Essential Tips And Information For Borrowers

IT'S MY HOPE THAT THIS INFORMATION WILL HELP YOU BECOME A MORE INFORMED BORROWER MAKING A MORE INFORMED DECISION. YOU MAY WISH TO REVIEW THIS INFORMATION BEFORE APPLYING FOR YOUR LOAN.

Prepay Penalty- This is a provision in your mortgage agreement with the lender that states that in the event you pay the mortgage off entirely before a certain number of years, you will pay a penalty. Prepay penalty periods generally range from 1 to 3 years. They may be soft prepays meaning that you can sell the property without incurring the penalty but cannot refinance.

A hard prepay means you cannot sell or refinance during the designated period without incurring the penalty. Prepay amounts assessed vary by lender but are usually six months worth of interest. Many prime borrowers opt for a prepay penalty because they can receive a lower interest rate. If you know you will have your house for at least three years it makes all the sense in the world to get the lowest rate possible. Obviously, if you intend to flip house, the prepay penalty can get in your way.

ARM (Adjustable Rate Mortgage)- An adjustable rate mortgage is a loan tied to an index. In the U.S., indexes include the rolling average of the 12 month treasury bond (MTA), the LIBOR (London InterBank exchange rate), COFI (cost of funds rate) and several others. When you agree on an adjustable rate loan you will receive a margin rate which stays the same during the life of the loan. What will change is the index it is tied to. The index can change monthly, every six months or annually dependent on your particular loan. You need to know these factors before you get into the loan.

As an example, if your agreed upon margin is 2.20% and it is tied to an index such as the MTA which may be at 4.80% currently, your mortgage rate therefore will be 7.00% (2.20+4.80). Remember, your margin stays the same during the life of the loan. Your index is the only factor that can change. Your loan officer should show you historical date on the various indexes and with this information you can decide on the best index for your loan.

Pay Option ARM Loan- This is the loan program you have heard alot about. It's an adjustable rate loan that typically gives you the choice of four payment each month. For an example, the lowest payment amount can be 1%. This is a negative amortization payment that means your loan balance will increase by the difference between that payment and your full interest payment. Please know that you also have the choice to make a payment anywhere between the negative amortization payment and the full interest payment meaning that you decide each month what amount of interest if any to defer. With an example of a $400,000 30 year amortized loan amount at 7.0% interest, your four payment options each month would be;

1% Start Rate Deferred Interest Payment= $1,287/ month
Full Interest Payment= $2,334/ month
30 Year Fully Amortized Payment= $2,661/ month
15 Year Fully Amortized Payment= $3,595/ month

You may desire this program if you need payment flexibility. Perhaps your earnings are uneven or you own a second home or investment property and want to have maximum payment flexibility. This program would also let you tap into some of your dormant home equity to pay off high interest non-tax deductible credit card debt or college costs. This is a great plan to create long term wealth if it is utilized correctly and responsibly.

Interest Only Loan- This is a loan which offers an interest only payment over a designated period such as 3, 5, 7, or 10 years. After that period it becomes an adjustable rate loan tied to a specific index. This loan can be very helpful to people who receive their income unevenly over the year or if you wish to start with lower payments during the first few years of your loan. If you feel flush at any time over the year you can always send in money to pay down the principle, usually up to 20% of the outstanding loan amount per year. This program gives you great flexibility. It's currently one of the most popular loan programs available.

Mortgage Insurance- This is usually required by any lender giving you a loan that is over 80% of the homes appraised value. The cost per year added to your mortgage can be 1% of the mortgage amount. If a borrower wants to pay only 10% down on a property they will typically receive a 1st mortgage at 80% loan to value and a 2nd lien at 10% thus eliminating the need for mortgage insurance.

Title Insurance- This is required by state law and is a part of your closing costs. This insurance protects the lender from undetected liens that may be found after the loan closes. Your mortgage professional can quote you the cost of this through his or her title company. Rates charged are fairly uniform and are dependent on the size of your loan.

Closing Costs- These are costs associated with the closing of your loan. You would expect them to include processing fees, title insurance, escrow fee, notary services, underwriting, appraisal fee, recording fee, partial loan interest, buy down points if applicable. The important thing is that you have all costs explained to you line by line by your loan officer which is generally done through the Good Faith Estimate. This will avoid surprises. Buy-Down Points- You want to consider buy-down points when it can save you money. A point represents 1% of the loan amount. Generally, you would want to consider paying points to reduce your interest rate if you intend to have the loan for a number of years. Here's one example …

Loan amount= $416,000 at 6.75% interest only = $2,340 per month.
Loan amount-=$416,000 at 6.125% interest only= $2,123 per month.

If you pay 1.5 points to lock in the 6.125% rate you will save a total of $13,020 in interest over just 5 years. The buy-down will cost you $6,240 (1.5% of $416,000) and is tax deductible as interest expense. In this example you will save $6,180 in interest during those first five years by paying the 1.5 point buy-down ($13,020 minus $6,240). It is worth your while to have your loan officer calculate if a buy down will save you unnecessary interest expense. Once you have the information it will be easy for you to decide.

Appraisal- While applying for your home loan you will be required to have a property appraisal. This is done by a licensed appraisal professional and fees are usually $350 to $400. In most cases, your appraised value will reflect sales prices over the past 4 to 6 months for comparable properties in your geographic area. Your loan officer can offer you a list of qualified appraisers to choose from.

Full Doc Loan- This is where a borrower provides income documentation as part of the loan application. Documentation usually includes tax returns for the past two years, W-2's and certain bank statements. A full documentation loan generally offers lower interest rates.

Stated Income Loan- This loan allows the borrower to state his/her income without providing actual documentation. Interest rates are sometimes higher with this program depending on the lender and the borrower's credit score.

DTI- This is the Debt To Income ratio. Each lender has various debt to income ratios they require for various loan programs. Your mortgage professional will know what range of DTI is required for various loans. Typically DTI ratios range from 35% to 50% of your gross income. Your loan officer will be able to tell you what ratio is required.

1031 Exchange- A 1031 Exchange permits investment property owners to sell a property and defer tax payments by reinvesting the proceeds into a like-kind investment property or properties. This is allowed by Section 1031 in the Internal Revenue Code. You will want to read this tax code for full details.

Why Refinance?- You may wish to refinance your current loan if it can lower your costs, reduce your payments and/or generally improve your economic situation. The old standard was that you should refinance if you can save two points in interest. That was true years ago but now with the cost of refinancing dropping it's never the wrong time to think about a new loan. An effective mortgage professional can easily show you your options. After you study your options including terms and conditions, your decision should be a rather easy one. The determinant factor is…if it will help me financially I should definitely refinance.

Likewise, if it doesn't help me than I should not refinance. Just remember, a refinancing is intended to improve your current economic situation. If it can save you money and you fail to do it, it is the same as throwing away your hard earned money. All you need to do is gather the facts and make an informed decision. The intention of this web site is to give you the tools necessary to make that informed decision.