What is a fixed rate loan?
What are ARMs?
What is a "rate lock period"? How can I make sure my rate is low?
What is included in closing costs?
Will I need to have homeowner's insurance at closing?
How is my rate determined?
How quickly can I close on my home loan?
Should I talk to a mortgage professional before house hunting?
What is a fixed rate loan?
With a fixed rate loan, your monthly payment of principal and interest never change for the life of your loan. During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan if you want to lock in a low rate for the life of the loan. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can give you more monthly payment stability.
What are ARMs?
ARMs (Adjustable Rate Mortgages) determine what you must pay based on an outside index, perhaps the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others. They may adjust every six months or once a year. Most programs have a "cap" that protects you from your monthly payment going up too much at once. There may be a cap on how much your interest rate can go up in one period -- say, no more than two percent per year, even if the underlying index goes up by more than two percent. You may have a "payment cap," that instead of capping the interest rate directly caps the amount your monthly payment can go up in one period. In addition, almost all ARM programs have a "lifetime cap" -- your interest rate can never exceed that cap amount, no matter what.
You may hear people talking about or read about what are called "3/1 ARMs" or "5/1 ARMs" or the like. That means that the introductory rate is set for three or five years, and then adjusts according to an index every year thereafter for the life of the loan. Loans like this are often best for people who anticipate moving -- and therefore selling the house to be mortgaged -- within three or five years, depending on how long the lower rate will be in effect.
What is a "rate lock period"? How can I make sure my rate is low?
A rate lock or a rate commitment is a lender's promise to hold a certain interest rate and a certain number of points for you for a specified period of time while your application is processed. This prevents you from going through your whole application process and at the end of it finding out the interest rate has gone up.
A rate lock period can vary in length, and longer ones usually cost more. A lender will agree to "hold" your interest rate and points for a longer period, say 60 days, but in exchange the rate and maybe points are higher than with a shorter rate lock period, for example.
There are many ways besides opting for a shorter rate lock period to get a lower rate, though. A larger down payment will result in a lower interest rate than a smaller one, because you're starting out with more equity. You can pay points to lower your rate over the life of the loan, but that means you pay more up front. For many people, this makes sense and is a good deal.
What is included in closing costs?
Closings costs consists of the appraisal, Escrow fees, Title Insurance, processing fees, origination points, and notary fees. Many people pay closing costs when they sign on the dotted line, but many finance their closing costs. Paying closing costs when the loan closes will reduce your interest rate.
Will I need to have homeowner's insurance at closing?
Whether you are refinancing an existing loan or taking out a loan to purchase a new property, you will need one full year of homeowner's insurance in place at the time of closing. You will need to maintain this insurance for the life of the loan.
How is my rate determined?
The interest rate depends on your credit history, debt to income ratio, loan type and market conditions. If you have good credit and your income far exceeds your debt obligations, you will qualify for a lower rate.
How quickly can I close on my home loan?
Once you have signed a purchase agreement, you can begin the process of applying for a mortgage (if you have not already been pre-approved). Once approval has been made, including an appraisal and title search, the loan is ready to close. This process will take from three to six weeks depending on the particulars of your transaction. Please refer to How to Close Your Escrow on Time and The Loan Process.
Should I talk to a mortgage professional before house hunting?
Absolutely! Even if you haven't so much as picked out houses to visit yet, it's important to see your mortgage professional first. When we pre-qualify you, we help you determine how much of a monthly mortgage payment you can afford, and how much we can loan you. We do this by considering your income and debts, your employment and residence situations, your available funds for down payment and required reserves, among other things.
Once you qualify, we give you what's called a Pre-Qualification Letter (your real estate agent might call it a "pre-qual"), which says that we are working with you to find the best loan to meet your needs and that we're confident you'll qualify for a loan for a certain amount.
When you find a house that catches your eye, and you decide to make an offer, being pre-qualified for a mortgage will do a couple of things. First, it lets you know how much you can offer. Your real estate agent will help you decide on an appropriate offer, but being pre-qualified gives you the confidence to know you can follow through. More importantly, to a home seller, your being pre-qualified is like you walked into their house with a suitcase full of cash to make the deal. They won't have to wonder if they're wasting their time because you'll never qualify for a mortgage to finance the amount you're offering for the home. You have the clout of a buyer ready to make the deal right now! You can always use the calculators available on our site to get an idea of how much mortgage you can afford -- but it is important to meet with us to discuss all of the options available to you.
