Frequently
Asked Questions
Q: How do I know how much I can afford to purchase a
home?
A: Generally speaking, you can purchase a home with
a value of two or three times your annual household income.
However, the amount that you can borrow will also depend
upon your employment history, credit history, current savings
and debts, and the amount of down payment you are willing
to make. You may also be able to take advantage of special
loan programs for first time buyers to purchase a home with
a higher value.
Q: What is the difference between a fixed-rate loan and
an adjustable-rate loan?
A: With a fixed-rate mortgage, the interest rate
stays the same during the life of the loan. With an adjustable-rate
mortgage (ARM), the interest changes periodically, typically
in relation to an index. While the monthly payments that
you make with a fixed-rate mortgage are relatively stable,
payments on an ARM loan will likely change. There are advantages
and disadvantages to each type of mortgage, and the best
way to select a loan product is by talking to your broker.
Q: How is an index and margin used in an ARM?
A: An index is an economic indicator that lenders
use to set the interest rate for an ARM. Generally the interest
rate that you pay is a combination of the index rate and
a pre-specified margin. Three commonly used indices are
the One-Year Treasury Bill, the Cost of Funds of the 11th
District Federal Home Loan Bank (COFI), and the London InterBank
Offering Rate (LIBOR).
Q: How do I know which type of mortgage is best for me?
A: There is no simple formula to determine the type
of mortgage that is best for you. This choice depends on
a number of factors, including your current financial picture
and how long you intend to keep your house.
Q: What does my mortgage payment include?
A: For most homeowners, the monthly mortgage payments
include three separate parts:
Principal: Repayment on the amount borrowed
Interest: Payment to the lender for the amount borrowed
Taxes & Insurance: Monthly payments are normally made
into a special escrow account for items like hazard insurance
and property taxes. This feature is sometimes optional,
in which case the fees will be paid by you directly to the
County Tax Assessor and property insurance company.
Q: How much cash will I need to purchase a home?
A: The amount of cash that is necessary depends on
a number of items. Generally speaking, though, you will
need to supply:
Earnest Money: The deposit that is supplied when you make
an offer on the house
Down Payment: A percentage of the cost of the home that
is due at settlement
Closing Costs: Costs associated with processing paperwork
to purchase or refinance a house.
Q: What is private mortgage insurance (PMI)?
A: Private mortgage insurance protects the lender
from loss due to payment default by the borrower. It is
used with conventional financing only. It may be paid in
a lump sum at the time of settlement or in monthly installments
as part of the mortgage payment. PMI is typically required
when the amount of your loan exceeds 80% of the subject
property's value. This type of insurance should not be confused
with mortgage life, credit life, or disability insurance
which is designed to pay off a mortgage in the event of
the borrower's disability or death.
Q: What are "points"?
A: Fees used to adjust the yield on a mortgage
to current market conditions are called points. There
is an inverse relationship between points paid and the
interest rate on the mortgage. As the interest rate gets
higher, the points get lower. A point equals 1 percent
of the mortgage amount. For example, 1 point on a $100,000
mortgage would be $1,000.
Q: What is title insurance?
A: Title insurance protects the lender against
loss due to problems or defects related to the title on
the property being mortgaged. These problems would typically
involve ownership claims against the property which were
not identified by the title search. It is paid for with
a one-time premium at the time of settlement.
Q: What is an FHA or
VA mortgage?
A: Federal Housing Administration (FHA) or Veteran's
Administration (VA) mortgages are loans insured by the
respective governmental agencies. FHA programs enable
lenders to arrange financing for the borrower with a minimal
down payment. Similarly, VA programs (available to veterans
only) can be made to a borrower who has little or no down
payment. When borrowing under these programs, you will
pay a Mortgage Insurance Premium (FHA) or a Funding Fee
(VA) to insure the mortgage. This is similar to private
mortgage insurance on a conventional loan. These insurance
premiums may be paid out-of-pocket at the time of closing
or financed by increasing the mortgage amount.
Q: What is a conventional
mortgage?
A: A conventional mortgage is a loan not obtained
under a government insured program such as FHA or VA.
Conventional mortgage loans are typically held by institutional
investors such as banks or insurance companies.
Q: What
are escrows?
A: Escrows are funds collected with the borrower's
monthly payment and accumulated to pay for items such
as property taxes or hazard insurance as they come due.
Escrows are also collected at settlement to start the
escrow account. Escrowed funds can also be referred to
as holdbacks, reserves, or impounds.
Q: What is an ARM?
A: Adjustable rate mortgages (ARMs) are loans on
which the interest rate is periodically adjusted to coincide
with prevailing interest rates. The interest rate is tied
to an index which may go up or down during the life of
the loan. The payment on an ARM will change at intervals
defined by the loan contract. The borrower can have lower
initial payments with an ARM, making it easier to qualify
for a mortgage. Alternatively, a borrower could get a
larger mortgage loan with an ARM than with a fixed rate
mortgage.
Q: What is a fixed-rate
mortgage?
A: Under the terms of a fixed-rate mortgage, the
borrower's payment does not change over the life of the
loan.
Q: What is the appraisal?
A: The appraisal is a statement of property value
made by an independent, professional appraiser. It is
done to insure that the value of the property is sufficient
to secure the loan in the event that the borrower fails
to repay the loan in accordance with the provisions of
the mortgage contract. The value is set based on the home
itself and on recent comparable sales of homes close to
the subject property. The appraisal does not necessarily
detect or discuss defects in the property or the title
to the property.
Q: What is the loan
origination fee?
A: This fee covers the lender's administrative
costs in processing the loan. It is often expressed as
a percentage of the amount borrowed (see "points").
Q: What is a flood certification/flood
insurance?
A: A flood certification will identify a specific
property as being within or not within a flood hazard
area as defined by FEMA, a federal government agency.
If the property is within a flood zone, you will be required
to carry flood insurance, protecting you and the lender
from loss due to flood damage.
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