Mortgage Terms in Depth
What
is a "good faith" estimate?
It is an estimate of the fees that you will pay to
close your loan.
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What
is a cash-out option?
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 housing-to-income ratio?
Your income, debt, and mortgage payments are the primary
factors that affect whether you qualify for a loan.
If you do qualify for a loan, you can apply, and National Mortgage Center
will move to the next step of checking to see if you
can be approved.
To determine your qualification, the first thing National Mortgage Center
will do is divide the monthly payment of your proposed
loan by your gross monthly income. This provides your
housing-to-income ratio. If the resulting percentage
falls within a certain range, the next step is to divide
your total monthly debt by your gross monthly income.
This provides your debt-to-income ratio. Again, if the
ratio falls within prescribed limits, you are qualified
for the loan.
The limits within which your housing and debt ratios
must fall are determined primarily by the size of the
loan, the value of the property, and the ratio between
the two (known as the loan-to-value ratio, or LTV).
This loan-to-value ratio is one of the most important
factors in determining a home loan.
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What
is an appraisal and who completes it?
The appraisal determines the value of the property
in question, which becomes a prime factor in determining
the loan-to-value - or LTV - ratio (the amount of your
loan divided by the value of your property). Your LTV
is important because it determines your equity in the
property. With the exception of leveraged equity and
some second mortgages, National Mortgage Center will arrange an appraisal
of your property to verify its value. An appraiser is
an authorized professional who estimates the value of
the property and sends the information to National Mortgage Center
and to you.
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What
is an impound/escrow account?
An impound account or an escrow account (the terms
are interchangeable; each is used in different states)
is the name of the account in which a lender collects
payments you make toward your property taxes and hazard/fire
insurance. If you have an impound/escrow account, each
of your monthly payments will contain a fraction of
your annual property tax and insurance costs. Your lender
keeps these funds in the impound/escrow account and
then pays your taxes and insurance directly when they
become due.
An impound/escrow account can be a convenient and trouble-free
manner of ensuring that your insurance and tax payments
are made on time. Additionally, choosing the convenience
of an impound/escrow account allows National Mortgage Center to offer
you a better rate or lower fee. Please note that impound/escrow
accounts are mandatory for purchase or refinance Loans
where the loan amount is 80.01 percent or more of the
property value (loan-to-value ratios of 80.01 percent
or more), unless otherwise restricted by laws in your
property's state (in California, impound accounts are
required for refinance loans, purchase loans with LTV
of 90 percent or greater, and for second mortgages with
LTVs of 80.01 percent or greater).
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What
is an income-to-debt ratio?
Your income, debt, and mortgage payments make up your
income-to-debt ratio. These are the primary factors
that affect whether or not you qualify for a loan. If
you do qualify for a loan, you can apply, and National Mortgage Center
will move to the next step of checking to see if you
can be approved. To determine your qualification, the
first thing National Mortgage Center will do is divide the monthly
payment of your proposed loan by your gross monthly
income. This provides your housing-to-income ratio.
If the resulting percentage falls within a certain
range, the next step is to divide your total monthly
debt by your gross monthly income. This provides your
debt-to-income ratio. Again, if the ratio falls within
prescribed limits, you are qualified for the loan.
The limits within which your housing and debt ratios
must fall are determined primarily by the size of the
loan, the value of the property, and the ratio between
the two (known as the loan-to-value ratio, or LTV).
This loan-to-value ratio is one of the most important
factors in determining a home loan.
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What
is an owner's estimate of value?
For the 125% Freedom loan product, National Mortgage Center relies
on your estimate of the value of your property. You
can estimate the value by reviewing neighborhood comparable
properties (comps). A good way to do this is to simply
call a local real estate agent. You can also visit open
house events in your neighborhood. This may give you
an indication of what prices are being asked for various
properties.
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What
is PITI?
PITI is the acronym for Principal, Interest, Taxes
and Insurance. That is, each month your payment to your
lender will consist of:
-
Funds to be applied to the principal - to
repay the actual money you borrowed
-
Funds to be applied to the interest - to
repay the interest you're being charged on the loan,
over the life of the loan
-
Funds being collected in an impound/escrow account
to pay your property taxes when they come
due
-
Funds being collected in an impound/escrow account
to pay your hazard/fire Insurance when it
comes due
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What
is PMI?
Private Mortgage Insurance (PMI) is usually mandatory
for loans when the ratio of the loan amount to the value
of the subject property is greater than 80 percent;
that is, 80.01 percent or more of the property is being
paid for by the loan. This is known as the loan-to-value
ratio, or LTV. Basically, the lower your loan-to-value
ratio, the higher your equity in the property will be.
You can think of equity as the part of your property
you actually own. If you sold your property (for its
appraised value), equity is the amount of cash you'd
have left after you repay your loan balance in full.
Common wisdom holds that the more equity a borrower
has in a property, the lower the risk of defaulting
on the loan. Thus, Private Mortgage Insurance (PMI)
must be paid for lower equity (high LTV) loans to safeguard
the lender from possible loan defaults.
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What
is prequalification vs. preapproval?
National Mortgage Center simultaneously gives prequalification and
preapproval based upon the information you provide in
the online application. Because this preapproval is
based on information provided to National Mortgage Center verbally
and as set forth on the application, it is considered
conditional loan approval.
The conditional approval is subject to the verification
and/or receipt of additional information. Once all closing
conditions and lender requirements are satisfied, the
loan will receive final approval.
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What
is roll in refinancing?
Rolling in your loan costs is especially attractive
when refinancing. By rolling in your costs, you incur
no expenses, thus you have no "payback period." The
payback period is the time required to recoup the cost
of your new loan through the monthly savings you get
from the difference between your new lower payments
and your old ones. For example, if your new loan's payments
are $100 a month less than your old one, but you had
to pay $1,200 to refinance, you'd have a payback period
of 12 months before you'd actually start saving. By
rolling in the cost of your refinance, your actual savings
begin immediately. Rolling in your costs is particularly
appropriate if you're planning to sell or refinance
again in a few years because, in this case, it doesn't
really matter that your loan amount is higher as long
as you enjoy savings right now.
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What
is the difference between an Equity Line of Credit and
another type of second mortgage?
An Equity Line of Credit is money in an account that
can be used as you need it. You can use any portion
of it at any time and pay it back at any time. The interest
rate is usually variable and is tied to the prime rate.
Other types of second mortgages, such as the Home Equity
Loan and 125 percent Freedom Loans are simple interest
products. You borrow a lump sum and pay it back over
a period of years with interest. The interest rate for
these products is fixed.
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What are closing costs?
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 income, debt, and mortgage payments?
These are the primary factors that effect whether you
qualify for a loan. In order to determine if you qualify
for a loan, your lender will calculate two defining
ratios: the housing-to-income ratio and the debt-to-income
ratio. The first of the two ratios, the housing-to-income
ratio, is calculated by dividing the monthly payment
of your proposed loan by your gross monthly income.
If the resulting percentage falls within a predetermined
range, the lender will then go on to calculate your
debt-to-income ratio. The debt-to-income ratio is calculated
by dividing your total monthly debt by your gross monthly
income. Once again, if this ratio falls within prescribed
limits, the lender will qualify you for the loan. The
limits within which your housing and debt ratios must
fall are determined primarily by the size of the loan,
the value of the property, and the ratio between the
two (known as the loan-to-value ratio, or LTV). This
loan-to-value ratio is one of the most important factors
in determining a home loan.
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What are prepaid interest and impound/escrow
funds?
Prepaid interest and impound/escrow funds are costs
generally associated with a mortgage. At the time of
closing your loan, a lender will often require you to
provide the funds to establish your impound/escrow accounts
(so your taxes and insurance can be paid on time) and
to pay the interest for the time period between the
loan closing date and the end of the closing month.
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What are rates, terms, and APR?
All mortgages have an interest rate, a term, and an
annual percentage rate (APR). For example, a mortgage
might be defined as a 30-year fixed-rate loan at 7.625
percent, with an APR of 7.800 percent. In this example,
the mortgage term is 30 years. As the borrower, you
will pay back the loan in installments over the course
of 30 years.
The interest rate in this example is 7.625 percent.
This means you must pay interest on the money you've
borrowed at a rate of 7.625 percent per year. That is,
in addition to paying back the loan, you will pay your
lender an additional 7.625 percent of the current loan
balance every year. This interest is basically the fee
your lender charges you in return for lending you the
money.
The annual percentage rate (APR) is a measure of the
cost of credit, expressed as a yearly rate. Because
APR includes points and other costs such as origination
fees, it's usually higher than the advertised rate.
The APR allows you to compare different mortgages based
on actual annual costs.
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What is "locking in a rate"?
You can secure your rate by completing a written agreement
in which National Mortgage Center guarantees a specified interest
rate for a specified period of time. Locking in a mortgage
rate protects you against interest rate changes from
the date of the rate lock until the date of the closing
as long as your rate lock has not expired. Should interest
rates rise during that period, National Mortgage Center is obligated
to honor the committed rate. Should interest rates fall
during that period, you must honor the lock.
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What is a mortgage?
A mortgage is a loan you acquire in order to purchase
property, but you can also get cash for other purposes
using the property as equity. In return for the loan,
you pledge real property (land and/or a building) as
security in case you fail to live up to your obligation.
When you borrow money against property, you commit
to two financial documents:
-
The NOTE that is a personal obligation to repay
the loan on a timely basis
-
The MORTGAGE DEED OF TRUST that is the pledge of
the property as security; the mortgage deed of trust
defines your obligations to your lender, as well
as your rights and those of the lender.
You are pledged to repay the mortgage loan, along with
an additional charge for the lender's service of lending
you the money.
The cost of borrowing the money is the interest rate
specified in your note. The amount of time you have
to pay back the loan is the note's term.
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What is amortization?
Amortization means paying down your principal. You
repay your loan in monthly installments. If you have
a fixed mortgage (that is, an interest rate that remains
fixed for the entire term of the loan), 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 principal).
The balance of the principal (what you still owe at
any given time) 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.
You can create an amortization schedule for fixed loans
when they are originated. This schedule will show how
much of each payment will go toward interest and how
much will go toward principal over the life of the loan.
As your principal decreases, your equity in the mortgaged
property increases. Equity is a very important factor
in mortgage financing.
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What
is equity?
Equity is a crucial aspect of home loans. 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 percent equity in his or her property.
Equity exists in conjunction with your loan-to-value
ratio (or LTV). Your LTV is a ratio expressing the value
of your property to the amount of your loan. You determine
your LTV by dividing your loan amount by your property's
value or selling/purchase price, whichever is lower.
For example, you buy a $100,000 home with a $20,000
down payment of your own money, and cover the remaining
$80,000 with a mortgage - 80,000 divided by 100,000
gives you a loan-to-value ratio of 80 percent and equity
of 20 percent.
Equity and LTVs are important because lenders prefer
a borrower to have as much equity as possible. Traditional
wisdom holds that the higher the LTV on a loan, the
higher the risk of default; alternatively, the higher
the equity, the lower the risk - and therefore the lower
the interest rate, cost, and fees associated with doing
the loan. Equity also determines how much a lender will
allow you to refinance your property for and how much
they will lend you for a second mortgage.
Another way to think of equity is as the amount that
you'll receive when you sell the property and pay back
the remaining loan balance. Again, for a $100,000 house
bought with an $80,000 loan and sold for $100,000, you
would get $20,000 in cash back - or 20 percent of the
home's value.
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