What documentation will the lender typically require to process my mortgage?: The answer depends upon the quality of your credit and the amount of equity you have in your property. On a typical fully documented mortgage application (where an applicant is seeking to qualify based on a salary), the lender will require: one month's current pay stubs, W-2's for the prior two years and bank and investment account statements for the prior quarter. If an applicant is self-employed (has a 25% or greater ownership in a business) then additional documentation could be required (i.e. 1040's, 1165's, 1120's, P & L statement).
Should I lock my interest rate at mortgage application or float the rate until closing?: The answer depends on one's outlook for interest rates, whether you are satisfied with the current rate being offered (and would not be deterred from proceeding if rates declined), when you need to close and whether or not a rate increase could effect your ability to qualify for the mortgage. With a purchase, there is a contractual obligation to close on a specified date. With a refinance transaction, there is no such obligation to close and therefore a refinance applicant could postpone closing for a more favorable rate. Some lenders take the guesswork out of the process by allowing borrowers to lock and then float the rate down one time during the mortgage process. Typically a borrower is required to bring in a fee of ½-1% of the mortgage amount which is then credited (or refunded) to them at closing. It is a lock fee the lender requires to insure the transaction will in fact close.
If I decide to lock my interest rate and rates go down, will the lender give me the current lower rate?: It depends upon the lender involved and how much of a rate decline has occurred. Some lenders may re-price the mortgage at a rate close to market if there has been a substantial rate decline (i.e. = or >3/8%) and some may prefer that a mortgage is canceled rather than re-price it at a market rate. Some lenders allow borrowers to lock and then float the rate down one time during the mortgage process, typically a borrower is required to bring in a fee of ½-1% of the mortgage amount which is then credited (or refunded) to them at closing. It is a lock fee the lender requires to insure the transaction will in fact close.
Will the lender require a fee to lock in my interest rate?: For a traditional 30-90 day rate lock, the lender will not require the borrower to pay a lock fee, but for the privilege of locking for a period beyond 90 days they may. Some lenders allow borrowers to lock and then float the rate down one time during the mortgage process, typically a borrower is required to bring in a fee of ½-1% of the mortgage amount which is then credited (or refunded) to them at closing. It is a lock fee the lender requires to insure the transaction will in fact close.
Why do I need to pay for another policy of title insurance when we already own the property and purchased title insurance when we bought the house?: Before closing your new mortgage, your new lender must be certain that the title to the property will be free and clear, free of prior defects and indebtedness. A new policy is needed to protect the new lender and subsequent investor of your new mortgage. Both a homeowner and prospective lender need to be certain that what is available on the property is what is referred to as a "marketable title". A title company researches the legal history of the property that entails searching public records in the offices of the county recorder. Problems with the title could threaten the mortgage, limit ones use and enjoyment of the property and could result in financial loss. A policy of title insurance protects a homeowner's title and the insurer covers the cost of any legal challenges.
How can I avoid having to get mortgage insurance on my mortgage?: Many borrowers who have less than 20% equity in their homes, choose a combination first and second mortgage (referred to as a combo or piggyback mortgage) to avoid mortgage insurance (MI). A common method of financing without MI is an 80-10-10 (an 80% 1st mortgage, 10% 2nd mortgage with 10% equity). Also available is an 80-15-5 (requiring an 80% 1st mortgage, 15% 2nd mortgage with 5% equity) and an 80-20 (requiring no down payment).
Is it best to pay points up front to reduce the interest rate?: When points are paid on a mortgage, the result is to buy down the interest rate. Typically 1 point (or 1%) will buy the rate down .25%. The key to analyzing whether paying points makes financial sense is to determine: 1) How long do you anticipate remaining in the property? 2) When would the break even point occur? For example if you pay two points to buy your rate down from 8.00% to 7.50% on a $300,000 mortgage, the payment at 8.00% would be $2,201 and at 7.50%, the payment would be $2,098, with the difference in payment amounting to $103/month. With two points costing $6000, divided by the savings of $103/month equaling 58.25 months or 4.85 years to break even. You would want to hold the mortgage and remain in the property approximately 5 years for this to make sense. Other factors to consider are the tax implications of paying points as well as the time value of money (could you put these funds to better use).
How do I know if it makes sense for me to refinance?: First determine your financial mortgage related goals: i.e. are you looking to improve your monthly cash flow, reduce your mortgage term, do you need to take out cash utilizing the equity from your home? Obtaining the right mortgage for your particular needs could make sense even when rates are not at their lowest levels. First identify your goal and contact a mortgage professional for suggestions on mortgage programs that would best help you meet your objectives. Then shop for rates after you have selected the appropriate mortgage program.
Is it possible to obtain a no cost mortgage when refinancing your mortgage?: Yes. In fact no cost mortgages are extremely popular among re-financers. Because a borrower pays no non-recurring closing costs, it is easy to analyze how soon money is saved on a monthly mortgage payment by refinancing. Many homeowners will consider refinancing for as little as .25% improvement to their mortgage rate with no-cost mortgage financing.
I am refinancing a condo (or townhouse or PUD) and am aware that our HOA is currently in litigation with the developer. Will I be able to refinance my mortgage?: A Homeowner's Association could leave itself open for legal action if it doesn't act on legitimate building defects and disclose these defects to all unit owners. However the fact that an association is suing a developer can impact an owners ability to obtain financing. It is vital to let your lender know up front if the development or project you live in is in litigation. It is usually possible to obtain financing in such situations, but it will limit the number of lenders who might be able to finance your mortgage. In some cases the lender may require a higher percentage of equity in the property and the interest rate could exceed that of standard financing programs.
Which closing costs associated with my refinance are tax-deductible?: Please see the IRS link on our web site where this information is outlined. Also consult with your tax advisor. http://www.irs.gov/
What is APR and how is it calculated?: APR stands for annual percentage rate and its purpose is to give borrowers a truer representation of the effective interest rate on their mortgage. APR factors in certain closing costs and fees and spreads these costs over the life of the mortgage, along with the note rate, to arrive at a more accurate annualized percentage rate than the note rate alone represents.
What is a mortgage prepayment penalty and is it generally advisable to get a mortgage that has one?: A prepayment penalty on a mortgage allows the lender to charge a borrower additional interest, typically six months worth, when a mortgage is repaid during the penalty period, which is usually somewhere in the first two to three years of the mortgage. If a mortgage does have a prepayment penalty, this is clearly stated within the mortgage disclosures, mortgage note or prepayment penalty rider to the note. The advantage of taking a mortgage with a prepayment penalty is that it could carry a lower rate of interest or you may be permitted to take a mortgage without paying for non-recurring closing costs.
What is the difference between a zero point and a no cost mortgage?: With a zero point mortgage, a borrower has opted not to pay points to buy their interest rate down but will still be paying for their base closing costs (i.e. appraisal, credit report, lender doc fees, title and escrow, etc.). With a no cost mortgage, a borrower has accepted a higher interest rate, (typically .25%- 375% higher than on a zero point mortgage) with the trade off that the lender or broker will pay for all their non-recurring closing costs (all base closing fees except for interest, taxes and insurance due).
Guidelines for Selecting a Home Loan When searching for a home loan it is advised to first determine the financial objectives you require of a home loan. Consider the following:: 1. How long do you intend to live in the property? For example, if you plan to stay in the property for 7 years or less, you may want to consider an intermediate adjustable with a rate that is fixed for a 5 or 7 year period. Why pay the higher rate of a 30 year fixed when you don't require such long term financing. Also if your time horizon of ownership is 7 years or less, it is advisable to opt for minimal closing costs because your opportunity to recoup the price of high closing costs is dramatically reduced.
: 2. What are your current financial priorities (i.e. cash flow, rapid repayment of the home loan)? For example, if cash flow is a top priority, an adjustable with varied payment options may be your best bet. Some adjustable products allow borrowers to choose from 3-4 payment options each month (i.e. interest only, allowing for negative amortization, 30 year fixed rate fully amortized or 15 year fixed rate fully amortized). This allows a borrower to choose a different payment option every month based upon his or her monthly cash flow. For others, the goal may be rapid repayment in which case a 15 year home loan may be considered or possibly an adjustable rate with a lower rate of interest supplemented by additional principal payments to retire the mortgage debt early. With an adjustable vs. a fixed rate, your principal reduction payments will afford you a progressively lower required monthly home loan payment as the mortgage is recast and interest is calculated and your payment is based on the existing home loan balance vs. the original balance. With a fixed rate home loan your required payment will remain constant over the life of the home loan, regardless of any principal reduction payments you may make.
: 3. Do you anticipate any major changes to your financial situation in the next few years? For example, do you anticipate receiving funds (stock options, inheritance, sale of an asset) in the next few months or years that would permit you to pay down your home loan balance? If so you may choose a home loan with an interest rate that is guaranteed for a shorter term (i.e. an ARM with a rate fixed for 1-5 years) reflecting the time frame from which you expect to receive the funds. After this time you could refinance, using these funds to pay down the balance on your existing home loan or if you currently had an adjustable that is scheduled to recast, you may simply pay the balance down and enjoy a lower monthly payment without refinancing.
: 4. What kind of recent credit history do you have? If you have excellent credit, you may want to inquire about home loan products that are discounted for individuals with high credit ratings. In addition to credit, some lenders will also provide further discounts to borrowers who have high equity in their property, usually considered to be 30-35%+. For those having credit blemishes, it is best to discuss your history openly and honestly with your home loan consultant and to review your current credit report together. The market for less than perfect credit applicants (referred to as subprime) has grown dramatically over the last few years offering competitive interest rates and a greater variety of product options. For those planning to improve their credit ratings, it is best to take shorter term financing of 2 to 3 years, after which one can refinance into "A paper" (the best) financing.
: 5. Are you self-employed and will you have a difficult time documenting your income? If you will not be able to sufficiently document your income, you may opt for a quick qualifier, easy qualifier or no income verification home loan. These products usually offer a trade off though, the less documentation you are able to provide the higher the interest rate will be. Some of these programs also require a higher amount of equity in the property. There are also programs that do not require verification of either income or assets (referred to as NINA mortgages). Each of these mortgages could have higher interest rates and equity requirements associated with them.