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Frequently Asked Questions About Mortgages/Buying a Home

October 6th, 2013

Can I apply for a mortgage before I find a house? Yes, which most real estate and mortgage professionals will tell you is the best thing to do. Applying for a mortgage ahead of time is called getting pre-qualified. When you’re pre-qualified, you are given a letter assuring you that you will most likely be approved (unless any major changes to your credit or income occur) for a certain amount of money. Getting pre-qualified allows potential buyers to look at homes in the right price range, and it assures real estate brokers and sellers that someone is a serious, qualified buyer.

What determined interest rates?  A variety of factor affect interest rates, including inflation, overall economic conditions and the Federal Reserve policy. Inflation has the biggest impact on rates, and when inflation rises, so do rates.

What is an escrow account? Escrow is an arrangement when a third party account is established to hold and distribute funds as part of a contract. The homebuyer who borrowed funds is typically required to pay into escrow for real estate taxes and home insurance as part of their monthly mortgage payment. Those bills go directly to the lender, who then withdraws the funds and pays on the buyer’s behalf. Buyers typically must put a certain amount into escrow at closing, but not all lenders or mortgages require escrow accounts.

What are closing fees? Obtaining a home loan often involves fees that vary from state to state and from lender to lender. Fees include appraisal fees, title charges, state or local taxes and a lender fee. Third party fees are for services by third parties that are required as part of the transaction, including the credit report fee, the appraisal fee and the survey fee. The lender is not making any money off these fees, as they cover bills for these services. Lender fees cover the work the lender did for the mortgage, such as loan document preparation fees.

What is a Fixed Rate Mortgage? The most conventional type of mortgage, the fixed rate mortgage has an interest rate that stays the same throughout the life of the loan, usually 15 or 30 years. While fixed rates are higher than adjustable rates, many homebuyers like being able to anticipate their mortgage payment for years out. If interest rates drop after a homebuyer has locked in their mortgage rate, they can pay to refinance to a lower rate.

What is an Adjustable Rate Mortgage? An adjustable rate mortgage is different from a fixed rate mortgage in that the rate you pay can change during the life of the loan. When you have an ARM, there are preset intervals where your mortgage rate can go up or down depending on the economy and general rate changes.

In most cases, the initial interest rate of an ARM is lower than a fixed rate mortgage because there is more risk and unknown involved. The life of an ARM loan is typically shorter than a fixed rate mortgage. To protect buyers from extreme increases, most ARMs have caps-limits on the amount of interest you can pay.

What is a FHA loan? An FHA-insured loan is a U.S. Federal Housing Administration mortgage that has historically allowed lower income Americans to borrow money for the purchase of a home, since private lenders may not take the risk. FHA loans typically require lower down payments, but they also require borrowers to pay for mortgage insurance.

What does it mean to lock in an interest rate? Locking in an interest rate is a guarantee that you will get a mortgage at a certain interest rate for a specific time period. Interest rates are ever changing, so the interest rate a loan officer quotes you one day may not be the exact rate you lock in a week later. Rate locks are typically good for a few weeks to 60 days, so you want to lock in a rate once you’ve signed a purchase agreement on a home. While a longer duration gives you more time to get the loan completed, it also means rates can change more drastically, for good or bad.

What does loan to value mean? Loan to value is the loan amount divided by the lesser of the sales price or appraised value. If you put down 10 percent of the total cost of the home as a down payment, for example, you would only be borrowing 90 percent of the total sales price from the lender. Your loan to value in that case would be 90 percent.

What is a down payment and how much does it cost? A down payment is the money you put down on a house to demonstrate your financial integrity and stake in the home. The amount required for a down payment varies for different loan types, with the lowest amount being 3 percent of the home value, which would be $7,500 for a $250,000 home. The down payment also lowers the amount you have to finance with a mortgage and pay interest on, so for the example above, the financed amount would be $242,500.

What is mortgage insurance? Mortgage insurance protects the lender in the event that a borrower is foreclosed on and cannot pay back the mortgage obligation. Paid for by the borrower, it allows lenders to give loans to people they may otherwise believe to be too high risk. Since the foreclosure crisis, mortgage insurance has become a much more common requirement.

What is refinancing? When mortgage rates drop significantly, borrowers who purchased a home when rates were higher can take advantage of lower rates by refinancing. There is a cost for the new loan application, but the fees can usually be rolled into your loan to avoid out of pocket expenses. It is a good idea to refinance only if your home is worth more than you owe and the amount you will save monthly for the life of your loan is more than the refinancing fees.

What does it mean to be underwater? Being underwater means you owe more on your home than it is worth. It is a worse type of debt that simply having a mortgage, because the amount you owe is more than your asset’s value, putting you in the red. This happens when there is economic downturn and property values decline, such as during the mortgage/foreclosure crisis. It can also happen if you sell your home less than five years after you purchased it, during which time property values stay about the same. It usually takes owning a home for at least five years to yield a return.

Do most lenders require a home appraisal? What is that and why? A home appraisal is when a third party property expert, other than the seller or potential buyer, determines the value of a home. It is a way to protect both the buyer and lender because it avoids having the buyer pay more for a home than it is worth. Most lenders will not finance a home for more than it is appraised at due to mortgage security.

Do most lenders require a homeowner’s inspection? No. The buyer usually requests an inspection take place as a condition of the purchase to ensure they are not buying a home that has any major undisclosed issues. If issues come up, the buyer may go back to the seller and request that the contract (sale price or conditions of sale) be modified.

Acadia Lending Group LLC

190 Riverside Street Unit 4B
Portland , Maine 04103

Phone: 207-899-4500

Fax: 207-899-4503

NMLS: 370636

 

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