Home |
Bad Credit Mortgages |
Refinance |
Purchase |
Apply
Online |
Contact Us |
 Questions |
Frequently Asked Questions - FAQ's What are the most commonly made mistakes in buying or refinancing a house? Should I refinance? Should I pay points? Does a 0 point/0 fee loan really exist? What is a FICO score? Why do interest rates change? What is the difference between pre-qualifying and pre-approval? What is a rate lock? Can my loan be sold? What happens if my lender goes out of business? What is PMI? Can I get rid of the PMI on my loan? What is an APR? Common Mistakes in Buying Or Refinancing? If you're like most people, purchasing a home is the biggest investment you'll ever make. If you're considering buying a home, you're likely aware of the complexity of the endeavor. Because of the numerous factors to consider when purchasing a home, it's important to prepare as best you can. Some common home-buying principals and caveats are presented here for your consideration. By keeping them in mind, you'll help create a successful and more enjoyable experience. These Top Ten lists are by no means exhaustive. Since your home could cost you 25 to 40 percent of your gross income, it's important to conduct research, ask questions and study the process carefully. Buying a home Looking for a home without being pre-approved. 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. Consider this hierarchy of preparedness: Neither pre-qualified nor pre-approved
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. Making verbal agreements. If you're asked to sign a document containing instructions contrary to your verbal agreements--don't! For example, the seller verbally agrees to include the washing machine in the sale, but the written purchase contract excludes it. The written contract will override the verbal contract. More importantly, your state may require that contracts for the sale of real property be in writing. Do not expect oral agreements to be enforceable Choosing a lender just because they have the lowest rate. While the rate is important, consider the total cost of your loan including the APR , loan fees, discount and origination points. 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 points (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. Interview prospective mortgage companies. 4. Not receiving 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. 5. Not getting a rate lock in writing. 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.
7. Buying a home without professional inspections. Unless you're buying a new home with warranties on most equipment, it's highly recommended that you get property, roof and termite inspections. This way you'll know what you are buying. Inspection reports are great negotiating tools when asking the seller to make needed repairs. When a professional inspector recommends that certain repairs be done, the seller is more likely to agree to do them. If the seller agrees to make repairs, have your inspector verify that they are done prior to close of escrow. Do not assume that everything was done as promised. 8. Not shopping for home insurance until you are ready to close. Start shopping for insurance as soon as you have an accepted offer. Many buyers wait until the last minute to get insurance and do not have time to shop around. 9. Signing documents without reading them. Whenever possible, review in advance the documents you'll be signing. (Even though some specifics of your transaction may not be known early in the transaction, the documents you'll sign are standard forms and are available for review.) It's unlikely that you'll have sufficient time to read all the documents during the closing appointment. 10. Not allowing for delays in the transaction. In a perfect world, all real estate transactions close on time. In the world we live in, transactions are often delayed a week or more. Suppose you asked your landlord to terminate your lease the day your purchase transaction was scheduled to close. A day or two before your scheduled closing date, you discover your transaction is delayed a week. In a perfect world, no one is nconvenienced and your landlord is willing to work with you. More likely, however, your landlord is inconvenienced and angry. Will you be thrown out? Will you hav to find interim housing for a week or more? The eviction process takes a little time, so the Sheriff won't immediately remove you, but this type of stress-producing episode can be avoided. How? Terminate your lease one week after your real estate transaction is scheduled to close. That way, i f there is a delay in closing your transaction, you have some leeway. This approach might cost a little more, then again, it might not. [Back to the top of this page] Refinancing your home 1. Refinancing with your existing lender without shopping around. 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. 2. Not doing 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. 3. Not getting a written good-faith estimate of closing costs. See item number four above. 4. Paying for an appraisal when you think your home value may be too low. Have the appraisal company prepare a desk review appraisal (typically at no charge) to provide you with a range of possible values. Your mortgage company's appraiser may do this for you. Do not waste your money on a full appraisal if you are doubtful about the value of your home. 5. Using the county tax-assessor's value as the market value of your 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. 6. Signing your loan documents without reviewing them. See item number nine above. 7. Not providing documents to your mortgage company in a timely manner. When your mortgage company asks you for additional documents, provide them immediately. They are doing what's necessary to get your loan approved and closed. Delays in providing documents can result in a costly delays. 8. Not getting a rate lock in writing. When a mortgage company tells you they have locked your rate, get a written statement which includes the interest rate, the length of the rate lock and details about the program. 9. Pulling cash out of your credit line before you refinance your first mortgage. Many lenders have cash-out seasoning requirements. This means that if you pull cash out of your credit line for anything other than home improvements, they will consider the refinance to be a cash-out transaction. This usually results in stricter requirements and can, in some cases, break the deal! 10. Getting a second mortgage before you refinance your first mortgage. Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first loan, check with your mortgage company to find out if getting a second will cause your refinance transaction to be turned down.
Getting a home-equity loan/line 1. Not knowing if your loan has a pre-payment penalty clause. If you are getting a "NO FEE" home-equity loan, chances are there's a hefty pre-payment penalty included. You'll want to avoid such a loan if you are planning to sell or refinance in the next three to five years. 2. Getting too large a credit line. When you get too large a credit line, you can be turned down for other loans because some lenders calculate your payments based upon the available credit--not the used credit. Even when your equity line has a zero balance, having a large equity line indicates a large potential payment, which can make it difficult to qualify for other loans. 3. Not understanding the difference between an equity loan and an equity line. 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. For both equity loans and lines, you can only be charged interest on the outstanding principal balance. 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., childrens' college tuition in the future. 4. Not checking the lifecap on your equity line. Many credit lines have lifecaps of 18 percent. Be prepared to make payments at the highest potential rate. 5. Getting a home-equity loan from your local bank without shopping around. Many consumers get their equity line from the bank with which they have their checking account. By all means, consider your bank, but shop around before making a commitment. 6. Not getting a good-faith estimate of closing costs. See item number four above. 7. Assuming that your home-equity loan is fully 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. 8. Assuming that a home-equity loan is always cheaper than a car loan or a credit card. Even after deducting interest for income tax purposes, a credit card can be cheaper than a credit line. To find out, compare the effective rate of your home-equity line with the rate on your credit card or auto loan. Effective rate = rate * (1 - tax bracket) 9. Getting a home-equity line of credit when you plan to refinance your first mortgage in the near future. Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first, check with your mortgage company to find out if getting a second will cause your refinance to be turned down. 10. Getting a home-equity line to pay off your credit cards when your spending is out of control! When you pay off your credit cards with an equity line, don't continue to abuse your credit cards. If you can't manage the plastic, tear it up! The most common reason for refinancing is to save money. Saving money through refinancing can be achieved in two ways: 1. By obtaining a lower interest rate that causes one's monthly mortgage payment to be reduced. 2. 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 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. Even the conventional wisdom of refinancing only when you can save 2% on your mortgage is not really true. If you are refinancing to save money on your monthly payments, the following calculation is more appropriate than the rule of 2%: Calculate the total cost of the refinance––example: $2,000 Calculate the monthly savings––example: $100/month Divide the result in 1 by the result in 2––in this case 2000/100 = 20 months. This shows the break-even time. If you plan to live in the house for longer than this period of time, it makes sense to refinance. 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. The best way to decide whether you should pay points or not is
to perform a break-even analysis. This is done as follows: 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! Whatever happened to the conventional wisdom of waiting for the
rates to drop 2% before refinancing? 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. You can also think of this as negative points! For example, a 30-year
fixed loan may be available at a retail price of : On a $200,000 loan, the loan officer can offer you 8.75% with a cost of -1 point, which is a $2,000 credit towards your closing costs. A mortgage broker can use rebate pricing to pay for your closing costs and keep the balance of the rebate as profit. What are the benefits of a zero-point/zero-fee loan? The zero-point/zero-fee loan eliminates the need to do a break-even analysis since there is no up-front expense that needs to be recovered. It also is a great way to take advantage of falling rates. Some consumers have used zero-point/zero-fee loans on adjustable loans to refinance their adjustables every year and pay a very low teaser rate. What are the disadvantages of a zero-point/zero-fee loan? The main disadvantage is that you are paying a higher rate than you would be paying if you had paid points and closing costs. If you keep the loan for long enough, you will pay more––since you have higher mortgage payments. In the scenario where you plan to stay in the house for more than 5 years, and if rates never drop for you to refinance, you could wind up paying more money. If, on the other hand, you plan to stay at a property for just 2-3 years, there really is no disadvantage of a zero-point/zero-fee loan. Whose money is it? To summarize, zero-point/zero-fee loans in many cases are good deals. Make sure, however, that the lender pays for your closing costs from rebate points and NOT by increasing your loan amount. So if your old loan amount was $150,000, your new loan amount should also be $150,000. You may have to come up with some money at closing for recurring costs (taxes, insurance, and interest), but you would have to pay for these whether you refinanced or not. Zero-point/zero-fee loans are especially attractive when rates are declining or when you plan to sell your house in less than 2-3 years. Zero-point/zero-fee loans may not be around forever. Lenders have
discussed adding a pre-payment penalty to such loans, however few
lenders have taken steps to implement such a measure. What is a FICO score?
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.
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.
To understand why mortgage rates change we must first ask the more general question, "Why do interest rates change?" It is important to realize that there is not one interest rate, but many interest rates! Prime rate: The rate offered to a bank's best customers. Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate). Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years. Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations. Federal Funds Rate: Rates banks charge each other for overnight loans. Federal Discount Rate: Rate New York Fed charges to member banks. Libor: : London Interbank Offered Rates. Average London Eurodollar rates. 6 month CD rate: The average rate that you get when you invest in a 6-month CD. 11th District Cost of Funds: Rate determined by averaging a composite of other rates. Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly. Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans. 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 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 5 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000. [Back to the top of this page]What is the difference between pre-qualifying and pre-approval? A pre-qualification is normally issued by a loan officer, who, after interviewing you, determines the dollar value of a loan you can be approved for. However, loan officers do not make the final approval, so a pre-qualification is not a commitment to lend. After the loan officer determines that you pre-qualify, he/she then issues you a pre-qualification letter. This pre-qualification letter is used when you are making an offer on a property. The pre-qualification letter indicates to the seller that 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, you are then issued a pre-approval certificate. 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! What is a rate lock? Loan program 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. Let's say you lock in a 30-year fixed loan at 8% for 2 points for 15 days on March 2. This lock will expire on March 17 (if March 17 is a holiday then the lock is typically extended to the first working day after the 17th). The lender must disburse funds by March 17th, otherwise your rate lock expires, and your original rate-lock commitment is invalid. The same lock might cost 2.25 points for a 30-day lock or 2.5 points for a 60-day lock. If you need a longer lock and do not want to pay the higher points, you may instead pay a higher rate. After a lock expires, most lenders will let you re-lock at the higher of the original price and the originally locked price. In most cases you will not get a lower rate if rates drop. Lenders can lose money if your lock expires. This is because they are taking a risk by letting you lock in advance. If rates move higher, they are forced to give you the original rate at which you locked. Lenders often protect themselves against rate fluctuations by hedging. Some lenders do offer free float-downs––i.e. you may lock the rate initially and if the rates drop while your loan is in process, you will get the better rate. However, there is no free lunch––the free float-down is costly for the lender and you pay for this option indirectly, because the lender has to build the price of this option into the rate. What do you do if the rates drop after
you lock? Lock-and-shop programs. New-construction rate locks. Can my loan be sold? What happens if 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. [Back to the top of this page] 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. The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. Your PMI premium is normally added to your monthly mortgage payment. The decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage-insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, 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 cancelling the PMI on your loan is to refinance and to get a new loan without PMI. [Back to the top of this page]What is an Annual Percentage Rate (APR)?
Example: 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. The best way to compare loans in the author's opinion is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. Then delete all fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees. The reason why APRs are confusing is because the rules to compute APR are not clearly defined. What fees are included in the APR? The following fees ARE generally included in the APR: Points - both discount points and origination
points The following fees are SOMETIMES included in the APR: The following fees are normally NOT included in the APR: 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! Conclusion : |