MORTGAGE Frequently Asked Questions

The APR, or Annual Percentage Rate, is often higher than the quoted interest rate, or note rate. This is because the APR includes, in addition to interest, some of the additional costs of obtaining your financing. Simply stated, if there were no costs in obtaining financing, your note rate and your APR would be the same.

Your APR will be noted on your Truth-in-Lending disclosure that you receive after application

A point equals one percent of the loan and is usually paid at closing.

For example, if your loan amount is $100,000…then one point would equal $1,000 OR one percent.

Discount Points are fees paid by the buyer to the lender to reduce the loan's interest rate. If you plan to keep your residence for five or more years, it may be worthwhile to pay discount points to reduce your monthly payment and achieve greater savings over the life of the mortgage.

The number of discount points required to buy down your interest rate will vary based on the loan type.

Generally speaking, points are tax deductible when you are buying a primary residence. Consult your tax advisor for more information on tax deductibility

An appraisal is the estimate of the value of the home you are purchasing and is provided by a professional appraiser, trained in estimating the value of real or personal property.

A copy of the appraisal is provided to you at closing.

Surveys determine whether there has been an encroachment on the property lines, building lines or easements. If your home is new construction, the builder may order the survey just after completion or just before closing. Although we recommend that all buyers purchase a survey, they are not required on most mortgage products in Georgia. In Florida & North Carolina, they are required on all mortgage products

Closing will typically take place at an attorney or title agent's office. The attorney or title agent represents the lender - not the seller, real estate agent or you - the buyer.

Your Realtor will give you instructions on where the closing will be conducted, along with a phone number and a fax number for the closing attorney or agent in case you have any questions for him.

All borrowers associated with the loan transaction will be required to bring a government issued photo ID such as a driver's license or passport to closing.

Here's what you can expect to happen at the closing table:

• The closing agent reviews the HUD-1 Settlement Statement with both you and the seller. Next,
• Evidence of required insurance and inspections are presented. Then,
• Signatures are collected for loan documents including the HUD-1, mortgage or deed note and the Truth-in-Lending statement. Next,
• You submit a certified or cashier's check to cover your down payment and closing costs. Or, in some proceedings, money is drawn from an escrow account established for your home purchase. Then,
• The Lender provides a check to the closing agent to cover the home loan amount. If your monthly payments are to include property taxes and insurance, a new escrow account (or reserve) is established.
• Finally, you receive the keys to your new home

What are credit scores?
A credit score (such as FICO - developed by Fair Isaac & Co and used by Experian, or BECON – developed and used by Equifax or EMPIRICA – developed and used by Trans Union) or credit scoring is a method of determining the likelihood that a credit user (you) will pay their bills. Fair Isaac began its pioneering work with credit scoring in the late 1950’s. Since then scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this practice to be acceptable.

Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information that best predict future credit performance. Developing these models involves studying how thousands, even millions, of people that have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower's credit history considering many factors such as:

• Late payments
• The amount of time credit has been established
• The amount of credit used versus the amount of credit available
• Length of time at present residence
• Employment history
• Negative credit information such as bankruptcies, charge-off’s, collections, etc.
   

There are really three credit scores computed by data provided by each of the three bureaus––Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score and still others may use all three.
 

How can I increase my score?
While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.

• Pay your bills on time. Late payments and collections can have a serious impact on your score.
• Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
• Reduce your credit card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.

If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score. (Normally lenders like to see you have at least five (5) lines of credit not including utilities (such as telephone, gas and electric companies) and oil company credit cards.

What if there is an error on my credit report?
If you see an error on your report, to rectify it, you must contact the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, we as your mortgage company may help you correct this problem as well. Understand this process takes time, must be done in writing, and may require proof depending on the nature of the error.

Why are interest rates different from day to day and one source to another?
To understand why mortgage rates change we must first ask the more general question, "Why do interest rates change?"

Interest rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers (those who loan the money) can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.
 

This leads to a fundamental concept:

• Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).

Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).
 

A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real estate prices, higher rents on apartments and higher mortgage rates.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up!

There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity––typically $1000. If the price of the bond is currently at $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 10 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.

Do I need flood Insurance?
Most lenders will not lend you money to buy a home in a flood hazard area unless you pay for flood insurance. Some government loan programs will not allow you to purchase a home that is located in a flood hazard area. Your lender may charge you a fee to check for flood hazards. You will be notified if flood insurance is required. If a change in flood insurance maps brings your home within a flood hazard area after your loan is made, your lender or service may require you to buy flood insurance at that time.

What are your rates?
The first question customers usually ask when calling a mortgage company or lender is "What are your rates?" Because of the number of mortgage programs available and the various rate and point combinations, most mortgage companies have rate sheets that are 5-10 pages long.

Getting a rate quote is just a small part of shopping for a mortgage and usually not the best way to select a lender. Customer service, professional staff, convenience, and flexibility are some of the key attributes to selecting the best lender for your needs.

In helping you assess a rate, you will need to provide answers to a few basic questions like:

• What is your purchase price?
• What loan amount are you looking for or what loan amount do you want to finance?
• Do you prefer a fixed rate or an adjustable rate mortgage?
• How long do you plan to live in the house?

How many points are you willing to pay?
 

The purchase price or the value of your home effects the rate because it effects the size of the loan. For example, Jumbo Loans, currently over $240,000, have a higher rate. Similarly, smaller loans have a higher rate or cost more because it cost the same and takes the same effort to do $35,000 loan as it does a $200,000 loan. Lenders and brokers need to make or charge a certain minimum amount of money to cover overhead, per loan (transaction) cost and make a profit.

The type of loan, fixed or variable for example, affect the rate because they affect the lenders income & inflation risk. For example, with a fixed rate loan, if rates go up the lender could lend out money at a higher rate than they are currently loaning it to you, and therefore earn more money. With a variable rate loan since the rate the lender can charge you changes regularly their income remains consistent with their current income opportunities.  Therefore with variable rate loans they give you a better rate since they know that if rates go up they can charge you more.

The length of time you will own a house affects both the type of loan you may want and the amount of points it may make sense to pay. For example, if you are going to keep a house for a short period of time (let’s say 3 years), you may be better off with a variable rate loan (e.g. a 3/1 ARM – fixed for 3 years and varies once a year every year there- after until the loan is paid off). Why? Because typically the 3/1 ARM has a lower rate associated with it than a 30 year fixed rate loan and since you will sell the house in 3 years you would not be affected by higher rates which may exist at that time. On the other hand, if you expect to live in the house for 30 years you might be willing to pay some points to receive a lower interest rate now. The lower interest rate would save you money every month over the life of the loan. The total savings in this situation should be greater than the cost of points, giving consideration to the amount that the point money could earn if invested (saved) after taxes.
 

What happens if my loan gets sold or my lender goes out of business?
The simple answer is nothing. You will still have to pay your mortgage. The terms of your mortgage will not change nor will the requirement for you to pay on time change. The only thing that would change is to whom you make out your check.

Does zero points really mean zero points?
What about no closing costs loans?
The answer is maybe. Remember there are more then one type of Points (Discount and Origination) not to mention a Mortgage Broker fee which is expressed as points. Remember that the lender and broker needs to make a living. Therefore the more lines on the closing statement or good faith estimate that says zero the more likely the rate you are paying is higher than it otherwise would be. Also, it is often unclear what a lender or broker means by no closing costs or no point loans. Sometimes the lender or broker will increase fees to compensate for the lack of points or a more favorable rate.

Should I refinance?
Yes, if it saves you money or converts you out of a mortgage type you don’t want. The saving money is obvious but not necessarily easy to calculate.