- What is the difference between fixed rate and variable rate (ARM) mortgages?
- How do adjustable rate mortgages work?
- What are escrow accounts and how much do I need in my escrow account?
- What is APR?
- What are "Points"?
- What is PMI?
- What does LTV mean?
- What if the appraised value on a home is less than the purchase price?
- What is the difference between "Pre-Qualified" and "Pre-Approved"?
- What are the advantages of being Pre-Approved?
- What documents will I need to bring to a loan application?
- How do I know how much I can afford?
- How much do I need as a down payment on a home?
What is the difference between fixed rate and variable rate mortgages?
A fixed rate mortgage is a loan where the principle and interest payment never change during the life of the loan.
A variable rate mortgage is a loan where the interest rate can change periodically. The changes in the interest rate are tied into the market rates that exist at the time the rate is subject to change. They usually offer lower interest rates than fixed rate mortgages, but can adjust upward if interest rates go up. There is a predetermind cap which defines how high the interest rate can adjust.
Fixed rate mortgages are beneficial to those who are on a fixed income, and those who prefer fixed payment schedules.
Adjustable rate mortgages are advantageous for those who do not plan to stay in their home for a long time, for those borrowers who do not qualify at higher fixed interest rates, and those who can financially accomodate fluctuating payments.
How do adjustable rate mortgages work?
There are many types of adjustable rate mortgages, but all have some common features.
One common feature of adjustable rate mortgages is an interest rate change that occurs after a stipulated number of payments have been made. The interest rate can increase or decrease depending on how the new interest rate is calculated. Typically, the interest rate change is based upon a predetermined index value and a margin. If a mortgagor currently has an interest rate that is pending adjustment, the new rate would be calculated by adding the current index rate and a margin. For example, if the mortgagor’s current rate was 6.000% with a 2.000% margin, the new rate would be determined by adding the current index rate (5.000% as an example) to the margin. In this example the new interest rate would be 7.000%.
The maximum amount the interest rate can change during any adjustment period is usually fixed. This maximum adjustment is called the "cap." Adjustable rate mortgages also have a lifetime cap, preventing the interest rate from exceeding a predetermined rate.
What are escrow accounts and how much do I need in my escrow account?
Escrows are payments made by a mortgagor to a mortgagee for the purpose of paying the mortgagor’s taxes, insurance, and other payments associated with home ownership. The mortgagee is responsible for the timely disbursement of escrow funds to pay the mortgagor’s bills as they come due.
Usually, a mortgage company collects funds for placement into the mortgagor’s escrow account with the mortgagor’s periodic payment for principal and interest. An escrow account has sufficient funds if there is enough to pay all bills when they come due.
It is common practice for mortgage companies to hold an "escrow cushion" for a mortgagor. The "cushion" is kept by the mortgage company to assure that if the cost of any escrowed item were to increase in the future, there would be sufficient funds to pay all bills as they come due.
The Annual Percentage Rate (APR) is the cost of your credit expressed as an annual rate. Because you may be paying loan discount "points" and other "prepaid" finance charges at closing, the APR disclosed is often higher that the interest rate on your loan. This APR can be compared to the APR on other loan programs to give you a consistent means of comparing rates and programs.
Points are prepaid interest. By paying points the lender collects interest up front and the borrower may be able to obtain a lower interest rate on their mortgage. A point is 1% of the mortgage amount. As an example, 1 point on a $100,000 loan would be $1,000.00.
PMI stands for Private Mortgage Insurance. This insurance, provided by non-government insurers, protects a lender against loss if the borrower defaults. PMI insurance is required on any loan with a LTV (Loan To Value) of greater than 80%. The amount of coverage depends on the loan program and the level of down payment. PMI costs more on a Loan with 5% down than a loan with 15% down.
LTV means Loan-to-Value. The loan balance is compared to the purchase price or the value of the home. For an example, a loan balance of $80,000 on a home valued at $100,000 would carry an LTV of 80%.
What if the appraised value on a home is less than the purchase price?
The appraised value takes precedence over the purchase price. If a $100,000 home is appraised at $98,000, the loan-to-value will be based on the appraised value, not what the borrower paid for the home.
What is the difference between "Pre-Qualified" and "Pre-Approved"?
There is considerable difference between being "Pre-Qualified" for a mortgage and being "Pre-Approved." Generally becoming pre-qualified only requires a brief discussion with a loan officer outlining credit, income, debts and liabilities with no actual verification of this information. Obviously a borrowers picture can change if the information given at the pre-qualification meeting cannot be verified. On the other hand a Pre-Approval actually approves a borrower for a pre determined amount pending only the appraisal of the home selected to purchase. All information about the borrower's credit history, income, debts, liabilities and work is verified before a Pre-Approval status is given.
What are the advantages of being Pre-Approved?
The advantages are many:
- Sellers take an approved buyer more seriously when making an offer on the home.
- Approved buyers may gain a competitive advantage in negotiating with the seller.
- Realtors work harder for Pre-Approved buyers.
What documents will I need to bring to a loan application?
There are a number of documents to bring that will assist your loan officer completing the application quickly. Find out here.
How do I know how much I can afford?
Before you start looking for a home you need to speak to a Shore Mortgage® loan officer who is trained to make an accurate determination upon reviewing your financial situation and employment history.
How much do I need as a down payment on a home?
It is probably less than you think! Many first time buyers are surprised to learn there is no set answer and often times you can move in with nothing down. Generally your down payment can be anywhere from three percent to twenty percent of the home's value. Veterans or those on active duty can also move into a house with nothing down. Shore Mortgage® even has programs that will finance 103% of the value of the home.