FREQUENTLY ASKED QUESTIONS:
What are your interest rates?
How can I get pre-qualified?
What is the difference between a mortgage broker and a mortgage banker?
Should I refinance my current home mortgage?
What are bi-weekly payments and how can they save me money?
What is private mortgage insurance, how is it paid, and can it be cancelled?
Why is the payoff higher than the balance on my current loan?
How are homeowners insurance premiums calculated, and how much insurance do I need?
What tax deductions are involved in homeownership?
What determines a credit score, and how can I improve or maintain my credit rating?
What are your interest rates?
This is the most frequently asked question in our business. The answer is that it depends on a lot of variables. Allow us to point out some of the most important factors that will affect your interest rate:
- Borrowers’ Credit: All conventional loan interest rates are affected by the borrowers’ credit. Lenders not only analyze the “fico” score but other credit factors such as: time out of bankruptcy or foreclosure, the number of open credits reporting, and mortgage late payments, just to name a few. Generally, a 620 fico score is considered a minimum to qualify for “A” paper low interest rates. “Sub prime,” higher interest rate mortgages, are available for fico scores as low as 500.
- Property Type: Investment (rental) property will have a higher interest rate than primary or second home properties, as will multiple unit properties (2-4 units).
- Loan-to Value (LTV): The percentage of the loan amount to the selling price (or appraised value for a refinance loan) can have an effect on your interest rate. This is particularly true for jumbo loan amounts in excess of $1million, “sub prime” credit loans, investment property loans, and loans where full income and asset documentation is not provided. Generally, very high LTV loans (95 to100%) may carry higher interest rates.
- Documentation: Sometimes a borrower is not able to or prefers not to provide a “full documented” loan file. Full documentation normally includes, federal income tax returns & W-2s, two months of complete financial asset statements, and 24 months of employment history. Limited documented loans can mean that income, or assets, or both are “stated” but not documented. A “no doc” loan looks at a borrower’s credit only, as employment, income and assets are left blank on the loan application. Often self-employed borrowers are good candidates for limited documentation loans because their income is not always readily apparent from the tax returns. Limited documented loans may have a higher interest rate depending on other variables in the loan file.
Any of the above factors or a combination of the above may have a direct effect on your interest rate. So when inquiring about interest rates be prepared to, first, answer a few questions so the loan counselor can provide an informed answer.
How can I get pre-qualified?
Becoming pre-qualified for a mortgage is a short but essential first step to purchasing a home. It is a service Legend Mortgage provides for free. The end result for you, the borrower, will be to identify a housing price range that makes you comfortable, or to know if you qualify for the loan amount you will need. You will also learn the interest rate and monthly payment of your desired loan program.
The pre-qualification process can be done in a short meeting or over the phone if necessary. Your loan officer will need to analyze your credit report and ask you a series of questions. The questions will relate to your employment history, current income and financial asset picture. Most importantly, your loan counselor will need to understand all of your objectives for the mortgage loan request. This information will allow your loan counselor to suggest loan options to satisfactorily meet all of your requirements.
At the end of the process you will be issued a signed, mortgage loan pre-approval letter. This can be a powerful document for any potential homebuyer. As a pre-approved buyer, you will find your real estate agent much more motivated to help you find an acceptable home. It is important for your agent to also have a copy of your pre-approval letter, as this letter should be attached to all purchase offers presented on your behalf. This gives you, the buyer, a lot of leverage with home sellers. It lets the seller know you already have your financing in place, and your purchase offer should be weighted heavily against any other offers on the table. It removes any uncertainty the seller may have about your ability to secure financing.
To set up your free pre-qualification consultation, simply call and ask to speak to a Legend Mortgage loan counselor. You can also fill out the information card located on the “Contact Us” tab, and we will call you at the time you specify. We guarantee that you will be happy with the results.
What is the difference between a mortgage broker and a mortgage banker?
Simply put, a Mortgage Broker is a retailer of wholesale mortgage loan products. That is, a Broker can offer a large selection of mortgage loan products from many mortgage lending sources (i.e. banks, savings banks, mortgage bankers). Brokers receive their mortgage pricing (interest rates) from the “wholesale windows” of these lending institutions. This arrangement enables Brokers to offer competitive interest rates on a large and diverse menu of mortgage loan products. In comparison, a bank’s loan officers are usually restricted to offering just that particular bank’s loan products. This is an important advantage when considering the recent explosion of new mortgage loan products available in the market. An experienced Mortgage Broker has the product line and expertise to design a financing package “custom fit” for the Borrowers’ unique purchase or refinance objectives. As mentioned, a Mortgage Broker receives pricing at a wholesale level. Consequently, Brokers can be very competitive in pricing their loan products. Due to this well developed and efficient wholesale structure of lending, Brokers do not add an extra layer of cost or fees to the transaction as is often mistakenly thought. On the contrary, Brokers are usually local business entrepreneurs, adept at controlling overhead and passing the savings on to their customers.
Should I refinance my current home mortgage?
Refinancing may be a good idea for homeowners who fall into the following categories:
- Have an adjustable rate mortgage and would like to have the certainty of a fixed rate mortgage
- Want to build equity quickly by converting to a loan with a shorter term
- Want to draw on the equity in the current home to obtain cash for a major purchase or home improvement
- Want to consolidate credit cards, or other high interest loans into one mortgage
- Want to take advantage of lower mortgage rates
If you are considering a refinance for the sole purpose of obtaining a better rate and payment, this question can be answered by doing a simple break-even analysis. First you will want to figure the total costs of refinancing. Include in this figure: lender fees, title fees, appraisal, etc. (all can be found on your good faith estimate), but do not include prepaid taxes, insurance and interest, as these items will not affect your overall financing picture. Divide this total cost figure by your monthly payment savings to determine how many months it will take you to cover the cost of the refinance. If the number of months you plan to be in your home exceeds this figure, then a refinance may be a good option.
For example: You have figured that it will cost $2500 for a refinance loan that will save you $100 per month. (2500 divided by 100= 25 months). Therefore, you may consider a refinance if you will benefit from a reduced payment after approx. 2 years.
What are bi-weekly payments and how can they save me money?
Just as the name suggests, bi-weekly payments are made every two weeks and are equal to one half of your monthly mortgage payment. Bi-weekly payments can be beneficial as they will assist in paying down your principal loan balance quicker, and will therefore equate to significant interest savings paid over the life of the loan. The reality is that you are making one extra mortgage payment per year. (Figure 52 weeks divided by payment every 2 weeks = 26 half payments or 13 full payments). This extra yearly payment may seem insignificant, but on a $150,000, 30 year fixed mortgage at 6%, you will save $37,000 in interest over the life of the loan and be able to pay off the loan 5.5 years early. Most banks and mortgage companies will accept a bi-weekly payment schedule. You simply have to call a customer service representative to request it.
What is private mortgage insurance, how is it paid, and can it be cancelled?
Mortgage insurance is a type of insurance that helps protect lenders against losses due to foreclosure. This protection is provided by private mortgage insurance companies, such as PMI Mortgage Insurance Co., and allows lenders to accept lower down payments than would normally be allowed. For example: Private mortgage insurance makes it possible for a homebuyer to obtain a mortgage with a down payment as low as 3%. Such mortgages are popular today because potential homebuyers are not always able to accumulate the 20% down payment that is generally required by lenders if a loan is not insured.
The lender pays for mortgage insurance, although they will most always pass that cost on to the borrower. Private mortgage insurance can be paid on either an annual, monthly or single premium plan. Premiums are based on the amount and terms of the mortgage and will vary according to loan-to-value ratio, type of loan, and amount of coverage required by the lender. Premiums are not related to individual borrower characteristics, and therefore are not negotiable.
Mortgage insurance is maintained at the option of the current owner of the mortgage. In many cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. However, the degree of equity in the home is not the only factor that a lender may take into consideration. It is best to contact your lender directly to determine the criteria for cancelling mortgage insurance.
Why is the payoff higher than the balance on my current loan?
Interest on a home mortgage is paid in arrears, or at the beginning of the next month. For example: You pay your January interest on the 1st of February. This also explains why you typically skip one month’s payment after the closing of your loan. A good rule of thumb is to add 75% of your monthly payment to the current loan balance in order to determine your payoff amount.
How are homeowners insurance premiums calculated, and how much insurance do I need?
Once a mortgage transaction has begun, it is important to leave ample time to select a policy and insurance provider. Waiting until the last minute can cause mortgage delays and may end up costing more because there wasn’t time to compare.
A traditional homeowners policy includes four types of coverage: coverage for the structure of the home, coverage for personal belongings, living expenses in case of disaster, and liability protection. When calculating premiums, insurance companies will consider the location and age of the home, the cost of its construction, the replacement value of personal property inside the home, and the individual requests of the homeowner.
If you’re financing, lenders will ask you to carry insurance as a security for their investment. Typically you are required to carry the lesser of 100% of the insurable value of the improvements (replacement cost as determined by the insurer) or 100% of the amount of the mortgage (both junior and senior liens included). Selecting your policy preferences ultimately becomes a personal decision, and one that’s best made with the help of a trusted insurance provider.
What tax deductions are involved in homeownership?
MORTGAGE INTEREST: Your biggest tax break is reflected in the house payment you make each month, since the bulk typically goes towards interest. All of that interest is deductible, unless your loan is more than $1.1 million, then the IRS limits your deductibility.
If you have taken out a loan to purchase a primary and/or second home, or if you have taken out a loan to improve either a primary or second home, you can deduct the interest on any combination of these loans up to $1 million. This means you could buy a home for $250,000, a beach home for $200,000, and add a family room to your first house for another $100,000, and still have $450,000 to spend on these homes for further improvements before you reached your limit for interest deductibility.
Interest tax breaks aren’t limited to your home’s first mortgage. If you took advantage of low rates and appreciating real estate values to pull out cash via refinancing or an equity line of credit, that interest is also deductible within IRS guidelines. This money is referred to as equity debt and can be used for whatever you want: buy a new car, pay college tuition, etc. Generally equity debts of $100,000 or less are fully deductible, unless you have excessively leveraged your home, in which case you may be limited. Because tax laws are constantly changing, consult with your tax advisor for all information regarding mortgage interest deductibility.
PROPERTY TAX: The other major deduction in connection with your home is property taxes. Often your property taxes are paid from the escrow account that your lender has in place for you. Total yearly taxes paid can be found on the annual statement that you receive from your lender. In your first year of ownership, make sure to include any prepaid taxes, found on your settlement statement. As long as taxes were due and paid within the year, they can be deducted for that year. Deductions for prepayment of taxes will have to wait until that year in which they are due.
POINTS: If you paid points to get a better rate on any of your various home loans, you may get a tax break, too. The only issue is when you get to claim it. Points paid on loans intended to purchase, build, or improve a primary residence can be deducted in the year that they were paid. If the loan was put in place to refinance an existing mortgage, purchase or improve a second home, or take out equity debt (unrelated to home improvement) points are still deductible, but must be deducted over the life of the loan.
MORTGAGE INSURANCE: If you were required to pay mortgage insurance as part of your loan terms, you are now able to deduct this premium from your taxes. This rule has been reinstated as of January 1, 2007 and will apply to all mortgage loans regardless of origination date.
WHEN YOU SELL: When you decide to move up to a bigger home, you’ll be able to avoid taxes on the profit you make. Current tax law allows for a $250,000 ($500,000 for married joint filers) exclusion. This means that any profit made on the sale of your primary residence up to $250,000 is tax-free. The rule is that you must have owned the home for two years, and have lived in it for two out of five years prior to the sale. The treasury has identified some unforeseen circumstances that may allow homeowners to get some tax relief even if they have not owned the home for the entire two-year period. For more information on these circumstances or any other tax related information, visit www.irs.gov or consult with a professional tax advisor.
What determines a credit score, and how can I improve or maintain my credit rating?
A credit score is a rating used by a lender to help determine whether you qualify for a particular credit card, loan, or service. Based on information in your credit file, the credit reporting company analyzes your information using a complex mathematical model to condense your credit history into a single number. Credit scores analyze your credit history by considering numerous factors such as:
- Your payment history (Have you paid your accounts on time?) –35%
- The amount of credit used versus the amount of credit available -30%
- Length of credit history (How long have you had credit?) – 15%
- Recent inquiries (Are many different sources searching for your credit?)-10%
- Other factors, including your credit mix (auto vs. mortgage vs. credit cards)-10%
Here are a few general tips to assist you in raising and maintaining your credit score:
- Maintain two to three revolving charge accounts (such as Visa or MasterCard) in good standing. Charge small balances and then pay them off to get started.
- If you have difficulty obtaining charge cards because of previous credit problems, consider asking your local bank for a card “secured” by a savings account.
- Apply for and open new credit accounts only when needed.
- Don’t “max out” your credit cards, as the ratio of available credit to your total credit balances is very important. Keeping your balances below 35% of the total available credit is best.
- Try to limit the number of credit inquiries. If you need a loan, do your comparison shopping within a focused period of time, such as 30 days, to avoid lowering your score.
- Avoid co-signing on a loan for someone else.
- If you have questions or find inaccuracies in your credit report, contact the company that provided it to you.
Equifax: (800) 685-1111 Experian: (866) 200-6020 TransUnion: (800) 888-4213
www.equifax.com www.experian.com www.transunion.com
