1) What is the difference between the interest rate and APR? I often have folks call and ask what our APR is. What I think they really want to know is the interest rate, as that dictates the monthly payment, but they may have read somewhere that it is all about the APR and that is the number that is meaningful. The truth is, it is meaningful but as a comparative number when stacking up the total cost of a loan. The interest rate is strictly the cost of the money that is borrowed for the loan. The APR is a number based on a formula that takes into account some of the finance costs such as discount points, mortgage insurance and a few other fees and expresses the total as a percent annualized over 12 months. The APR then can be used to compare various loan products against each other to determine the overall best deal. However, the key to this is to understand the products that are being compared. If, for instance you are comparing three 5% down conventional mortgages at three different lenders you will obtain a fair comparison. If however, one lender throws a different kind of loan in the mix-let's say an FHA mortgage that has a higher mortgage insurance cost, lower interest rate and down payment which results in a higher loan amount, you will obtain a higher APR-but it may be the best loan for your situation due to the fact that you only have 3.5% to put down rather than 5%. So the numbers show the most advantageous financial situation, but they may not show the best situation for you.
2) Now that you mention it...what are points?
Um, no, that isn't quite what I had in mind.
Ah...no, that's not it either. When I say "points" I am not speaking of score keeping or finger pointing. I am speaking of discount points, which is a fee you pay to reduce your interest rate. Points are a percent of your mortgage amount. So today, if you wanted a rate of 3.65% rather than 3.75% on an FHA loan, you would be charged .100 points. If you were talking about a $95,000 loan, the cost of that would be $95.00. I have had some folks think that if they pay 1% in points that would reduce their interest rate by 1%. It doesn't work that way. Today on that same FHA loan, the 1% in points or $950.00 would take the interest rate down to 3.375%, so the decrease in rate for the $950.00 would be .375% reduction in rate. Though that .375% reduction would actually save $7313.00 over the thirty years of the loan. So not a bad return for an investment of $950.00 Again, whether or not it makes sense to buy points is an individual decision based on how much money you have available, how long you intend to be in the house or whether you are receiving seller concessions or seller paid closing costs in your transaction.
Which brings me around to...
3) What exactly are closing costs? Closing costs are the fees that are charged to bring the loan to a legal conclusion that results in transferring the property from one party to another plus the cost of processing the loan. The fees that are most often referred to when someone speaks of closing costs are: discount points if any, appraisal fee, credit report fee, underwriting fee, title company fees to under write a clear title, close the loan as well as provide the buyer a title insurance policy, various legal transfer fees, home owner's insurance, interest from the day of closing to the end of the month as well additional monies collected to set up the escrow account so taxes and insurance can be paid on behalf of the buyer in the future. Depending on the type of loan, these costs can range from about $2500 to $3500. It is always important to ask what the total closing costs are including title fees and escrows because lenders will often relay the lender fees only, which are only about half of the fees involved. Never ask "what are your closing costs?" That is a sure invitation to obtain only the lender specific fees.
4) Why is the payment the lender quoted me different than the payment I figured on the mortgage loan calculator I found online? Every website you visit will have a mortgage calculator available. You can punch in an interest rate and a loan amount to get a payment. However, interest rates change daily, so the rate you used and the rate the bank is quoting may be different, and the bank may be putting 1/12th of the taxes and insurance, plus mortgage insurance into their quote. The government loans also have an upfront mortgage insurance or funding fee factor that changes the loan amounts. For instance, FHA has a 3.5% down payment. So if you are purchasing a $100,000 home, what they refer to as your base loan will be $96,500 (Purchase price less 3.5% or $3500 for down payment) but then FHA has an upfront mortgage insurance factor of 1.75% which gets added back into the loan amount which equals a total loan of $98, 188. You may be able to get a ball park figure from an online calculator but don't plan on that payment being your actual number.
lockz.com
5) The rates are awesome When can I lock it in? Do you have a property under contract? That is the first criteria for a mortgage loan lock. There has to be an address to attach it to. Depending on the type of loan, you can lock anywhere from 15 days to 60 days, though typically a mortgage loan transaction takes about 30 days. If you know that the seller can't be out of the property for 40 or 45 days you might choose a 45 day option. There can be charges for extending a lock or relocking a loan so it is important to know exactly when the transaction should close.
6) How do I know what my home is worth? If you are in the buying part of the process an appraisal is one of the items that will be required to satisfy the condition of your loan. Most homes that are marketed through a Real Estate company have had a market analysis done by the listing agent prior to placing the home on the market. The agent will look at homes that have sold recently and are currently on the market and provide an opinion of value to the seller. A buyer's agent will do the same for you prior to writing an offer so you can feel comfortable with your offer. The appraisal will back up the purchase price in most cases. However, the lender will not close the loan if the home doesn't appraise for the sale price. So the appraiser is the final word on value. If you are a seller, you can use your agent's market analysis to get an idea of value or you can pay for an appraisal yourself, though it can't be used as a valuation for the buyer's mortgage loan and it is possible that another appraisal will result in a different valuation. Appraisal isn't a science. It is subjective and the result depends on the comparable properties chosen. A couple things to note are that the values you might find on some real estate web sites aren't necessarily accurate as they are based neighborhood averages. The same can be surmised for the tax assessment value of your home. The values done by the county assessor are based on a method called "trending" which again is an estimate based upon averages for geographic areas of our county. They may be spot on if the homes that have sold are all very close in size and area. But they can be way off the mark too if older homes or older subdivisions are factored in. The last thing to remember with property value is that it changes all the time so any valuation is a snapshot of what is happening in the neighborhood at a specific time. Once six months have elapsed the value may no longer be valid.
So there are today's answers to most frequently asked questions. I will begin to compile a new list for another time. It is interesting what people come up with, operators are standing by.
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