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Frequently Asked Mortgage Loan Questions
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Usually higher than your quoted interest rate because it includes, in addition to interest, some of the additional costs of obtaining your financing.
Origination and Discount points are both a percentage of your loan. Usually 1% of the total amount of the loan. (often tax deductible)• • Clients with low or no down payment can still obtain a loan, but will usually pay a slightly higher interest rate.
Vinings Mortgage serves as both a broker and a banker- meaning we can either service or sell your loan, depending on what best fits your financial situation.
A mortgage banker will originate, process, underwrite, close and fund the loan in-house. Vinings Mortgage is an affiliate of the Bank of England, England, Arkansas.
A mortgage broker will sell your loan to an investor who has guaranteed your loan program, and therefore your loan will be serviced and funded by that investor.
Locking your interest rate refers to guaranteeing a specific interest rate for a specific period of time. Shorter lock periods usually have lower interest rates. For more information, contact Vinings Mortgage’s qualified home mortgage loan experts.
Your lender will order the appraisal and survey for you. (Unless your home is new construction and then your builder will order your survey) Most contracts have option periods that allow you to dictate when the appraisal and survey are ordered.
Internet statements are not allowed because they’re not yet seen as completely unalterable by Fannie Mae or Freddie Mac. ALL PAGES of a required hard copy statement must be submitted (1 of 5 – all 5) even if the first page is an advertisement.
No. Your pre-closing signatures are non-committal but only allow your mortgage banker to negotiate and approve you for a loan.
A mortgage pre-qualification is basically the lenders opinion of your ability to buy or refinance a home. Requires only basic information and no documentation or credit score. A mortgage pre-approval is the underwriter’s decision that you are qualified. Credit check and documentation are required.
A typical home mortgage loan process consists of 10 easy steps:
1. Complete the pre-qualification worksheet
2. Pre-purchase consultation with an Vinings home mortgage loan specialist
3. Gather and prepare necessary documents
4. Receive credit approval
5. Obtain a property inspection
6. Loan officer orders home mortgage loan documents
7. Buyer obtains homeowners insurance
8. Vinings loan experts update you on document status
9. Seven-day pre-closing confirmation
10. Easy, smooth, on-time closing!
By switching to a fixed rate loan, you will not only reduce your payment, you will also likely lock in an attractive rate for as long as you own your home.
In fact, while one year ARMs currently offer tempting introductory rates, most experts recommend avoiding them, because you could easily find yourself facing sharply higher payments in the near future, even if interest rates don’t rise. Why? Well, after the introductory rate expires, ARMs are typically pegged to the one year Treasury rate (recently 5.25%) plus 2.75 percentage points, with increases of as much as two points a year. Assuming interest rates don’t change, you would pay 7.59% in the second year (the full two point increase) and 8% in the third year.
There are certain cases, however, where an ARM makes sense. If you are fairly certain you’ll be moving within five years, you can save some money — and avoid rising payments — with a five year ARM. Such loans offer a fixed rate for five years and adjust annually thereafter.
LIBOR is the rate on dollar-denominated deposits, also know as Eurodollars, traded between banks in London. The index is quoted for one month, three months, six months as well as one-year periods.
LIBOR is the base interest rate paid on deposits between banks in the Eurodollar market. A Eurodollar is a dollar deposited in a bank in a country where the currency is not the dollar. The Eurodollar market has been around for over 40 years and is a major component of the International financial market. London is the center of the Euromarket in terms of volume.
The LIBOR rate quoted in the Wall Street Journal is an average of rate quotes from 16 major banks.
The most common quote for mortgages is the 6-month quote. LIBOR’s cost of money is a widely monitored international interest rate indicator. LIBOR is currently being used by both Fannie Mae and Freddie Mac as an index on the loans they purchase.
LIBOR is quoted daily in the Wall Street Journal’s Money Rates and compares most closely to the 1-Year Treasury Security index.
The 11th District Cost of Funds is more prevalent in the West and the 1-Year Treasury Security is more prevalent in the East. Buyers prefer the slowly moving 11th District Cost of Funds and investors prefer the 1-Year Treasury Security.
The monthly weighted average 11th District has been published by the Federal Home Loan Bank of San Francisco since August 1981. Currently more than one half of the savings institutions loans made in California are tied to the 11th District Cost of Funds (COFI) index.
The Federal Home Loan Bank’s 11th District is comprised of saving institutions in Arizona, California and Nevada.
Few people who use and follow the 11th District Cost of Funds understand exactly how it is calculated, what it represents, how it moves and what factors affect it.
The predecessor to the 11th District Cost of Funds index was the District semiannual weighted average cost of funds published for a six month period ending in June and December. The San Francisco Bank was the first Federal Home Loan Bank to publish a monthly cost of funds index.
The funds used as a basis for the calculation of the 11th District Cost of Funds index are the liabilities at the District savings institutions: money on deposit at the institutions, money borrowed from a Federal Home Loan Bank (known as advances) and all other money borrowed. The interest paid on these types of funds is the cost of these funds.
The ratio of the dollar amount paid in interest during the month to the average dollar amount of the funds for that month constitutes the weighted average cost of funds ratio for that month.
The average cost of funds is said to be weighted because the three kinds of funds and their costs are added together before a ratio is computed rather than calculating averages individually for the three sources and using a simple average of the three ratios. This gives the greatest weight to the interest paid on deposits, and explains the delayed reaction of the index to rising fixed rate mortgages.
A few options are available to fit your individual needs and your risk tolerance with the various market instruments.
ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward.
The interest rate and monthly payment can change based on adjustments to the index rate.
6-Month Certificate of Deposit (CD) ARM
This program has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index is generally considered to react quickly to changes in the market.
1-Year Treasury Spot ARM
This program has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index generally reacts more slowly than the CD index, but more quickly than the Treasury Average index.
6-Month Treasury Average ARM
This program has a maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
12-Month Treasury Average ARM
This program has a maximum interest rate adjustment of 2% every 12 months. The Treasury Average Index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule the lower the start rate is the shorter the time before the loan makes its first adjustment.
The index of an ARM is the financial instrument that the loan is “tied” to, or adjusted to. The most common indices are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets.
The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value.
All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six months or a year. There are loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.
Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or “negative amortization.” These loans generally cap your annual payment increases to 7.5% of the previous payment.
Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.
These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.
However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.
There are also mortgages that combine aspects of fixed and adjustable rate mortgages – starting at a low fixed rate for seven to ten years, for example, then adjusting to market conditions. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation.
If you have ever paid off a home loan backed by FHA, you may have money owed to you. And the government wants to pay you back.
About 1 in 10 FHA borrowers leave money in their escrow accounts when they pay off their loans. The average refund for each borrower is about $700.
Former FHA borrowers who think they might be due a refund can call a toll free number, 800-697-6967, write HUD at P.O. Box 23669, Washington DC 20026-3699, or look for his/her name with the HUD Refund Search Form on their web site.
Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining are eligible to participate in HUD’s reverse mortgage program. The program allows homeowners to borrow against the equity in their homes.
Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. Homeowners whose circumstances change can restructure their payment options.
Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Mortgage companies recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the company the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.
The size of reverse mortgage loans is determined by the borrower’s age, the interest rate, and the home’s value. The older a borrower, the larger the percentage of the home’s value that can be borrowed.
For example, based on a loan at an interest rate of 9 percent, a 65-year-old could borrow up to 26 percent of the home’s value, a 75-year-old could borrow up to 39 percent of the home’s value, and an 85-year-old could borrow up to 56 percent of the home’s value.
There are no asset or income limitations on borrowers receiving HUD’s reverse mortgages.
There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area. As a result, owners of higher priced homes can’t borrow any more than owners of homes valued at the FHA limit.
HUD’s reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home’s value as an up front payment plus one half percent on the loan balance each year. These amounts are usually paid by the mortgage company and charged to the borrower’s principal balance.
FHA’s reverse mortgage insurance makes HUD’s program less expensive to borrowers than the smaller reverse mortgage programs run by private companies without FHA insurance.
FHA energy efficient mortgage program provides mortgage insurance for a person to purchase or refinance a principal residence and incorporate the cost of energy efficient improvements into the mortgage. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.
What are the eligibility requirements?
- Borrowers are eligible for approximately 97% financing. Borrowers are able to finance closing costs and the up front mortgage insurance premium into the mortgage. Borrowers are also responsible for paying an annual premium.
- Eligible properties are one to two existing units and new construction.
- The cost of the energy efficient improvements that may be eligible for financing into the mortgage is the greater of 5% percent of the property’s value (not to exceed $8,000) or $4,000.
- To be eligible for inclusion in the mortgage, the energy efficient improvements must be cost effective, meaning that the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement.
- The cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating system (HERS) or energy consultant.
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