Q: How do I know
how much I can afford to purchase a home?
A: Generally speaking, you can purchase a home
with a value of two or three times your annual household
income. However, the amount that you can borrow will also
depend upon your employment history, credit history, current
savings and debts, and the amount of down payment you
are willing 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. There are
advantages and disadvantages to each type of mortgage,
and the best way to select a loan product is by talking
to your broker.
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 is private mortgage insurance
(PMI)?
A: Private mortgage insurance protects the lender
from loss due to payment default by the borrower. It is
used with conventional financing only. It may be paid
in a lump sum at the time of settlement or in monthly
installments as part of the mortgage payment. PMI is typically
required when the amount of your loan exceeds 80% of the
subject property's value. This type of insurance should
not be confused with mortgage life, credit life, or disability
insurance which is designed to pay off a mortgage in the
event of the borrower's disability or death.
Q:
What are "points"?
A: Fees used to adjust the yield on a mortgage
to current market conditions are called points. There
is an inverse relationship between points paid and the
interest rate on the mortgage. As the interest rate
gets higher, the points get lower. A point equals 1
percent of the mortgage amount. For example, 1 point
on a $100,000 mortgage would be $1,000.
Q: What is title insurance?
A: Title insurance protects the lender against
loss due to problems or defects related to the title
on the property being mortgaged. These problems would
typically involve ownership claims against the property
which were not identified by the title search. It is
paid for with a one-time premium at the time of settlement.
Q:
What is an FHA or VA mortgage?
A: Federal Housing Administration (FHA) or Veteran's
Administration (VA) mortgages are loans insured by the
respective governmental agencies. FHA programs enable
lenders to arrange financing for the borrower with a
minimal down payment. Similarly, VA programs (available
to veterans only) can be made to a borrower who has
little or no down payment. When borrowing under these
programs, you will pay a Mortgage Insurance Premium
(FHA) or a Funding Fee (VA) to insure the mortgage.
This is similar to private mortgage insurance on a conventional
loan. These insurance premiums may be paid out-of-pocket
at the time of closing or financed by increasing the
mortgage amount.
Q:
What is a conventional mortgage?
A: A conventional mortgage is a loan not obtained
under a government insured program such as FHA or VA.
Conventional mortgage loans are typically held by institutional
investors such as banks or insurance companies.
Q:
What are escrows?
A: Escrows are funds collected with the borrower's
monthly payment and accumulated to pay for items such
as property taxes or hazard insurance as they come due.
Escrows are also collected at settlement to start the
escrow account. Escrowed funds can also be referred
to as holdbacks, reserves, or impounds.
Q:
What is an ARM?
A: Adjustable rate mortgages (ARMs) are loans
on which the interest rate is periodically adjusted
to coincide with prevailing interest rates. The interest
rate is tied to an index which may go up or down during
the life of the loan. The payment on an ARM will change
at intervals defined by the loan contract. The borrower
can have lower initial payments with an ARM, making
it easier to qualify for a mortgage. Alternatively,
a borrower could get a larger mortgage loan with an
ARM than with a fixed rate mortgage.
Q:
What is a fixed-rate mortgage?
A: Under the terms of a fixed-rate mortgage,
the borrower's payment does not change over the life
of the loan.
Q:
What is the appraisal?
A: The appraisal is a statement of property value
made by an independent, professional appraiser. It is
done to insure that the value of the property is sufficient
to secure the loan in the event that the borrower fails
to repay the loan in accordance with the provisions
of the mortgage contract. The value is set based on
the home itself and on recent comparable sales of homes
close to the subject property. The appraisal does not
necessarily detect or discuss defects in the property
or the title to the property.
Q:
What is the loan origination fee?
A: This fee covers the lender's administrative
costs in processing the loan. It is often expressed
as a percentage of the amount borrowed (see "points").
Q:
What is a flood certification/flood insurance?
A: A flood certification will identify a specific
property as being within or not within a flood hazard
area as defined by FEMA, a federal government agency.
If the property is within a flood zone, you will be
required to carry flood insurance, protecting you and
the lender from loss due to flood damage.
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