Mortgage Explained

FAQ

Mortgage FAQ

You’re ready to invest in the home of your dreams. It’s a big step, so research is key. This article will answer all your burning mortgage questions, and more importantly, the questions you didn’t know to ask!

What is a mortgage?

A mortgage is a loan for a piece of property, in this case, a home. A mortgage loan allows you to borrow a large amount of money and then pay it off in monthly installments over a long period of time. In a mortgage the property being purchased is used as collateral for the loan. Collateral is a guarantee that secures the loan. That means that in the event of a default on the loan, the lender gets the collateral as payment. In a traditional mortgage, if you are buying a house, the title to the house is the collateral. In a traditional mortgage, if a default occurs, the lender gets the home.

How do I get a mortgage?

To get a mortgage, first you need to be pre-approved. Pre-approval is determining how much money you are eligible to actually borrow. It involves figuring out how much money you make (your income), what expenses you have, and how much do you have left over to pay for a mortgage. Pre-approvals are your best friend. It is a good thing to have a lender on board that has already agreed to lend you the amount you need to buy your home. If you are pre-approved, then it makes you much more attractive to a seller, since they know that you have already secured financing and are ready to buy.

Sometimes when you find the home of your dreams, there are other buyers who also are interested in the same property. Pre-approval can give you an edge in this situation. In a seller’s market, we encounter many situations with multiple offers. Not only is it absolutely necessary to be pre-approved, it is also important that you have a commitment from a local, reputable lender. To find one, check out our list of preferred lenders on our Community Resources page. We don’t get a kick-back from any of them – it’s simply a list of lenders that we’ve worked with before (that we know will make your life easier and who won’t drop the ball on you).

How do I apply for a Pre-Approval?

To apply for a pre-approval for a mortgage, you will provide the lender your current monthly income, a list of your current debt, a list of your assets, your social security number and your employment information. The lender will run a credit report with the information you provide.

During a pre-approval your lender can provide you with a total amount that they can lend you, the interest rate that they can give you, and the length of the mortgage.

The lender will offer you an interest rate, and a time-frame during which that rate is good. That is called a rate lock-in. The bank guarantees that rate, as long as close on your purchase before the offer expires.

I found my dream home! They accepted my offer! Now what?

Once your offer is accepted and all the terms of the offer have been fulfilled, a closing date will be set. The closing is where you sign the loan documents, all the legal documents to transfer the title, and officially become the owner of your new home. Closings typically happen at a title company office, or at an attorney’s office.

At the closing you will receive a copy of all the legal documents that will be on record regarding the property that you are purchasing. You’ll also receive the final loan documents which will detail how much your monthly payments are, what the total loan amount is, and other related information.

What is included in closing costs?

Here is what you are paying for in the closing costs – some are negotiable and some are not.

Private Mortgage Insurance (PMI)
PMI is required for the majority of mortgages. It is an insurance policy for the bank that you have to pay for. It insures that they will get their money back in the event of a default.

Mortgage Life Insurance
This is an insurance policy that pays the bank the balance owed on your mortgage in the event of your death during the term of the mortgage.

Hazard Insurance
This insurance protects your investment. In the case of any property loss or damage, you will be compensated.

Origination Fee
Your lender will charge you an origination fee, somewhere around 1% of the loan amount. This fee covers the expenses that occur when the lender sets up – or originates – your loan.

Points
Points are a percentage of your loan that you pay the lender to originate (set up) your loan. The longer your rate is locked in for, the more points they will charge.

Points is also a term used to refer to your interest rate percentage.

Closing Costs can also include third-party fees

– usually non-negotiable. These fees include the insurance fees, title search, inspections, and appraisals. Government fees include recording the deed with the county clerk, and state & local mortgage taxes.

Escrow and interest fees include homeowner’s insurance, loan interest, real estate taxes, and occasionally PMI (private mortgage insurance).

How long does the loan process take?

The loan process can take anywhere from 14-60 days, sometimes sooner depending on the situation. Things that could delay a loan from being approved are appraisals and inspections, as well as your current financial situation.

Choosing the Loan that is Right for You

There are different types of loans that you can get for your mortgage, these days the majority of mortgages are fixed rate mortgages. A fixed rate mortgage means that your interest rate is fixed and does not fluctuate during the term of your loan. The second most popular type of mortgage is the adjustable rate mortgage. An adjustable rate mortgage means that the interest rate will adjust over time depending on a number of factors, most of which are out of your control. That means that your monthly payments can increase (or less likely, decrease) during the term of your loan.

Mortgage Loan Details You Need to Know

When you get to your closing, you’ll be asked to sign a stack of papers. One document, called a HUD 1, will include a list of all the costs that you are being charged in addition to the cost of your home. These costs are called closing costs— and some buyers (perhaps you) will have to come with funds to cover their portion of the closing costs. These costs include an origination fee, discount point, appraisal fee, credit report, title search, recording fees, charges for loan processing, underwriting, preparation, and establishing an escrow account.

What is an Escrow Account?

An escrow account is a bank account that your lender opens for you to put the money that is allocated for your yearly property tax and property insurance. When those payments are due, your lender pays them from the escrow account on your behalf.

Paying off your Mortgage

One question that buyers always have is “Can I pay my loan off early?” The answer is yes, you can pay extra each month to reduce the principal on your loan, or you can make a periodical lump sum payment, and you can even pay the loan in full early. Whatever you decide to do, it’s helpful to know exactly how the funds of your payment are allocated to the mortgage.

PITI – a helpful acronym to remember

When you make a mortgage payment, this is the order in which your funds are applied to the loan:

P – Principal
I – interest
T – Taxes
I – Insurance