A banker funds
its own loans. Usually, bankers later sell these loans to investors
such as Fannie Mae or Freddie Mac. A broker submits processed
loans through banks, savings and loans or bankers and receives
a fee from the entity that funds the loan in exchange for the
broker's service.
A loan with
no points requires the borrower to pay fees such as escrow, title
insurance; appraisal, recording, etc. Some fees are charged by
the bank and some fees are outside services required to close
a loan. (For more info about closing costs: 
).
A no cost loan has no points and no fees. The interest rate for
a no cost loan is generally .125%-.375% higher in rate than a
no point loan. Only larger loan amounts lend themselves to doing
a no cost loan.
A broker receives
compensation from the lender in exchange for soliciting and packaging
the loan for underwriting, and for providing service to the borrower
throughout the loan process. Brokers generally submit their loans
to the wholesale division of the banks, savings and loans and
mortgage bankers. These entities discount the loans to the brokers
because the brokers do the lion's share of the work. A lender
can fund many more loans in a wholesale division with fewer employees
by using the broker's resources and expertise. Therefore, it benefits
these lenders to solicit the broker's loan business. In addition,
it benefits the borrowers to use the broker's expertise since
it costs them nothing extra and exposes them to so much more loan
product.
It makes no
difference to the broker if the borrower does a no cost loan,
a no point loan or a loan with points, the broker is compensated
in all of these instances equally. Therefore, it is not necessary
for a broker to steer a client into a specific loan in order to
"line his own pockets." A reputable broker will always
keep the borrower's needs at the top of his list.
A discount
point is a loan fee paid to the lender to buy down the interest
rate for a set term. For example, if a 30 year fixed rate loan
is offered at 6.25% for no discount points, the same loan could
be bought down to a rate of 6% for the entire 30 years in exchange
for the borrower paying one point. One point simply means one
percent of the loan amount. An origination fee is the fee charged
to arrange the loan. Often origination fees and discount points
are used interchangeably.
The answer
is…sometimes. Buying money is just like buying an outfit.
You never know if it will go on sale the day after you buy it.
If you plan on keeping the loan and the property for a long time
(more than 5 years), then buying down the interest rate on a long
term loan could make sense. On the other hand, if the rates drop
really low and you can refinance to a better rate, you would have
wasted money on buying down the interest rate because you didn't
hold onto the loan. In the case of a purchase, paying a point
at closing to buy down your interest rate is tax deductible in
the year the point is paid. In that case, there is a double benefit.
The actual
interest rate you pay on a loan will most times differ from the
APR. The 'interest rate' is the actual rate you are paying on
the money you have borrowed. The APR is the cost of the loan in
percentage terms taking into account the various loan charges,
including interest, PMI, origination fees, etc. The APR is calculated
by spreading these charges over the life of the loan which results
in a higher rate than the interest rate shown on the Note or Deed
of Trust.
P.I.T.I. stands
for Principal, Interest, Taxes & Insurance. It is a term that
is used in the mortgage industry to refer to a person's total
housing obligation.
This is where
a good mortgage broker comes in handy. Many lenders have many
different requirements for obtaining home financing. The broker
will be able to look at your income and financial situation to
determine how much of a loan you can qualify for. It is very important
to determine this before shopping for homes, so as to avoid making
an offer on a home you really can't afford.
Because the
property is the collateral for the loan, most lenders will require
an appraisal to ensure the value is accurate. Some lenders will
do an automated appraisal, or AVM, which searches the surrounding
sales in your neighborhood and uses those to determine your property's
value.
Common closing
costs include escrow fees, title insurance, document recording
and loan points and fees. Sometimes the seller/buyer will pay
a portion of the fees as a concession on a purchase transaction.
For more info about closing costs:
Yes, if your
loan amount is large enough. It is the same process as doing a
no cost loan on a refinance. You will just end up paying a higher
interest rate, usually about .125% to .375% higher than if you
paid fees.
It depends
on how long an escrow the seller is asking for. The average escrow
lasts 30 days, but some may want more or less time. The average
time to process a loan on a refinance is 30 days.
H.O.A. stands
for Homeowners Association. It is a group that governs a subdivision,
condominium or planned community. The association collects monthly
fees from all owners to pay for maintenance and upkeep of any
common areas, including community centers, swimming pools, health
club facilities and landscaping. They also handle legal and safety
issues and enforce the covenants, conditions, and restrictions
(CC&R's) set by the developer.
A type of
insurance that protects the property insured against specified
losses such as fire, tornadoes, earthquakes, etc. Often, mortgage
lenders require borrowers to maintain an amount of hazard insurance
on the mortgaged property that is equal to the cost it would be
to rebuild the dwelling. Often times, a homeowner will add liability
insurance and extended coverage for personal property.
A conforming
loan is a loan that does not exceed the maximum loan amount allowed
for the most common mortgage investors. The current conforming
limit on a single family residence is $417,000 or below. Loans
that exceed this amount are referred to as non-conforming or "jumbo
loans". The rate on a jumbo mortgage is generally higher
than the rate on a conforming mortgage.
Buyers and
Sellers nowadays are more savvy than previous generations. This
is due to the fact that with the internet, there is much more
information at their fingertips in regards to home loans and internet
listings of homes for sale. But even with all the information
they can get off the internet, there are some things that Realtors
can provide that the average buyer or seller do not know. Realtors
study market trends and have specific knowledge of the area where
they work. They are also able to negotiate on your behalf. It
is their fiduciary duty to get you a fair deal.
A loan with
no points requires the borrower to pay fees such as escrow, title
insurance; appraisal, recording, etc. (Link this to the closing
cost sheet again). Some fees are charged by the bank and some
fees are outside services required to close a loan. A no cost
loan has no points and no fees. The interest rate for a no cost
loan is generally .125%-.375% higher in rate than a no point loan.
Only larger loan amounts lend themselves to doing a no cost loan.
NO! They can
only suggest that you use their lender. Often times a builder
will require you to at least apply with their lender to ensure
you qualify for the loan, but they cannot require you to use them.
It is important to find a lender or broker you are comfortable
with.
An impound
account is an account established by the lender to pay a borrower's
tax and insurance costs. The borrower's monthly mortgage payment
is increased to cover these costs, with the additional amount
being held in the impound account and distributed by the lender
when the payments are due.
Mortgage insurance
(commonly called PMI) is an insurance plan that protects the lender
in the event the borrower does not repay a loan. Mortgage insurance
is required if a loan amount is more than 80% of the value of
the home. There is a premium that the borrower must pay that is
usually built into the monthly payment. It can usually be removed
in 2 years with a new appraisal providing evidence the loan amount
is now less than 80% of the home's value. Some lenders offer "No
MI" loans above 80% loan-to-value but those loans just have
a higher interest rate to cover the cost of the mortgage insurance.
A "traditional"
second mortgage, generally referred to as a home equity loan,
is a mortgage that is fixed for the entire term of the loan. You
borrow money and pay principal and interest on it for the term
of the loan, just like a car payment. The terms can be anywhere
from 5 to 30 years, sometimes with a balloon payment at the end.
A home equity
line of credit is an adjustable rate loan that acts like a credit
card and is tied to the equity in your home. You have a set limit
and you can borrow and pay back as much as you want, up to the
limit of the line. You only pay on what you borrow, and you can
make interest only payments for up to 10 years on some equity
lines. After the interest only draw period the line converts to
a fully amortized repayment period (principal and interest) from
5 to 25 years, depending on the lender.
What
are the pros and cons of each?
Home Equity
Loan
Pros: The rate is fixed for the entire term, your payment never
changes, you pay principal and interest for the entire period.
Cons: You have to borrow all the money at once; paying a large
principal pay down does not adjust your payment in any way.
Home Equity
Line of Credit
Pros: Only borrow what you need, only pay interest on the money
you borrow, interest only period allows for lower monthly payments,
during the interest only draw period if you make a principal pay
down your payment will decrease.
Cons: The rate is adjustable and generally equity lines have a
lifetime interest rate cap of 18% or more. If you make the minimum
interest only payment, you are not paying down the principal on
the loan.
Introduction
As more people learn about the versatility of reverse mortgages,
this financial planning tool has gained significant popularity.
Today, record numbers of consumers are using reverse mortgages
to remain in their homes to supplement their retirement income,
pay for health care expenses, make home modifications, or simply
establish a cash revenue for emergencies.
Pre-qualification
is when someone, like a mortgage broker, looks at your credit
report, loan application, income documents and bank statements
and determines whether or not they think you can qualify for a
loan, based upon their knowledge of the lender's guidelines. The
benefit of pre-qualification is that you have an idea of what
amount and payment you can qualify for and you can begin to look
for a home.
Pre-approval
is when all of those documents are actually submitted to the lender
and the lender issues a conditional approval. The benefit of pre-approval
is that you have actual approval from a lender, which can be a
better bargaining tool when it comes to making an offer on a home.
A prepayment
penalty is a fee that a lender may charge if you pay off your
mortgage within a specific time period of obtaining the mortgage.
It is generally a fee equal to a certain percentage of the loan
amount, or equal to a certain number of months interest. Larger
loans will generally have a much larger prepayment penalty amount.
Once your
refinance is complete and the money has been transferred to your
account, it's yours to spend as you like. The lender cannot dictate
how you spend the money.
Depending
on your income, credit score and reserve money, you may qualify
for 100% financing. This is usually only available to people with
good credit who can prove their income. Most lenders require at
least 5% of the purchase price for a down payment.
Debt-to-income
is the relation between what you make (income) and what you owe
(debt). To calculate your debt-to-income ratio, you use your gross
monthly income, before tax, and your total monthly debt payments
including credit cards, installment and mortgage obligation, including
taxes and insurance. You divide the monthly debt amount by the
monthly gross income and that number is your overall debt-to-income
ratio. Most lenders require that your debt-to-income ratio be
45% or below but some lenders will allow you to go as high as
50%.
Fannie Mae,
also seen as FNMA (Federal National Mortgage Association) purchases
home mortgages, thus serving as a source of funds for mortgage
lenders. It is a privately owned corporation whose shares are
traded on the New York Stock Exchange, but it is subject to the
strict supervision of the secretary of the US Department of Housing
and Urban Development (HUD).
Freddie Mac,
also known as FHLMC (Federal Home Loan Mortgage Corporation) is
a publicly owned, government-sponsored enterprise that buys qualifying
residential mortgages from lenders, packages them into new securities
backed by those pooled mortgages, provides certain guarantees,
and then resells the securities in the open market.
A "full
doc" loan is when a borrower can prove the income they need
to qualify for the loan. This usually includes paycheck stubs,
W2s and in some cases tax returns.
Many borrowers
who are self-employed have a hard time proving their income due
to the large write-offs they have on their tax returns. Because
of this problem some lenders offer "stated income" loans.
Stated income mortgage loans allow the borrower to state their
income, rather than document it. For self employed borrowers,
this solution typically requires at least two years of self employment
(must be proved).
A 1031 Exchange
is a way of structuring a sale of a property so that the proceeds
of the property being sold are used to buy another "like
kind" property. In order to reap the full benefits, the property
must be exchanged for one of an equal or greater value, and all
proceeds from the sale must be used to obtain the new property.
The idea behind the 1031 Exchange is that since the taxpayer is
merely exchanging one property for another property(ies) of "like-kind"
there is nothing received by the taxpayer that can be used to
pay taxes. In addition, the taxpayer has a continuity of investment
by replacing the old property. All gain is still locked up in
the exchanged property and so no gain or loss is "recognized"
or claimed for income tax purposes.
If you are
just beginning to shop for that new home, then the home purchase,
loan acquisition and loan closing process could take up to 90
days or more. If you are refinancing, the loan process will be
considerably shorter. However, to assure having your interest
rates be at the current level, you should arrange for a rate lock
now. Some lenders offer a "lock and shop" commitment
while you are trying to locate your dream home.
Your Credit
