What
is the difference between pre-qualifying and pre-approval?
Why are the advantages of a mortgage broker versus
a thrift or a mortgage banker?
What are credit scores?
How can I increase my score?
What if there is an error on my credit report?
Why are interest rates different from day to day
and one source to another?
Do I need flood insurance?
What are your rates?
What happens if my loan gets sold or my lender goes
out of business?
Does zero points really mean zero points?
Should I refinance?
What is an Annual Percentage Rate (APR)?
What is the difference between pre-qualifying and pre-approval?
A pre-qualification for a specific loan dollar amount is based on
a review of basic financial information you supply to us. No verification
of this information is performed. The pre-qualification means that
if the information you supplied to us is accurate, subject to verification
of credit, appraisal of the property, and the lenders underwriting
criteria for the loan amount, you should be able to receive a loan
as described in the pre-qualification letter or document. This is
not a final approval. A pre-qualification is not a commitment to
lend. However, a pre-qualification letter indicates to you and the
seller that in the opinion of the loan officer 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. Your loan application
is submitted to an underwriter and a decision is made regarding
your loan application. If your loan is pre-approved, the lender
will loan you money on the basis that you requested subject to:
a satisfactory appraisal (both as to value and type of product);
your financial condition remains as stated on your application and
satisfying any underwriting conditions from the lender.
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!
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What
are the advantages of a mortgage broker versus a thrift or a mortgage
banker?
First we need to define the terms. A thrift is your typical neighborhood
bank - mutual savings banks and savings-and-loan institutions offering
savings accounts, mortgages and other financial products and services.
Mortgage bankers work for a single lender and are in the sole business
of lending money. Mortgage brokers, on the other hand, are middlemen
who, by state law, work on behalf of borrowers. Brokers counsel
borrowers on the loan options available from different wholesalers
and then research a number of lending sources - commercial banks,
thrifts and mortgage bankers - to find appropriate loans to meet
the specific needs of borrowers they represent. Mortgage brokers
do not add any net cost to the lending process because they perform
functions that would otherwise have to be done by employees of the
lender. When a broker processes the paperwork on a loan, it costs
less for the lender to make the loan. Therefore, lenders often discount
loans to brokers. The borrower pays no additional cost and benefits
from the broker's service. By state law, the broker's fee and the
discount the lender offers the broker must be disclosed to the borrower.
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What
are credit scores?
A credit score (such as FICO - developed by Fair Isaac & Co
and used by Experian, or BECON ? developed and used by Equifax or
EMPIRICA ? developed and used by Trans Union) or credit scoring
is a method of determining the likelihood that a credit user (you)
will pay their bills. Fair Isaac began its pioneering work with
credit scoring in the late 1950?s. Since then scoring has become
widely accepted by lenders as a reliable means of credit evaluation.
A credit score attempts to condense a borrower?s credit history
into a single number. Fair, Isaac & Co. and the credit bureaus
do not reveal how these scores are computed. The Federal Trade Commission
has ruled this practice to be acceptable.
Credit scores
are calculated by using scoring models and mathematical tables that
assign points for different pieces of information that best predict
future credit performance. Developing these models involves studying
how thousands, even millions, of people that have used credit. Score-model
developers find predictive factors in the data that have proven
to indicate future credit performance. Models can be developed from
different sources of data. Credit-bureau models are developed from
information in consumer credit-bureau reports.
Credit scores
analyze a borrower's credit history considering many 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-off?s, collections,
etc.
There are really
three credit 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
and still others may use all three.
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How
can I increase my score?
While it is difficult to increase your score over the short run, here
are some tips to increase your score over a period of time.
Pay your bills
on time. Late payments and collections can have a serious impact
on your score.
Do not apply for credit frequently. Having a large number of inquiries
on your credit report can worsen your score.
Reduce your credit card balances. If you are "maxed" out
on your credit cards, this will affect your credit score negatively.
If you have limited credit, obtain additional credit. Not having
sufficient credit can negatively impact your score. (Normally lenders
like to see you have at least five (5) lines of credit not including
utilities (such as telephone, gas and electric companies) and oil
company credit cards.
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What
if there is an error on my credit report?
If you see an error on your report, to rectify it, you must contact
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, we
as your mortgage company may help you correct this problem as well.
Understand this process takes time, must be done in writing, and may
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Why are interest rates different from day to day and one source
to another?
Interest rate movements are based on the simple concept of supply
and demand. If the demand for credit (loans) increases, so do interest
rates. This is because there are more buyers, so sellers (those who
loan the money) can command a better price, i.e. higher rates. If
the demand for credit reduces, then so do interest rates. This is
because there are more sellers than buyers, so buyers can command
a lower better price, i.e. lower rates. When the economy is expanding
there is a higher demand for credit, so rates move higher, whereas
when the economy is slowing the demand for credit decreases and so
do interest rates. This
leads to a fundamental concept:
- Bad news
(i.e. a slowing economy) is good news for interest rates (i.e.
lower rates).
- Good news
(i.e. a growing economy) is bad news for interest rates (i.e.
higher rates).
A major factor
driving interest rates is inflation. Higher inflation is associated
with a growing economy. When the economy grows too strongly, the
Federal Reserve increases interest rates to slow the economy down
and reduce inflation. Inflation results from prices of goods and
services increasing. When the economy is strong, there is more demand
for goods and services, so the producers of those goods and services
can increase prices. A strong economy therefore results in higher
real estate prices, higher rents on apartments and higher mortgage
rates.
Mortgage rates
tend to move in the same direction as interest rates. However, actual
mortgage rates are also based on supply and demand for mortgages.
The supply/demand equation for mortgage rates may be different from
the supply/demand equation for interest rates. This might sometimes
result in mortgage rates moving differently from other rates. For
example, one lender may be forced to close additional mortgages
to meet a commitment they have made. This results in them offering
lower rates even though interest rates may have moved up!
There is an
inverse relationship between bond prices and bond rates. This can
be confusing. When bond prices move up, interest rates move down
and vice versa. This is because bonds tend to have a fixed price
at maturity typically $1000. If the price of the bond is currently
at $900 and there are 10 years left on the bond and if interest
rates start moving higher, the price of the bond starts dropping.
The higher interest rates will cause increased accumulation of interest
over the next 10 years, such that a lower price (e.g. $880) will
result in the same maturity price, i.e. $1000.
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Do
I need flood insurance?
Most lenders will not lend you money to buy a home in a flood hazard
area unless you pay for flood insurance. Some government loan programs
will not allow you to purchase a home that is located in a flood hazard
area. Your lender may charge you a fee to check for flood hazards.
You will be notified if flood insurance is required. If a change in
flood insurance maps brings your home within a flood hazard area after
your loan is made, your lender or service may require you to buy flood
insurance at that time. Back
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What are your rates?
The first question customers usually ask when calling a mortgage company
or lender is "What are your rates?" Because of the number
of mortgage programs available and the various rate and point combinations,
most mortgage companies have rate sheets that are 5-10 pages long.
Getting a rate
quote is just a small part of shopping for a mortgage and usually
not the best way to select a lender. Customer service, professional
staff, convenience, and flexibility are some of the key attributes
to selecting the best lender for your needs.
In helping you
assess a rate, you will need to provide answers to a few basic questions
like:
- What is your
purchase price?
- What loan
amount are you looking for or what loan amount do you want to
finance?
- Do you prefer
a fixed rate or an adjustable rate mortgage?
- How long
do you plan to live in the house?
- How many
points are you willing to pay?
The purchase
price or the value of your home affects the rate because it affects
the size of the loan. For example, Jumbo Loans, currently over $322,700,
have a higher rate. Similarly, smaller loans have a higher rate
or cost more because it costs the same and takes the same effort
to do $35,000 loan as it does a $200,000 loan. Lenders and brokers
need to make or charge a certain minimum amount of money to cover
overhead, per loan (transaction) cost and make a profit.
The type of
loan (fixed or variable) affects the rate because it affects the
lenders income and inflation risk. For example, with a fixed rate
loan, if rates go up the lender could lend out money at a higher
rate than they are currently loaning it to you, and therefore earn
more money. With a variable rate loan since the rate the lender
can charge you changes regularly their income remains consistent
with their current income opportunities. Therefore with variable
rate loans they give you a better rate since they know that if rates
go up they can charge you more.
The length of
time you will own a house affects both the type of loan you may
want and the amount of points it may make sense to pay. For example,
if you are going to keep a house for a short period of time (let?s
say 3 years), you may be better off with a variable rate loan (e.g.
a 3/1 ARM fixed for 3 years and varies once a year every year there-
after until the loan is paid off). Why? Because typically the 3/1
ARM has a lower rate associated with it than a 30 year fixed rate
loan and since you will sell the house in 3 years you would not
be affected by higher rates which may exist at that time. On the
other hand, if you expect to live in the house for 30 years you
might be willing to pay some points to receive a lower interest
rate now. The lower interest rate would save you money every month
over the life of the loan. The total savings in this situation should
be greater than the cost of points, giving consideration to the
amount that the point money could earn if invested (saved) after
taxes.
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What happens if my loan gets sold or my lender goes out of
business?
Your loan can be sold at any time. There is a secondary mortgage market
in which lenders frequently buy and sell pools of mortgages. This
secondary mortgage market results in lower rates for consumers. A
lender buying your loan assumes all terms and conditions of the original
loan. As a result, the only thing that changes when a loan is sold
is to whom you mail your payment. If your loan has been sold, your
existing lender will notify you that your loan has been sold, who
your new lender is, and where you should send your payments from now
on. If
your lender goes out of business, you are still obligated to make
payments! Typically, loans owned by a lender going out of business
are sold to another lender. The lender purchasing your loan is obligated
to honor the terms and conditions of the original loan. Therefore,
if your lender goes out of business, it makes little difference
with regards to your loan payments. In some cases, there may be
a gap between the date of your lender's going out of business and
the date that a new lender purchases your loan. In such a situation,
continue making payments to your old lender until you are asked
to make payments to your new lender.
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Does
zero points really mean zero points?
Points are a cash payment as part of the charge for the loan, expressed
as a percent of the loan amount; e.g., "2 points" means
a charge equal to 2% of the loan balance. Points can be used to "buy
down" the rate on a loan or to help fund closing costs. For example,
a 30-year fixed loan may be available at a retail price of :
- 8.0% with
2 points or
- 8.25% with
1 point or
- 8.5% with
0 points or
- 8.75% with
-1 point or
- 9% with -2
points
On a $200,000
loan, the loan officer can offer you 8.25% with 1 point ($2,000)
cash at closing or a higher rate of 8.75% with a cost of -1 point,
which is a $2,000 credit towards your closing costs. The basic idea
of the zero-fee loan 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 best way
to decide whether you should "buy down" and 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 usually tax-deductible,
so you may 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 fewer 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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Should
I refinance?
The most common reason for refinancing is to save money. Saving money
through refinancing can be achieved in two ways: By
obtaining a lower interest rate that causes the monthly mortgage
payment to be reduced.
By reducing
the term of the loan you actually save money over the life of the
loan. For example, refinancing from a 30-year loan to a 15-year
loan can significantly reduce the total of the payments made during
the life of the loan.
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. However, if you are looking to save money, try this
calculation:
Calculate the
total cost of the refinance (Example: $ 2,000)
Calculate the
monthly savings (Example: $100 per month)
Divide the total
cost of the refinance (#1) by the monthly savings (#2). This is
the "break even" time. If you own the house longer than
this, you will save money by refinancing. (Example: 2,000 / 100
= 20 months to break even)
Sometimes, you
do not have a choice??you are forced to refinance. This happens
when you have a loan with a balloon provision, but with no conversion
option. In this case it is best to refinance a few months before
the balloon comes due.
Whatever you
choose to do, consulting with a seasoned mortgage professional can
often save you time and money.
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What
is an Annual Percentage Rate (APR)?
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. Typically
the APR is found next to the rate. Example:
30-year fixed
at 8% note rate and 1 point = 8.107% APR
The APR does
NOT affect your monthly payments. Your monthly payments are a function
of the interest rate and the length of the 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 hiding fees.
If life were
easy, all you would have to do is compare APRs from the lenders/brokers
you are working with, then pick the easiest one and you would have
the right loan. Right? Wrong!
Unfortunately,
different lenders calculate APRs differently! So a loan with a lower
APR is not necessarily a better rate. An APR also does not tell
you how long your rate is locked for. A lender who offers you a
10-day rate lock may have a lower APR than a lender who offers you
a 60-day rate lock!
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.
Do not attempt
to compare a 30-year loan with a 15-year loan using their respective
APRs. A 15-year loan may have a lower interest rate, but could have
a higher APR, since the loan fees are amortized over a shorter period
of time.
Finally, 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!
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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GAMC - General Acceptance Mortgage Corporation