What
is the difference between pre-qualify and pre-approval?
What is the difference between a
fixed and adjustable rate mortgage?
What are points? Should I pay points?
Does a zero point, no fee loan really
exist?
What is APR?
What is rate lock?
What is PMI? Can I get rid of PMI on my loan?
What is FICO score?
Will credit score affect the
loan application?
How can I improve my credit score?
What is closing cost? What does it
include?
A: A
pre-qualification is normally issued by a loan officer, who, after
interviewing you, determines the dollar value of a loan you can be
approved for. However, loan officers do not make the final approval,
so a pre-qualification is not a commitment to lend. After the loan
officer determines that you pre-qualify, he/she then issues you a
pre-qualification letter. This pre-qualification letter is used when
you are making an offer on a property. The pre-qualification letter
indicates to the seller that you are qualified to purchase the house
you are making an offer on.
Pre-approval is a step above pre-qualification. Pre-approval
involves verifying your credit, down payment, employment history,
etc. If your loan is pre-approved, you are then issued a
pre-approval certificate. Getting your loan pre-approved allows you
to close very quickly when you do find a house. A pre-approval can
help you negotiate a better price with the seller, since being
pre-approved is very close to having cash in the bank to pay for the
house!
A: Fixed
rate mortgages feature an unchanging interest rate, which is
determined when you are approved for a mortgage and remains the same
for the term of the loan. With adjustable-rate mortgages (ARMs) the
interest rate may vary over the course of the loan. Typically, the
interest rate is lower the first year, then increases at
predetermined intervals. This means your payments increase as well.
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A: A point
is 1% of the loan amount. For example, for 2 points on a $300,000
house, you will pay 2% of $300,000, or $6,000. The number of points
charged for a mortgage depends on the circumstances. Sometimes it is
advantageous to pay higher points and get a lower interest rate, as
you'll end up paying less over the life of your loan. You will pay
for the points at the time of closing and can deduct the point
amount as interest on your income tax return. (Consult a tax
professional.)
The best way to decide whether you should pay points or not is to
perform a break-even analysis. This is done as follows:
-
Calculate the
cost of the points. Example: 2 points on a $100,000 loan is
$2,000.
-
Calculate the
monthly savings on the loan as a result of obtaining a lower
interest rate. Example: $50 per month.
-
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.
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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A: You have
a 30-year fixed loan at 8.5%. A loan officer calls you up and says
they can refinance you to a rate of 8.0% with no points and no fees
whatsoever.
What a dream come true! No appraisal fees, no title fees and not
even any junk fees! Is this a deal too good to pass up? How can a
bank and broker do this? Doesn't someone have to pay? Whose money is
being used to pay these closing costs?
this is not a scam. Thousands of homeowners have refinanced using a
zero-point/zero-fee loan. Some refinanced multiple times, riding
rates all the way down the curve in 1992, 1993 and, more recently,
in 1996. Some homeowners used zero-point/zero-fee adjustable loans
to refinance and get a new teaser rate every year.
The way this works is based on rebate pricing, sometimes also known
as yield-spread pricing, and sometimes known as a service-release
premium. The basic idea is that you pay a higher rate in exchange
for cash up front, which is then used to pay the closing costs. You
will pay a higher monthly payment––so
the money is really coming from future payments that you will make.
The main benefit is that you have no out-of-pocket costs. As a
result, if the rates drop in the future, you could refinance again
even for a small drop in rates. The zero-point/zero-fee loan
eliminates the need to do a break-even analysis since there is no
up-front expense that needs to be recovered. It also is a great way
to take advantage of falling rates.
Some consumers have used zero-point/zero-fee loans on adjustable
loans to refinance their adjustables every year and pay a very low
teaser rate.
The main disadvantage is that you are paying a higher rate than you
would be paying if you had paid points and closing costs.
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A: The
annual percentage rate (APR) is an interest rate that is different
from the note rate. It is commonly used to compare loan programs
from different lenders. The Federal Truth in Lending law requires
mortgage companies to disclose the APR when they advertise a rate.
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 hiding fees.
The APR is a very
confusing number! Even mortgage bankers and brokers admit it is
confusing because different lenders calculate APRs differently! 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! So a loan with a lower
APR is not necessarily a better rate. Calculating APRs on adjustable
and balloon loans is even more complex because future rates are
unknown. The result is even more confusion about how lenders
calculate APRs. The best way to compare loans is to ask lenders to
provide you with a good-faith estimate of their costs on the same
type of program (e.g. 30-year fixed) at the same interest rate.
The following fees
ARE generally included in the APR:
-
Points - both
discount points and origination points
-
Pre-paid
interest. The interest paid from the date the loan closes to the
end of the month. Most mortgage companies assume 15 days of
interest in their calculations. However, companies may use any
number between 1 and 30!
-
Loan-processing
fee
-
Underwriting
fee
-
Document-preparation
fee
-
Private
mortgage-insurance
The following fees
are normally NOT included in the APR:
Use the APR as a
starting point to compare loans. The APR is a result of a complex
calculation and not clearly defined. There is no substitute to
getting a good-faith estimate from each lender to compare costs.
Remember to exclude those costs that are independent of the loan.
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A: There are
four components to a rate lock:
-
Loan program.
-
Interest rate.
-
Points.
-
Length of the
lock.
You must lock an
interest rate before the mortgage loan close. The longer the length
of the lock, the higher the points or the interest rate. After a
lock expires, most lenders will let you re-lock at the higher of the
original price and the originally locked price. In most cases you
will not get a lower rate if rates drop.
Some lenders do
offer free float-downs––i.e. you may
lock the rate initially and if the rates drop while your loan is in
process, you will get the better rate. However, there is no free
lunch––the free float-down is costly
for the lender and you pay for this option indirectly, because the
lender has to build the price of this option into the rate.
A: PMI or
Private Mortgage Insurance is normally required when you buy a house
with less than 20% down. Mortgage insurance is a type of guarantee
that helps protect lenders against the costs of foreclosure. This
insurance protection is provided by private mortgage-insurance
companies. It enables lenders to accept lower down payments than
they would normally accept. In effect, mortgage insurance provides
what the equity of a higher down payment would provide to cover a
lender's losses in the unfortunate event of foreclosure.
You can get rid of
PMI by borrow 80% as first mortgage and 10% or 15% as second
mortgage. Most lenders will increase the mortgage rate if the down
payment is less than 10%.
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A. A FICO score is
a credit score developed by Fair Isaac & Co. Credit scoring is a
method of determining the likelihood that credit users will pay
their bills. Credit scores are calculated by using scoring models
and mathematical tables that assign points for different pieces of
information which best predict future credit performance.
Credit scores
analyze a borrower's credit history considering numerous factors
such as:
-
Late payments
-
The amount of
time credit has been established
-
The amount of
credit used versus the amount of credit available
-
Length of time
at present residence
-
Employment
history
-
Negative credit
information such as bankruptcies, charge-offs, collections, etc.
There are really
three FICO scores computed by data provided by each of the three
bureaus––Experian, Trans Union and Equifax.
Some lenders use one of these three scores, while other
lenders may use the middle score.
If you see an error
on your report, report it to the credit bureau. The three major
bureaus in the U.S., Equifax (1-800-685-1111), Trans Union
(1-800-916-8800) and Experian (1-888-397-3742) all have procedures
for correcting information promptly. Alternatively, your mortgage
company may help you correct this problem as well.
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A: Your
credit score plays a significant role when you apply for a loan.
People with higher credit scores are eligible for more loan options
and better interest rates. If you've had credit difficulties in the
past, you may still qualify for some mortgage programs, but these
usually cost more, depending on the severity of your credit
problems.
You can develop or
improve your credit score by following these tips: Pay your bills
consistently and on time. Check your credit report and work to
correct any errors. Keep your spending and debt under control.
Maintain only a reasonable amount of unused credit. For example,
keep the number of credit cards you use to a minimum. Avoid too many
credit inquiries. Contact creditors immediately if you cannot make a
payment on time. This may keep them from reporting your delinquency
to a credit agency.
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A: Closing
costs are the innumerable fees and taxes associated with purchasing
and taking ownership of a home. They include searches, clearances,
and reports to process the transaction. Depending on where you live
and the complexity of your transaction, they can easily add up to
thousands of dollars. They're generally around 3% to 6% of the
purchase price of the home. It includes:
-
Points or
loan origination fees. This is an up-front payment of the
interest that you owe your lender.
-
Escrow fees.
These are the fees that are charged to process all of the
paperwork and keep the money in a safe place while you and the
seller dicker over things.
-
Homeowner's
insurance. You should expect to pay between $500-$2,000
depending on the value of your home and your coverage. You must
get this insurance before your lender will release the funds for
your house.
-
Title
insurance. What would happen if, six months after you move
into your new house, you discover that the person who sold you
the house didn't really own it? Arrgh! While it's a rare
possibility, it does occasionally happen. Luckily, there's
protection against this very problem. Your lender will want you
to get "title insurance" to take care of this
situation should it arise. Based on the value of your home,
expect to pay between $500-$2,000.
-
Property
taxes. Depending on when your purchase actually closes, you
may owe the previous owners for taxes that they've already paid.
For example, say the old owners paid their taxes from January
through June. You buy the house in April. Well, they've already
paid for your taxes for May and June. You need to reimburse them
for this expense. In addition you may need to prepay some taxes.
-
Private
mortgage insurance. We've talked about this one earlier. If
you have a loan that requires it, count on paying at least a few
month's premiums in advance. Some lenders will want you to pay
for an entire year.
-
Notary.
Yes, someone has to swear that you are who you say you are.
Expect to pay about $50 for the privilege.
-
Document
prep fees. Lender and/or broker fees.
-
Appraisal
fees. To give your home a fair market value.
-
Factual
credit report fee. A verified credit report.
-
Tax service
fees. To ensure your taxes are paid each year.
-
State
recording fees. As your state requires.Top
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