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What is APR (Annual Percentage Rate)? |
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Appraisal Basics |
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What is a rate lock? |
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What is amortization? |
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What is a FICO (Credit) score? |
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What is a "Good Faith" estimate? |
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What are closing costs? |
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What are loan points? |
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What is a rebate? |
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What is a "no cost loan"? |
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What is title insurance and why do I need it? |
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What is PMI? |
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What is a cash-out option? |
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What is a Piggy-Back Loan? |
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What is the difference between a conforming loan and a jumbo loan? |
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What is a negative amortization loan? |
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What is the difference between the rate and APR? |
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Is comparing APR's the best way to decide which lender has the lowest rates and fees? |
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What is an adjustable rate mortgage? |
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What is prepaid interest? |
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What is overlapping interest? |
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What is equity? |
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What is a IRS-4506 form? |
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What's the difference between a home equity loan and a refinance? |
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What is a Home Equity Line of Credit? |
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What is an impound/escrow account? |
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What is homeowner's insurance? |
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What is APR (Annual Percentage Rate)? |
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The Annual Percentage Rate, or APR, is the cost of the borrower's
credit expressed in terms of an annual rate. Because the borrower
may be paying "points" and other closing costs, the APR disclosed
is often higher than the interest rate on the loan. The APR can be
compared to other loans for which the borrower may have applied
and give them a fair method of comparing price.
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Appraisal Basics |
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An appraisal of real estate is the valuation of the rights of
ownership. The appraiser must define the rights he intends
to appraise.
The appraiser does not create value, the appraiser interprets
the market to arrive at a value estimate. As the appraiser
compiles data pertinent to a report, consideration must be
given to the site and amenities as well as the physical
condition of the property. An appraiser may spend only a short
time inspecting the property, however, this is only the
beginning.
Considerable research and collection of general and specific
data must be accomplished before the appraiser can arrive at a
final opinion of value.
Due to the many types of value, such as Fair Market Value,
Insurance Value, Tax Value and Value In Use, the need to precisely
define the purpose of the appraisal is essential.
Appraisal To Obtain Loan
Usually, individuals applying for a loan are only interested in
obtaining the loan and unfortunately are not worried about the
prudence of buying the property at the agreed price. In fact,
many purchasers will try to encourage appraisers to increase
the appraised value so that they can purchase the home regardless
of its value.
The majority of real estate appraisals are requested by mortgage
companies to validate the property's purchase price for loan
purposes. Except for periods of very low interest rates when
everyone is refinancing, most loans are for the purchase of
real estate and ordered after a sale price is negotiated.
Purchasers mistakenly assume that mortgage companies are looking
after their interests in the purchase transaction.
The law states that if the mortgage company orders the appraisal,
the appraiser is responsible only to the mortgage company. We expect
mortgage companies to be prudent and they should be, but being
prudent is protecting their interest, not necessarily the purchaser's.
The mortgage company's position:
It has two sources of repayment: the purchaser's income and the
property.
The responsibility to repay the loan is not based upon the property's
value, so the purchaser is obligated to pay the note even if the
property value declines to zero.
The loan may be insured or guaranteed by a government agency.
The government does not promise to pay the purchaser's debt if the
property value is wrong. If the loan is greater than 80% of the value,
a portion of the loan may be insured by a private mortgage insurer.
There is no decrease in risk for the purchaser regardless of the
loan-to-value ratio. The investment by the purchaser is the same,
a mixture of personal cash and a loan that must be repaid.
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What is a rate lock? |
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A rate lock is a lender's guarantee on your loan's interest rate
and point payment. You can only lock your rate once you have
identified a property. Until you request a rate lock, the rate
and point are considered to be "floating", in other words are
subject to change due to market fluctuations.
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What is amortization? |
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Amortization means paying down your principal. You repay
your loan in monthly installments. If you have a fixed
mortgage, your payments will always be the same amount.
Part of the payment goes toward the payment of the
interest, and part toward the repayment of the money
you've borrowed.
The balance of the principal is reduced with each payment.
As a result, your monthly payment will pay the principal
in increasing amounts over time. With a fixed interest
rate, the amount of interest you owe will decrease as
your principal balance decreases.
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What is a FICO (Credit) score? |
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A FICO score is computed based upon a statistical analysis of your
credit history and patterns.
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What is a "Good Faith" estimate? |
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It is an estimate of the fees that you will pay to close your loan.
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What are closing costs? |
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Closing costs are sometimes also called settlement costs.
These are the costs a lender charges for funding and
completing your loan and are generally charged at the
time of closing (or settlement). They often include
Discount Points, which are fees paid to lower your
interest rate. Settlement costs/closing costs vary
greatly depending on your state, county, and/or
metropolitan area. They also vary from one lender to
another, so it pays to shop around.
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What are loan points? |
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Points are paid to reduce the interest rate you pay on
a loan. Each loan "point" is equal to one percent of
the loan amount. Your decision on whether or not to
pay points depends on how long you plan to keep the
loan, your tax situation, and other factors.
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What is a rebate? |
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Rebates are credits paid to the borrower by the lender
for taking an interest rate higher than the zero point
interest rates. The lender hopes to recapture the rebate
paid by collecting the higher interest rate over the life
of the loan.
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What is a "no cost loan"? |
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Using lender rebates to offset all normal loan-closing costs
creates a no cost loan. To obtain the rebates, the borrower
must take a higher interest rate and the lender hopes to
recapture the waived fees in the form of additional interest
earned over the life of the loan.
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What is title insurance and why do I need it? |
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If you've ever purchased a home before, you may already be
familiar with the benefits and terms of title insurance. But
if this is your first home loan or you are refinancing, you
may be wondering why you need another insurance policy.
The answer is simple: The purchase of a home is most likely one
of the most expensive and important purchases you will ever make.
You, and especially your mortgage lender, want to make sure the
property is indeed yours: That no individual or government
entity has any right, lien, claim, or encumbrance on your
property.
The function of a title insurance company is to make sure your
rights and interests to the property are clear, that transfer
of title takes place efficiently and correctly, and that your
interests as a homebuyer are fully protected.
Title insurance companies provide services to buyers, sellers,
real estate developers, builders, mortgage lenders and others
who have an interest in real estate transfer. Title companies
typically issue two types of title policies:
- Owner's Policy. This policy covers you, the homebuyer.
- Lender's Policy. This policy covers the lending institution
over the life of the loan.
Both types of policy are issued at the time of closing for a
one-time premium, if the loan is a purchase. If you are
refinancing your home, you probably already have an owner's
policy that was issued when you purchased the property, so we'll
only require that a lender's policy be issued.
Before issuing a policy, the title company performs an in-depth
search of the public records to determine if anyone other than
you has an interest in the property. The search may be performed
by title company personnel using either public records or, more
likely, the information contained in the company's own title
plant.
After a thorough examination of the records, any title problems
are usually found and can be cleared up prior to your purchase
of the property. Once a title policy is issued if any claim,
which is covered under your policy is ever filed against your
property, the title company will pay the legal fees involved
in the defense of your rights. They are also responsible to
cover losses arising from a valid claim. This protection
remains in effect as long as you or your heirs own the
property.
The fact that title companies try to eliminate risks before
they develop makes title insurance significantly different from
other types of insurance. Most forms of insurance assume risks
by providing financial protection through a pooling of risks for
losses arising from an unforeseen future event, say a fire,
accident or theft. On the other hand, the purpose of title insurance
is to eliminate risks and prevent losses caused by defects in title
that may have happened in the past.
This risk elimination has benefits to both the homebuyer and the
title company. It minimizes the chances that adverse claims might
be raised, thereby reducing the number of claims that have to be
defended or satisfied. This keeps costs down for the title company
and the premiums low for the homebuyer.
Buying a home is a big step emotionally and financially. With title
insurance you are assured that any valid claim against your property
will be borne by the title company, and that the odds of a claim
being filed are slim indeed.
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What is PMI? |
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Private Mortgage Insurance is charged on loan amounts exceeding
80% of the purchase price of a home. It is also charged on
loan amounts refinanced that exceed 80% of the value of the
property. The mortgage insurance protects the lender against
loan default.
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What is a cash-out option? |
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If your equity in your property qualifies, you can refinance
with a loan amount greater than your current mortgage - and
keep the difference! Use it for home improvement, debt
consolidation, or whatever you desire.
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What is a Piggy-Back Loan? |
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A Piggyback Loan is designed to eliminate PMI. Two loans are
closed concurrently - an 80% 1st mortgage and a 10% or 15%
2nd mortgage. This allows the borrower to purchase a property
with just 5% or 10% down. On an 80/10/10, the rate on the 1st
mortgage is the same as if the borrower puts 20% down. On an
80/15/5, the rates are slightly higher on both the 1st and
2nd mortgages. The 80/10/10 is our most popular financing
package for Jumbo purchases.
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What is the difference between a conforming loan and a jumbo loan? |
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A conforming loan is one that is less than the maximum loan
amounts set be Fannie Mae and Freddie Mac. Jumbo loans are
loans that exceed these limits. The loan amounts are revised
each year to reflect the change in the national average cost
of a home. The current conforming loan amounts limits are:
- $333,700 for a Single Family Home or Condo
- $427,150 for a 2-unit property
- $516,300 for a 3-unit property
- $641,650 for a 4-unit property
The conforming loan limits are 50% higher for the states of Hawaii
and Alaska.
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What is a negative amortization loan? |
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A negative amortization loan has a low monthly payment but
accrues interest at a higher rate. Because the borrower is
not paying enough to cover the interest accruing on the loan,
it is added to the balance of the loan each month. Be cautious
of loans advertised with very low rates such as 3.95% or 4.95%.
Your initial payment will be calculated using this rate but the
loan will generally accrue interest at the rate calculated by
adding the current index to the loan margin. Add the index
rate to the margin to determine the true cost of the loan.
Often times a 3/1 or 5/1 ARM, or even a 30-year fixed, will
give you a lower cost of borrowing. We would only recommend
negative amortization to sophisticated individuals who are
seasoned investors in a cash flow business.
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What is the difference between the rate and APR? |
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The note rate is used to calculate your interest payment each
month. The APR (Annual Percentage Rate) is a calculation based
on standardized federal regulations. In addition to the
interest rate, it factors in other finance charges such as
certain loan fees, to show the total cost of the financing
over the scheduled life of the loan. The APR is designed to
help borrowers fairly compare different lenders and loan
options.
Please note that the loan amount will influence the APR
calculation, with higher loan amounts reporting lower APR
calculations. To get a true comparison, the same loan amount
must be used. Lenders like Shearsons Mortgage allow you to input
your loan amount into their Web sites, which generally calculates
an accurate APR. Beware of lenders that just display a rate
chart on their Web site; these Web sites are reporting an APR
for a set loan amount and your APR will be different.
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Is comparing APR's the best way to decide which lender has the lowest rates and fees? |
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The Federal Truth in Lending Act requires that all financial
institutions disclose the Annual Percentage Rate (APR) when
they advertise a rate. The APR is designed to present the
actual cost of obtaining financing, by requiring that some,
but not all, closing fees are included in the APR calculation.
These fees in addition to the interest rate determine the
estimated cost of financing over the full term of the loan.
For adjustable rate mortgages, the APR can be complex. Since no
one knows exactly what market conditions will be in the future,
assumptions must be made regarding future rate adjustments.
You can use the APR as a guideline to shop for loans but you
should not depend solely on the APR in choosing the loan
program that's best for you. Also, the APR doesn't include all
the closing costs. Look at total fees, possible future rate
adjustments (for ARM loans) and the length of time you plan to
have your mortgage.
Don't forget that the APR is an effective interest rate - not
the actual interest rate. Your monthly payments will be based on
the actual interest rate, the amount you borrow, and the term of
your loan.
You may also want to use the Fannie Mae True Cost Calculator
available in our Calculator or FAQ Section to help you compare
mortgage options.
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What is an adjustable rate mortgage? |
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An adjustable rate mortgage, or an "ARM" as they are commonly
called is a loan type that offers a lower initial interest rate
than most fixed rate loans. The trade off is that the interest
rate can change periodically, usually in relation to an index,
and the monthly payment will go up or down accordingly.
Against the advantage of the lower payment at the beginning of
the loan, you should weigh the risk that an increase in interest
rates would lead to higher monthly payments in the future. It's
a trade-off. You get a lower rate with an ARM in exchange for
assuming more risk.
For many people in a variety of situations, an ARM is the right
mortgage choice, particularly if your income is likely to increase
in the future or if you only plan on being in the home for 3 to
5 years.
Here's some detailed information explaining how ARM's work.
Adjustment Period
With most ARMs, the interest rate and monthly payment are fixed
for an initial time period such as one year, three years, five
years, or seven years. After the initial fixed period, the
interest rate can change every year after. For example, one of our
most popular adjustable rate mortgages is a 5 year ARM. The interest
rate will not change for the first 5 years (the initial adjustment
period) but can change every year after the first 5 years.
Index
Our ARM interest rate changes are tied to changes in an index rate.
Using an index to determine future rate adjustments provides you
with assurance that rate adjustments will be based on actual market
conditions at the time of the adjustment. The index we use is the
U.S. Treasury Securities weekly average. The current value of this
index is published weekly in the Wall Street Journal. The Treasury
Securities weekly average index usually goes up and down with the
general movement of interest rates. If the index rate moves up so
does your mortgage interest rate, and you will probably have to
make a higher monthly payment. On the other hand, if the index
rate goes down your monthly payment may decrease.
Margin
To determine the interest rate on an ARM, we'll add a pre-disclosed
amount to the index called the "margin". The margin used for all
of our ARM products is 2.75%. If you're still shopping, comparing
one lender's margin to another's can be more important than comparing
the initial interest rate, since it will be used to calculate the
interest rate you will pay in the future.
Interest-Rate Caps
An interest-rate cap places a limit on the amount your interest
rate can increase or decrease. There are two types of caps:
- Periodic or adjustments caps, which limit the interest
rate increase from one adjustment period to the next.
- Overall or lifetime caps, which limit the interest rate
increase over the life of the loan.
As you can imagine, interest rate caps are very important since no
one knows what can happen in the future. All of the ARM's we offer
have both adjustment and lifetime caps. Please see each product
description for full details.
Negative Amortization
"Negative Amortization" occurs when your monthly payment changes to
a payment amount less than the amount required to pay interest due.
If a loan has negative amortization, you might end up owing more than
you originally borrowed. None of the ARM's we offer allow for negative
amortization.
Prepayment Penalties
Some lenders may require you to pay special fees or penalties if you
pay off the ARM early. We never charge a penalty for prepayment.
Contact a Loan Advisor
Selecting a mortgage may be the most important financial decision
you will make and you are entitled to all the information you need
to make the right decision. Don't hesitate to contact a loan advisor
if you have questions about the features of our adjustable rate
mortgages.
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What is prepaid interest? |
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Prepaid interest is paid at the time of closing of your loan to
cover the interest that will accrue on your new loan for the
remaining days of the month.
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What is overlapping interest? |
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On a refinance loan, your interest on your new loan begins
on the day your loan funds. Your deed will record the
following business day and then your previous loan will be
paid off. Shearsons Mortgage guarantees that you will not
pay more than two business days of overlapping interest.
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What is equity? |
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Equity is simply the value of a homeowner's unencumbered
interest on real estate. Equity is computed by subtracting
the total of the unpaid mortgage balance and any outstanding
liens or other debts against the property from the property's
fair market value. A homeowner's equity increases as he or
she pays off his or her mortgage or as the property appreciates
in value. When a mortgage and all other debts against the
property are paid in full, the homeowner has 100% equity in his
or her property.
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What is a IRS-4506 form? |
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A 4506 form is an IRS form, which authorizes a mortgage
lender to obtain copies of a borrower's tax returns
directly from the IRS.
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What's the difference between a home equity loan and a refinance? |
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A home equity loan is generally a second mortgage against your
home, meaning it is a loan that you take out using your home as
collateral without paying off your first mortgage. A refinance
typically means that you'll be paying off your existing first
mortgage and replacing it with a new first mortgage.
Determining whether it's best to refinance or to obtain a home
equity loan is very complicated and depends on many factors.
You should consider contacting your tax advisor to determine
what makes the most sense for you.
In general, a home equity loan should be considered:
- The lower the interest rate on your first mortgage is
- The shorter the remaining term on your first mortgage is
- The shorter the term is on the second mortgage you are considering
- The higher the rate and points on a new first mortgage
- The requirement of mortgage insurance for a new first mortgage
Comparing monthly payments of your existing first mortgage and a new
home equity loan as opposed to a new first mortgage should help. You
should also keep in mind the term of each of your loans, especially
if monthly payment is not a significant issue for you.
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What is a Home Equity Line of Credit? |
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A home equity line is a form of revolving credit in which your
home serves as collateral. Because your home is likely to be your
largest asset, you should consider a home equity line of credit
for the purchase of major items such as education, home improvements,
or medical bills and not for day-to-day expenses.
With a home equity line, you will be approved for a specific amount
of credit-your credit limit-meaning the maximum amount you can borrow
at any one time while you have the plan. Since you can get approved
for an amount of credit now and not access the funds until you need
them, a home equity line of credit is a good choice if you simply
want to ability to access cash as you need it.
With our home equity loan, you'll have the ability to access funds,
up to the amount of your credit limit, by simply writing a check.
A supply of checks will be sent to you after closing.
The monthly payment for a home equity loan is typically based on
your daily balance and the daily interest rate.
If you are thinking about a home equity line of credit you also
might want to consider a more traditional second mortgage loan.
This type of loan provides you with a fixed amount of money
repayable over a fixed period. Usually the payment schedule
calls for equal payments that will pay off the entire loan
within that time. You might consider a traditional second mortgage
loan instead of a home equity line if, for example, you need a set
amount for a specific purpose, such as an addition to your home.
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What is an impound/escrow account? |
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Instead of paying large, lump sums to cover the costs of
homeowner's insurance and property taxes, these payments
are divided into installments which are paid to the lender
monthly along with your loan principal and interest. The
lender will hold the money in an impound/escrow account
and make the payments from the account when they are due.
Impound/escrow accounts may be optional, or they may be
required by the lender, depending on the location of the
property, the size of the loan in relation to the value
of the property, and the loan type.
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What is homeowner's insurance? |
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Homeowner's insurance is designed to protect your home.
It is also known as hazard insurance, or fire insurance.
While the lender requires this coverage, you determine
which insurance company will carry the policy. Homeowner's
insurance premiums are either paid directly to the insurance
agency or by your lender through an impound/escrow account.
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