General Mortgage Information
The following will provide some basic mortgage terminology to assist you during the home buying or refinance process.
How/Why do Mortgage Interest Rates Adjust - Long-term mortgage rates are driven by the yield of the ten year treasury note. As the yield rises, so will long-term mortgage interest rates. Remember though that the ten-year treasuries yield moves inversely of the ten-year price. Therefore, if you hear on the evening news that "bond prices fell", that will indicate that the yield rose and thus causing long-term mortgage rates to rise.
Credit Scoring/Effect of Rate - Credit scoring is now a major factor in determining whether or not you will be approved for a mortgage. You have three credit scores. One score from each credit bureau. The range from each bureau is listed below.
EQUIFAX - 300 to 850
TRANS UNION - 395 to 848
EXPERIAN - 375 to 900
In cases of conforming fixed rate mortgages, a higher score does not mean you will receive a better rate. In fact, the aforementioned scenario you are either approved or not approved. The person with the 650 credit score will receive the same rate as the person with a 800 credit score. Generally speaking, any score over 660 is good. As your score breaches the 700 level, it is considered excellent.
Loan Origination Fee - A fee paid directly to a mortgage broker for professional/lending services rendered.
Loan Discount Points - A fee paid directly to a lender to secure a lower interest rate.
Interest Only Loan - An interest only loan is a loan or product where only the outstanding interest that is owed is paid each month. There is no principal added to your monthly payment. In most cases you are allowed to pay principal if you desire but you are not required to. Therefore, presuming you pay the interest only payment and you start with a $200,000 loan, in five years you will still have a $200,000 loan.
Fixed Rate Mortgage - This means the interest rate you pay is fixed at a pre-determined level for the life of the loan.
Adjustable Rate Mortgage (ARM) - This means the interest rate is fixed for a pre-determined amount of time, but not the life of the loan. Once the initial fixed period expires, in most cases, the interest rate rises. Typically lenders will offer a lower starting rate on these types of loans.
Negative Amortization - Negative Amortization occurs when you have an interest rate that adjusts monthly/quarterly with a payment that adjusts annually. These products can literally cause you to go backwards on your mortgage balance and can create a higher loan balance than the one you start with.
**ALTHOUGH CMS HAS INTEREST ONLY AND NEGATIVE AMORTIZATION LOANS AVAILABLE, WE STRONGLY ENCOURAGE ALL CLIENTS TO CLOSELY SCRUTINIZE THESE PRODUCTS PRIOR TO EXECUTION. WE DO NOT RECOMMEND THESE PRODUCTS UNLESS THERE ARE VERY UNIQUE BORROWER PARAMETERS THAT MAKE THE AFOREMENTIONED TYPE OF TRANSACTION BENEFICIAL TO THE BORROWER.
MORTGAGE SUMMARY - All mortgage bankers/brokers basically have the same interest rates and cost structures available for each transaction regardless of what they may tell you. It is imperative to not be misled by dishonest or too good to be true offers when it comes to a long-term financial transaction as important as your home mortgage.
TRUTH IN LENDING
| ANNUAL PERCENTAGE RATE The cost of your credit at a yearly rate A |
FINANCE CHARGE The dollar amount the credit will cost you B |
AMOUNT FINANCED The amount of your credit provided to you on your behalf
|
TOTAL OF PAYMENTS The amount you will have paid after you have made all payments as scheduled D |
Q. What is the Truth-In-Lending Disclosure and why do I receive it?
A. The Disclosure is designed to give you information about the costs of your loan so that you may compare these costs with those of other loan programs or lenders.
Q. What is the ANNUAL PERCENTAGE RATE? (Box "A" Above)
A. The Annual Percentage Rate (A.P.R.) is the cost of your credit expressed as an annual rate. Because you may be paying loan discount "points" and other "prepaid" finance charges at closing, the A.P.R. disclosed is often higher than the interest rate on your loan. This A.P.R. can be compared to the A.P.R. on other loan programs to give you a consistent means of comparing rates and programs.
Q. Why is the Annual Percentage Rate different from the interest rate for which I applied?
A. The A.P.R. is computed from the Amount Financed and based on what your proposed payments will be on the actual loan amount credited to you at settlement. In a $50,000 loan with $2,000 Prepaid Finance Charges, a 30 year term, and a fixed interest rate of 12%, the principal and interest payments would be $514.31. Since the A.P.R. is based on the Amount Financed ($48,000), while the payment is based on the actual loan amount given ($50,000), the A.P.R. (12.553%) is higher than the interest rate.
Q. What is the FINANCE CHARGE? (Box "B" Above)
A. The Finance Charge is the cost of credit expressed in dollars. It is the total amount of interest calculated at the interest rate over the life of the loan, plus Prepaid Finance Charges and the total amount of any required mortgage insurance charged over the life of the loan.
Q. What is the AMOUNT FINANCED? (Box "C" Above)
A. The Amount Financed is the loan amount applied for, minus the Prepaid Finance Charges. Prepaid Finance Charges include certain items paid at or before settlement, such as loan origination, commitment or discount fees ("points"), adjusted interest, and initial mortgage insurance premium. The Amount Financed is lower than the amount you applied for because it represents a NET figure. If you applied for $50,000 and the Prepaid Finance Charges total $2,000, the Amount Financed would be $48,000.
Q. Does this mean I will get a smaller loan than I applied for?
A. No. If your loan is approved in the amount requested, you will receive credit toward your home purchase or refinance for the full amount for which you applied. In the example above, you would therefore receive a $50,000, not a $48,000 loan.
Q. What is the TOTAL OF PAYMENTS? (Box "D" Above)
A. This figure represents the total amount you will have paid if you make the minimum required payments for the term of the loan. This includes principal, interest, prepaid finance charges, and mortgage insurance premiums, but does not include payments for real estate taxes or property insurance premiums.
Q. My Disclosure says that if I pay the loan off early, I will not be entitled to a refund of part of the Finance Charge. What does this mean?
A. This means that you will be charged interest for the period of the time in which you used the money loaned to you. Your prepaid finance charges are generally not refundable, nor is any interest which has been already paid.