow fee; attorney fee; notary fee; closing document preparation
fee (charged by the closing agent); home inspection fees; recording fee; and
transfer taxes.
Also, 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! Therefore, a loan with a lower APR is not
necessarily a better rate.
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What is pre-paid interest?
This is interim interest that accrues on the mortgage loan from the date of the
settlement to the beginning of the period covered by the first monthly payment.
Since you pay interest in arrears, your mortgage payment made in June actually
pays for interest accrued in the month of May. Because of this, if your
closing date is scheduled for June 25, your first mortgage payment will be due
August 1 (and will pay for the interest for the month of July). The lender
will then calculate an interest amount per day that is collected at the time of
closing (hence the name pre-paid). This amount covers the interest accrued
from June 25 to July 1.
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 (hazard and mortgage), 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. Below an 80% loan to value, you
are not required to have an escrow account. You always have the option of
paying your own property taxes and home owners insurance thereby reducing the
amount of money you would need to pay at your time of closing. In Arizona,
most lenders charge a fee to waive these escrow accounts.
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