Mortgage Q & A
Is there a way to determine how much house I can afford?
Do I have to wait until I’ve found a property to apply for a loan?
Why is an appraisal necessary? Can I use the tax value of the home?
What is a Good Faith Estimate?
What is a Truth-in-Lending statement?
How do I find out what my property taxes will be?
How are my property taxes paid?
Do lenders require any type of inspections before I close on my home?
What’s the difference between a fixed-rate and adjustable-rate mortgage?
How do interest only loans work?
What are points?
What is PMI?
What is APR and why is the Annual Percentage Rate (APR) different from the interest rate?
How often do interest rates change?
Is there a way to determine how much house I can afford?
The best way is to consult with a good mortgage professional. You can try the Affordability Calculator to get a quick estimate of how much you can spend for a house. Use your estimated down payment and monthly mortgage payment to get a ‘ballpark’ idea of how much you can borrow. Results from the Monthly Payment Calculator are based on your loan’s terms, property taxes, and insurance premiums.
Do I have to wait until I’ve found a property to apply for a loan?
No! It is a good idea to get started even before looking at property. By getting approved first, you will know exactly what you qualify for before you begin shopping. Realtors and sellers will know you are a serious buyer because your financing is already arranged. This may be an advantage when making an offer. Lenders take into account your current income, debt and credit history in order to approve you and determine the amount for which you qualify. Once you find a property, and sign a sales agreement, the lender will continue processing your loan.
Why is an appraisal necessary? Can I use the tax value of the property?
Appraisals compare the current market value of your home to other homes in your area that have recently been sold. Tax values can sometimes be higher or lower and may not reflect the actual appraised value of the home. A current appraisal is necessary for the lender to justify the loan amount you’ve requested and is required by our secondary investors. You should not, however, rely on the appraisal for assurance about the condition of your home or as a guarantee of the value of your home.
What is a Good Faith Estimate?
Required by federal law, the Good Faith Estimate (GFE) is a written list of the estimated closing costs associated with your mortgage transaction, including the lender’s charges along with the local closing agent’s charges and fees. It also includes estimated amounts for real estate property taxes and homeowner’s insurance. All lenders must provide you with a GFE when they are making a loan for you.
What is a Truth-In-Lending statement?
Required by federal Law, the Truth-in-Lending statement provides detailed information about the total charges that you will incur over the life of the loan. It includes the Annual Percentage Rate (APR), the amount of interest you’ll pay, the amount financed and schedule of payments, the total of your payments, and late payment charges.
How do I find out what my property taxes will be?
The seller and/or your Realtor should provide you with the current taxes for the property. Property taxes are reassessed from time to time, so this amount may change. Prop 13 limited property taxes in California to no more than one percent of a home’s assessed value. Furthermore, under Prop 13, assessments of property values could not rise by more than two percent per year, unless a property was sold, in which case it could be assessed at a new value which is usually the new sales price. In addition there can be some local taxes, such as those for schools or fire districts, that voters have appoved so the total tax can be somewhat more than 1% of the assessed value. In Sonoma County a rule of thumb is 1.25% of the purchase price will be the total tax. If you would like to confirm what your taxes would be, you can contact the county Assessor Office.
How are my property taxes paid?
It depends on your loan program and state requirements. Generally, if your monthly mortgage payment includes money for property taxes, these funds are held in escrow by the lender and the lender pays your property taxes as they become due. Generally, if your payment does not include property taxes, you are responsible for paying them by the due date mandated by your state.
Do lenders require any type of inspections before I close on my home?
Certain inspections may be required under your particular loan program. However, depending on the home and the location, there are a variety of inspections you may want to consider before you close on your new home even if they are not required under your program, such as:
- Home Inspection
- Pest Inspection
- Water Test (for well water)
- Septic Tank Inspection
- Radon Test
- Survey
- Soil Condtions
What’s the difference between a fixed-rate and an adjustable-rate mortgage?
Fixed-rate mortgages feature a steady interest rate, which is determined when you’re approved for a mortgage. This rate remains the same for the entire term of the loan. With adjustable-rate mortgages (ARMs), the interest rate may vary over the life of the loan.
There are many different ARMs. Interest rates are detemined by different indexes, depending on the lender and the loan program. These indexes are not controlled by the individual bank. Some examples are: average rate of matured treasury securities, the LIBOR or London Interbank Offered Rate (a rate banks charge each other), etc. The ARM interest rate is the index rate plus some fixed margin. You can ask your lender for the history of the index they use. Some indexes are more volatile than others, meaning they can go up or down faster than less volatile indexes. ARM’s also usually have a maximum and minumum rate regardless of the index. Rates can change monthly, yearly or at other intervals.
There are also hybrids. Typically, the interest rate is fixed the first 1 to 10 years and then adjusts or ‘resets’ at pre-determined intervals — usually once a year. For example, a 5/1 ARM will offer a lower, unchanging interest rate for the first 5 years of its term before adjusting every year. Every time your ARM’s rate adjusts, your monthly payments may increase or decrease depending on the current rate environment.
How do Interest Only loans work?
A borrower pays interest only payments for the first three, five, seven, or ten years of the loan. During the Interest Only period, the loan will be re-amortized at the remaining principal balance each month, allowing the customer to benefit from any principal payments made during the interest only timeframe.
After the fixed interest only period, the loan payments become fully amortized payments of both Principal and Interest for the remaining term. During this time, the interest rates become adjustable, based on an index such as the one-year LIBOR index plus a margin.
What are points?
A point is 1% of the loan amount. For example, 2 points on a $400,000 loan equates to 2% of $400,000, or $8,000.
You may have the option to lower your home loan’s interest rate by purchasing points, also known as Discount Points. You will pay the point fees at closing and may be able to deduct the point amount as interest on your income tax return. (Consult your tax professional.)
What is PMI?
Private Mortgage Insurance, or PMI, is required when a borrower provides less than a 20% down payment on a house. PMI partially protects the lender from loss if the borrower fails to make his/her mortgage payments.
Generally, when you’ve paid off 20% of your loan, you may ask for the PMI requirement to be removed. Removing PMI will decrease your total monthly loan payment. Requirements for removing PMI vary according to loan program and state.
What is APR and why is Annual Payment Rate (APR) different from interest rate?
The APR (annual percentage rate) is intended to reflect the total cost of your mortgage loan. To calculate the APR, lenders consider the interest rate on your mortgage loan, the term of the loan, and other loan fees such as closing costs, points, etc. In other words if you take the total cost of your loan and divided it by the total month of the loan you get an APR. This was intended to allow consumers to compare loans. For example, a loan with a low rate and very high costs might be more costly overall than a higher rate loan with very low costs.
Your monthly payment is calculated based on the mortgage note rate, not the APR. The APR will be higher than your interest rate, especially if you are paying any points.
To be used as a valid evaluation tool the APR must be loan specific. The actual APR will show up on the Truth-in-Lending statement that you will see once you have submitted your information and reserved your funds. When comparing loan programs based on APR make sure you ask each lender their criteria for determining the APR
How often to interest rates change?
Interest rates change regularly with the fluctuation of the market. This can happen on the same day; rate go up and down with bond market and other factors. The interest rates we quoted on websites may change at any time. This is why you should comparison shop rates on the same day. Of course, once you lock or protect your rate, it will not increase as long as you close and fund your loan on or before the rate expiration date.