frequently asked questions about mortgages
		What do I need to do to apply for a loan? Do I need to have a property to apply for a loan? What is needed at application? What are points? Is a no-cost loan really no cost? What does a rate lock mean? What is mortgage insurance? What is a conventional loan? Should I choose a fixed rate or adjustable rate loan? Is there a benefit to paying extra each month? What do I need to do to apply for a loan? The process of applying for a home loan can be as simple as placing a phone call to your preferred financial information. top Do I need to have a property to apply for a loan? The most efficient way of shopping for a home is to know ahead of time the financing for which you qualify. One step better is to have the lender approve you for a specific loan amount so that you, the realtors, and the seller will know that you are able to complete the transaction. top What is needed at application? Generally, the lender will require proof of employment and income in the form of paystubs and/or tax returns and proof of assets in the form of bank and brokerage statements. Usually, this docu- mentation and a credit report is sufficient for the lender to determine whether the borrower can afford the requested loan amount. If a property is identified, then an appraisal, property condition report, and preliminary title report will be required along with a complete copy of the purchase contract. top What are points? A point is 1 percent of the loan amount. "Discount points" generally vary inversely with the rate quoted, that is, the lower the rate quoted, the higher the amount of points charged. Discount points are used to adjust the yield on the loan to the institution providing the money. Origination points, such as is common for FHA and VA loans, are generally charged by the lender to offset the lender costs of administering the transaction. top Is a no-cost loan really no cost? There is no free lunch, not even in mortgages. Every real estate financing transaction has costs for processing the application, appraising the subject property, administering the transaction, escrow, securing title insurance, etc. In a typical "no-cost loan" the lender agrees to pay all of the costs of the transaction for the borrower in exchange for the borrower paying a higher interest rate on the loan. Depending on the individual borrower's circumstance, this may or may not be a "good deal." top What does a rate lock mean? Many borrowers do not want to be surprised at the close of the transaction with a rate which is higher than what was quoted at the beginning of the process. Hence, many borrowers ask that the lender commit or "lock" the initial rate quoted for a period of time sufficient to close the transaction. When a rate is "locked" the lender is being asked to guarantee the price of a commodity, the price of which changes daily (check out the daily changes in the bond market, which is a measure of the price of money on a daily basis). The longer the lock period, the riskier the position of the lender, hence the higher the loan price (points) charged the borrower. top What is mortgage insurance? Mortgage insurance, often called "private mortgage insurance," or PMI for short, insures the lender against loss which could be incurred should the borrower not make payments and the loan goes into default. It is the kind of insurance which allows lenders to make loans when the borrower's down payment is less than 20%. The term "mortgage insurance" is sometimes confused for a mortgage redemption life insurance policy which is used to payoff the balance of the mortgage in the event of the borrower's death. Yes, it can be confusing. Homeowners insurance, also referred to as hazard insurance, is your traditional insurance used to protect the borrower/homeowner against loss from fire, weather, etc. top What is a conventional loan? A conventional home loan is one which is not guaranteed by the Federal government. This is not true of FHA-insured and VA guaranteed loans. top Should I choose a fixed rate or adjustable rate loan? This often depends on the financial situation of the borrower. Generally, if the borrower plans to be in the home seven to ten years or more, fixed rate loans offer greater long-term payment certainty. For shorter anticipated stays, an ARM or ARM hybrid will usually offer lower payments compared to fixed rates. top Is there a benefit to paying extra each month? If you have a surplus of cash over your essential family needs, and as long as you do not afoul any pre-payment penalties, which may be in your loan, paying extra each month can reduce the term of the loan. For example, making the equivalent of one extra payment each year can take eight years off a 30 year term. With a "bi-weekly" mortgage the borrower makes 26 and a half payments, or 13 full payments, or one more payment than 30 year loan term by eight years. Something to think about top
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