HomeYeah Mortgage: Frequently asked questions
Financing a new purchase
Why is it important to obtain Pre-Approval before looking for a home?
Should I choose a lender solely based on the lowest rate?
What is a Good Faith Estimate?
Refinancing an existing home
Why should I shop around before committing to my current lender?
What is a break even analysis?
How does the lender determine the value of my home?
What is the difference between an equity loan and an equity line of credit?
Is my home equity loan interest tax deductible?
Why should I refinance?
What are Zero-Point / Zero-Fee loans?
What are the benefits of a Zero-Point / Zero-Fee loan?
What is a FICO Score?
Rate Locks / PMI / APR
What is a rate lock?
Should I receive my rate lock in writing?
What is PMI? Can I get rid of the PMI on my loan?
What is an Annual Percentage Rate (APR)?
Why is it important to obtain Pre-Approval before looking for a home?
The primary reason to pre-approve is to determine, with reasonable
certainty, the price range for homes you are approved to purchase.
This will help you to determine the parameters of your home search.
Second, as a potential buyer competing for a property, you'll have a
better chance of getting your offer accepted by being as prepared as
possible. Imagine you're a seller in receipt of multiple offers to
purchase your property. A complete stranger (buyer) is asking you to
take your property off the market for at least the next two to three
weeks while they apply for a loan. As the seller, lets consider the
type of buyer you'd prefer to deal with:
Neither pre-qualified nor pre-approved
This buyer provides no evidence that they can afford to purchase your
property. You may wonder how serious they are since they're not at
least pre-qualified.
Pre-qualified
This buyer has met with a mortgage broker (or lender) and discussed
their situation. The buyer has informed the broker regarding their
income, expenses, assets and liabilities. The broker may also have
seen their credit report. The buyer provided you with a letter from
the broker stating an opinion of what the buyer can afford.
Pre-approved
This buyer has provided a broker written evidence of income, expenses,
assets, liabilities and credit. All information has been verified by a
lender. As a result, much of the paperwork for this buyer's loan has
been completed. This buyer will probably be able to close
quickly. They provide you with a letter (pre-approval certificate)
from the lender. You're as certain as possible that this buyer can
close.
As a potential buyer, you can see that being pre-approved will give
you the best chance of getting your offer accepted. This is critical
in a competitive situation.
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Should I choose a lender solely based on the lowest rate?
While the rate is important, consider the total cost of your loan
including the APR, loan fees, discount points and origination
fees. When receiving a quote from a lender or broker, insist that the
discount points (charged by the lender to reduce the interest rate) be
distinguished from origination fees (charged for services rendered in
originating the loan). The cost of the mortgage, however, shouldn't
be your only criterion. Have confidence that the company you select is
reputable and will deliver the loan with the terms and costs they
promised. If in the final hours of the transaction you determine that
the lender has suddenly increased their profit margin at your expense,
you won't have time to start again with a different lender. Ask family
and friends for referrals and interview prospective mortgage
companies.
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What is a Good Faith Estimate?
Within three business days after the broker or lender receives your
loan application, you must receive a written statement of fees
associated with the transaction. This is both the law and the best way
to determine what you'll pay for your loan. Bring the Good Faith
Estimate (GFE) with you when you sign loan documents. You should not
be expected to pay fees which are substantially different from those
contained in your GFE.
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Why should I shop around before committing to my current lender?
If you presently have a mortgage, your existing lender may not have
the best rates and programs. There is a general misconception that it
is easier to work with your current lender. In most cases, your
current lender will require the same documentation as other
companies. This is because most loans are sold on the secondary market
and have to be approved independently. Even if you have made all your
mortgage payments on time, your existing lender will still have to
verify assets, liabilities, employment, etc. all over again.
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What is a break even analysis?
Determine the total cost of the transaction, then calculate how much
you will save every month. Divide the total cost by the monthly
savings to find the number of months you will have to stay in the
property to break even. Example: if your transaction costs $2000 and
you save $50/month, you break even in 2000/50 = 40 months. In this
case you'd refinance if you planned to stay in your home for at least
40 months. Note: This is a simplified break-even analysis. If you are
refinancing considering switching from an adjustable to a fixed loan,
or from a 30-year loan to a 15-year loan, the analysis becomes much
more complex.
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How does the lender determine the value of my home?
Mortgage companies do not use the county tax-assessor's value to
determine whether they will make the loan. They use a market-value
appraisal which may be very different from the assessed value.
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What is the difference between an equity loan and an equity line of credit?
An equity loan is closed--i.e., you get all your money up front and
make fixed payments until it is paid if full. An equity line is
open--i.e., you can get numerous advances for various amounts as you
desire. Most equity lines are accessed through a checkbook or a credit
card.
Use an equity loan when you need all the money up front--e.g., for
home improvements, debt consolidation, etc. Use an equity line when
you have a periodic need for money, or need the money for a future
event--e.g., childrenšs college tuition in the future.
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Is my home equity loan interest tax deductible?
In some instances, your home-equity loan is NOT tax deductible. Do not
depend on your mortgage company for information regarding this
matter--check with an accountant or CPA.
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Why 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 one's monthly mortgage payment to be
reduced. By reducing the term of the loan, thus saving money over the
life of the loan. For example, refinancing from a 30-year loan to a
15-year loan might result in higher monthly payments, but the total of
the payments made during the life of the loan can be reduced
significantly.
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 consumer loans are not tax deductible, while
interest on a mortgage loan can be tax deductible.
Whatever you choose to do, consulting with an experienced mortgage
professional can often save you time and money. Make a few phone
calls, check out a few web sites, crunch on a few calculators and
spend some time to understand the options available to you.
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What are Zero-Point / Zero-Fee loans?
Whatever happened to the conventional wisdom of waiting for the rates
to drop 2% before refinancing? 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?
No--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.
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What are the benefits of a Zero-Point / Zero-Fee loan?
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. So if you refinanced on the zero-point/zero-fee
loan to get a rate of 8.75% and if the rates drop 1/2%, you can
refinance again to 8.25%. On the other hand, if you refinanced by
paying 1 point and got a rate of 8.25%, it may not make sense to
refinance again. Now, if the rates drop another 1/2%, a
zero-point/zero-fee loan can drop your rate to 7.75%, whereas if you
paid points, you may have to do a break-even analysis to decide if
refinancing will save you money.
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What is a FICO Score?
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. Fair, Isaac began its pioneering work with
credit scoring in the late 1950s and, since then, scoring has become
widely accepted by lenders as a reliable means of credit evaluation. A
credit score attempts to condense a borrowers 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 to be acceptable.
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. Developing these models
involves studying how thousands, even millions, of people 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 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.
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What is a rate lock?
You cannot close a mortgage loan without locking in an interest
rate. There are four components to a rate lock: Loan program, Interest
rate, Points, Length of the lock. The longer the length of the lock,
the higher the points or the interest rate. This is because the longer
the lock, the greater the risk for the lender offering that lock.
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Should I receive my rate lock in writing?
Yes. When a mortgage company tells you they have locked your rate,
get a written statement detailing the interest rate, the length of the
rate lock, and program details.
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What is PMI? Can I get rid of the PMI on my loan?
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. Therefore, without mortgage insurance, you might not be
able to buy a home without a 20% down payment.
In most cases, the lender will allow cancellation of mortgage
insurance when the loan is paid down to 80% of the original property
value. Some lenders may require that you pay PMI for one or two years
before you may apply to remove it.
To cancel the PMI on your loan, contact your lender. In most cases, an
appraisal will be required to determine the value of your
property. You will probably also be required to pay for the cost of
this appraisal. Another way of canceling the PMI on your loan is to
refinance and to get a new loan without PMI.
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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. 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. The APR does NOT affect your
monthly payments. Your monthly payments are a function of the interest
rate and the length of the loan.
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