Home Mortgage Frequently Asked Questions (FAQ)

Where should I shop for home mortgages?

Answer : Many entities, including banks, credit unions, savings and loans, insurance companies, and mortgage bankers, make home loans. Lenders and terms change frequently as new companies appear, old ones merge, and market conditions fluctuate. To get the best deal, it's a good idea to compare loans and fees or to get the help of an experienced mortgage broker, who can help you sift through the latest offerings.

What kinds of government loans are available to home buyers?

Answer: The two main federal programs are:

VA loans - U.S. Department of Veterans Affairs (VA) loans are available to men and women who are now in the military and to veterans with honorable discharges who meet specific eligibility rules, most of which relate to length of service. The VA doesn't make mortgage loans, but guarantees part of the house loan you get from a bank, savings and loan, or other private lender. If you default, the VA pays the lender the amount guaranteed and you in turn will owe the VA. This guarantee makes it easier for veterans to get favorable loan terms with a low down payment. For more information, check the VA's Web site at www.va.gov or contact a regional VA office for advice.

FHA loans - The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development (HUD), insures loans made to all U.S. citizens, permanent residents, and non citizens with work permits who meet financial qualification rules. Under its most popular program, if the buyer defaults and the lender forecloses, the FHA pays 100% of the amount insured. This loan insurance lets qualified people buy affordable houses. The major attraction of an FHA-insured loan is that it requires a low down payment, usually about 3% to 5%. For more information on FHA loan programs, contact a regional office of HUD or check the FHA web site at www.hud.gov.

What's the difference between a fixed and adjustable rate mortgage?

Answer: With a fixed rate mortgage, the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15 or 30 years. A number of variations are available, including five and seven-year fixed rate loans with balloon payments at the end.

With an adjustable rate mortgage (ARM), the interest rate fluctuates according to the interest rates in the economy. Initial interest rates of ARMs are typically offered at a discounted ("teaser") interest rate that is lower than the rate for fixed rate mortgages. Over time, when initial discounts are filtered out, ARM rates will fluctuate as general interest rates go up and down. Different ARMs are tied to different financial indexes, some of which fluctuate up or down more quickly than others. To avoid constant and drastic changes, ARMs typically regulate (cap) how much and how often the interest rate and/or payments can change in a year and over the life of the loan. A number of variations are available for adjustable rate mortgages, including hybrids that change from a fixed to an adjustable rate after a period of years, or "option ARMs" that allow you to choose, on a monthly basis, whether to pay a minimum amount, an interest-only amount, an ordinary principal plus interest amount, or an accelerated payment amount.

What is a point?

Answer: A point is a fee, equaling one percent of the loan amount, that reduces your monthly interest rate and total interest due over the life of the loan (sort of a prepayment of interest). As a rule of thumb, each "point" adds about 1/8 to 1/4 of each percentage to the interest rate. Typically, the lower the interest rate, the higher the points are. So some companies will offer financing with no points but their interest rates will be higher. To help you decide what combination of rate and points is right for you, you should balance the amount you can pay up front by the amount you want to pay monthly. And, the less time you keep the loan, the more expensive points become.

What is private mortgage insurance (PMI)?

Answer: Private mortgage insurance or PMI policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and your house isn't worth enough to entirely repay the lender through a foreclosure sale. Most lenders require PMI on loans where the borrower makes a down payment of less than 20%. Premiums are usually paid monthly and typically cost around one-half of one percent of the mortgage loan. You can normally cancel the PMI once your equity in the house reaches 20-25%, so long as you've made timely mortgage payments.

How do I get rid of my PMI (Private Mortgage Insurance)?

Answer: PMI can usually be canceled after your home's value has risen enough to give you 20 to 25% equity in your house. Start trying to get your PMI cancelled as soon as you suspect that your equity in your home or its value has gone up significantly. The most obvious way for equity to increase is because you’ve made a lot of mortgage payments. Your equity may also increase because your home’s value has gone up due to a rise in local home values or because you’ve remodeled. Such value-based rises in equity are harder to prove to your lender, and some lenders require you to wait a minimum time (around two years) before they will approve cancellation of PMI on this basis.

What does LTV (Loan-to-Value) mean?

Answer: Loan to Value is a ratio determined by the loan amount divided by the property value. For example, if a home has a property value of $100,000 and the loan amount is $90,000 the LTV is 90%. LTV is used to define the maximum loan percentage available for each particular loan program. Lenders have different LTV parameters for different loan programs. Also the LTV available will depend on your personal credit situation. Higher LTV ratios are available for people with higher credit ratings.

What is the difference between "locking in an interest rate" and "floating an interest rate"?

Answer: When applying for a mortgage you may be quoted a simple interest rate that is available at that moment. In order to be insured the rate you are quoted is available at your closing time, the lender must lock in the interest rate for a term for as long as they predict it may require to process your loan. The longer it takes to go to closing the higher the interest rate lock in will cost. Typical lock periods are 30-45 days. Alternatively, especially if you think interest rates are trending lower you may choose to allow the interest rate to float and except whatever the prevailing interest is once you are closer to your closing date.

When can I lock in an interest rate?

Answer: This varies depending on the lender. Typically if you do not have a purchase agreement in place, lenders will require you to pay a fee to lock the rate in. However, many lenders will lock the rate for free once you have a sales agreement and complete the loan application.

What are escrows?

Answer: Escrows are the pre-payments of real estate taxes and homeowners insurance held in an escrow account. Escrow accounts make the annual payments to the appropriate parties by the lender.

Can I avoid paying escrows?

Answer: In most cases, if your down payment is 20% or more lenders will not require you to pay escrows. Some programs only require 15%. Ask the lender what the requirements are for the loan product you're interested in.

How long will it take for a lender to close my loan?

Answer: Some lenders can go to closing within 7 days. However, an average of 30 to 60 days is required. The length of time is dependant on a number of factors. For example, whether there is a current appraisal available for the property, how busy mortgage processors are at the time of loan request, and the length of time needed to process the title.