Top 10 Things to Know About a Mortgage
1. LOAN ATTRIBUTES
There are three categories that your loan amount may fall into. Please remember that in some counties some of these figures may vary.
- Conventional Loans: The loan amount is typically from $75,000-$417,000.
- Super Conforming: The loan amount is typically from $417,001- $625,500.
- Jumbo: The loan amount is typically from $625,501 and above depending on the lender.
Occupancy of Property
- Primary Residence: The home that you currently live in and occupy.
- Second Home: The home that is specifically located in a resort area or over 50 miles away from your primary residence. This type of home cannot be rented out or occupied by anyone other than the owners of the residence temporarily.
- If your property does not fall within the first two categories it will be considered an investment property. Investment properties are usually rented out by the owner of the property.
- Single family residence is also known as a single family detached. This property is a stand alone structure with its own lot.
- Condo consists of a complex of dwelling units in which each unit is individually owned and share common areas.
- Multi family property consists of separate housing units for residential use that are contained in one to several buildings in a complex.
- Duplex: A building consisting of two separate units.
- Triplex: A building consisting of three separate units.
- Fourplex: A building consisting of four separate units.
An impounded loan includes property taxes and hazard insurance as part of the mortgage payment.
2. INTEREST RATE
An interest rate is a rate that is paid to the lender for the use of their money. Your monthly payments will always be determined by the interest rate you have selected.
The annual percentage rate, APR, is determined by a combination of the interest rate along with other one-time fees that are associated with the loan. The APR allows borrowers to understand the true cost of their loan as it relates to closing costs.
4. FIXED VS. ADJUSTABLE RATE
Fixed rate mortgage is a mortgage loan in which the interest rate does not change during the entire term of the loan. There are five loan terms:
- 10 Year Fixed
- 15 Year Fixed
- 20 Year Fixed
- 25 Year Fixed
- 30 Year Fixed
Adjustable rate mortgage is a mortgage loan in which the interest rate may adjust annually after the initial fixed term of the loan has ended. The adjustment of the rate is specifically tied to the index that is used by the lender along with the lender’s set margin. The index that is normally used in the mortgage industry today is known as the London Interbank Offered Rate or LIBOR for short, and is adjusted monthly. There are three types of ARMs:
- 5/1 ARM: An adjustable mortgage rate that is fixed for five years in its initial term and adjusts annually after.
- 7/1 ARM: An adjustable mortgage rate that is fixed for seven years in its initial term and adjusts annually after.
- 10/1 ARM: An adjustable mortgage rate that is fixed for ten years in its initial term and adjusts annually after.
5. GOOD FAITH ESTIMATE
Good Faith Estimate, also known as a “GFE”, is a three page document that is provided by the mortgage lender or broker to a borrower. The GFE presents an itemized list of the fees involved with the loan. The GFE must be provided to the borrower within 3 days of the initial application in accordance to the Real Estate Settlement Procedures Act. This documents is used by the borrower to compare different offers from various brokers or lenders.
- Date 1: The date and time in which the interest rate for the GFE is available through.
- Date 2: The following date and time is for all the other settlement charges.
- Date 3: The amount of days in which you can go to settlement, after locking your interest rate.
- Date 4: The amount of days you have to lock before your settlement ends.
A) Your Adjusted Origination Charges.
- Box 1: Your origination charge.
- Box 2: The credit or charge in points for the interest rate chosen.
B) Your charges for all other settlement services.
- Box 3: Required services such as appraisal, tax certification, and flood certification.
- Box 4: Includes fees for the lender’s title insurance and escrow company.
- Box 5: Owners title insurance.
- Box 6: Required services that you can shop for.
- Box 7: Government recording charges.
- Box 8: Transfer taxes.
- Box 9: Estimated amount of the initial deposit for your escrow account.
- Box 10: Estimated daily interest charges.
- Box 11: Homeowners Insurance.
A+B) Your total estimate settlement charge.
6. POINTS or DISCOUNT POINTS
Discount points are fees that are paid to a lender at closing in exchange for selecting an interest rate and is equal to one percent of the loan amount. Whenever a borrower selects to lower their interest rate, their cost for the loan increases due to the positive points, which is considered buying down the interest rate. Should a borrower choose to select an interest rate with negative discount points, the lender would then be providing them credit for their closing costs.
7. THIRD PARTY FEES
Third party fees are fees from someone other than the lender for the use of their services. The two most important services that are required in any mortgage transaction are the services of a title as well as escrow company.
- Title: A title company insures the loan for the lender and also records the new deed of trust for the subject property.
- Escrow: The escrow company is in charge of assuring that there are no funds or property changing hands until the mortgage transaction is 100% complete. The escrow company has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow company. Also, the escrow company is responsible for the disbursement of funds to the appropriate parties.
8. LTV AND PMI
Loan-to-Value ratio is a ratio percentage that expresses the value of the mortgage loan considering the value of the property. In order to calculate the ratio percentage, the amount of the mortgage is then divided by the appraised value of the home.
Private Mortgage Insurance is an insurance that is required by lenders for all loans that have less than 20% equity or is over 80% loan to value ratio. Most lenders require PMI in order to protect themselves from defaulting loans due to their high risk. Borrowers with PMI may request lenders to remove the PMI requirement once they are at 80% loan to value ratio or PMI will automatically fall off at 78% loan to value ratio.
9. RATE LOCK
A rate lock is a guarantee by the lender to the borrower for a specific interest rate and its discount points. The guarantee protects the borrower from any market instabilities for a specific period of time as indicated on the lock. The guaranteed period of the lock typically ranges from 15 to 60 days and is usually in increments of 15 days.
10. TOTAL CLOSING COST
Total closing cost is the true and final cost of your mortgage loan. Total costs should include all lender fees, points that reduced your interest rate , appraisal, title and escrow. In some cases attorney fees should also be included depending on the state the subject property is located.