Mortgage Information: Frequently Asked Questions
1. Why Use Prism Mortgage LLC?
Prism Mortgage LLC has been in the Real Estate Business for 30 years. We will work with you to best assess your short and long term needs and then find the best loan program to meet those needs. We will be there for you from the first phone call right up to the closing. We, at Prism Mortgage LLC, attend EVERY closing. Our goal at Prism Mortgage LLC is to educate you on the mortgage process.
2. What if I don't have perfect credit, can I still get a mortgage?
Prism Mortgage LLC has lenders that look beyond credit reports and credit scores. We offer numerous programs for people who have less than perfect credit. Once again, we sit down with you, educate you by assisting you in picking out the mortgage that will benefit you the most. In some cases, we have two and three step programs. While we may not have programs for every borrower, we should have a program that fits most situations.
3. Should I refinance?
The most common reason for refinancing is to improve cash flow in some way. Improving cash flow can be accomplished in a variety of ways:
Additionally, refinancing may be a valid decision for reasons other than savings:
The answer to the question "Should I refinance?" is a complex one, since every situation is different and no two homeowners are in the exact same situation. Even the conventional wisdom of refinancing only when you can save 2% on your mortgage is not really true. If you are refinancing to save money on your monthly payments, the following calculation is more appropriate than the rule of 2%:
-- Calculate the total cost of the refinance––example: $2,000
-- Calculate the monthly savings––example: $100/month
-- Divide the result in 1 by the result in 2––in this case 2000/100 = 20 months. This shows the break-even time. If you plan to live in the house for longer than this period of time, it makes sense to refinance.
Sometimes, you do not have a choice––you are forced to refinance. This happens when you have a loan with a balloon provision, but with no conversion option. In this case it is best to refinance a few months before the balloon comes due.
Whatever you choose to do, consulting with a seasoned mortgage professional can often save you time and money.
4. What is a FICO score?
A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.
Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.
Credit scores analyze a borrower's credit history considering numerous factors such as:
-- Late payments
-- The amount of time credit has been established
-- The amount of credit used versus the amount of credit available
-- Length of time at present residence
-- Employment history
-- Negative credit information such as bankruptcies, charge-offs, collections, etc.
There are really three FICO scores computed by data provided by each of the three bureaus––Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score.
How can I increase my score? While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.
-- Pay your bills on time. Late payments and collections can have a serious impact on your score.
-- Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
-- Reduce your credit-card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.
-- If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.
What if there is an error on my credit report? If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, your mortgage company may help you correct this problem as well.
5. What is a rate lock?
You cannot close a mortgage loan without locking in an interest rate. There are four components to a rate lock:
-- Loan program.
-- Interest rate.
-- Length of the lock.
The longer the length of the lock, the higher the points or the interest rate. This is because the longer the lock, the greater the risk for the lender offering that lock.
Let's say you lock in a 30-year fixed loan at 8% for 2 points for 15 days on March 2. This lock will expire on March 17 (if March 17 is a holiday then the lock is typically extended to the first working day after the 17th). The lender must disburse funds by March 17th, otherwise your rate lock expires, and your original rate-lock commitment is invalid.
The same lock might cost 2.25 points for a 30-day lock or 2.5 points for a 60-day lock. If you need a longer lock and do not want to pay the higher points, you may instead pay a higher rate.
After a lock expires, most lenders will let you re-lock at the higher of the prevailing market rates/points, or the originally locked rates/points. In most cases you will not get a lower rate if rates drop. In some cases, prior to the rate lock expiration date, the lender may allow you to negotiate a rate lock extension at the original rate/points. An additional fee may be charged for this extension.
Lenders can lose money if your lock expires. This is because they are taking a risk by letting you lock in advance. If rates move higher, they are forced to give you the original rate at which you locked. Lenders often protect themselves against rate fluctuations by hedging.
Some lenders do offer free float-downs––i.e. you may lock the rate initially and if the rates drop while your loan is in process, you will get the better rate. However, there is no free lunch––the free float-down is costly for the lender and you pay for this option indirectly, because the lender has to build the price of this option into the rate. For example: the float-down rate may be 0.125% to 0.25% higher than the prevailing current market rate
What happens if rates drop after you lock?
Most lenders will not budge unless rates drop substantially (3/8% or more). This is because it is expensive for them to lock in interest rates. If lenders let borrowers improve their rate every time rates improved, they'd spend a lot of time relocking interest rates, since rates fluctuate daily. Also, they would have to factor this option into their rates, and borrowers would wind up paying a higher rate. If rates drop, one option is to go to a different lender. In this case, you would be starting the loan process from the beginning. If you have your loan with a mortgage broker, however, they'll probably be able to move your loan package (including application) to a new lender offering lower rates. Before applying with a different lender, inform your original lender that you are aware that rates have dropped. You may be pleasantly surprised to find that they will work with you rather than lose you to a competitor.
6. Closing Cost, what should I expect to pay?
While every mortgage transaction and every property are unique in their costs, due to loan size and property location, a general rule of thumb for loans under conforming limits would be approximately $2,500 or less. Sitting down with one of our mortgage professionals is the only way to look into the specific costs that might be involved in your transaction.
7. What is PMI? Can I get rid of the PMI on my loan?
PMI or Private Mortgage Insurance is normally required when you buy a house with less than 20% down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. This insurance protection is provided by private mortgage-insurance companies. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender's losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you might not be able to buy a home without a 20% down payment.
The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. Your PMI premium is normally added to your monthly mortgage payment.
The decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage-insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. Some lenders may require that you pay PMI for one or two years before you may apply to remove it.
To cancel the PMI on your loan, contact your lender. In most cases, an appraisal will be required to determine the value of your property. You will probably also be required to pay for the cost of this appraisal. Another way of canceling the PMI on your loan is to refinance and to get a new loan without PMI. Effective 1/1/2007, PMI in certain situations is now tax deductible. Ask your loan officer to explain the parameters.
8. What is an APR?
The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate.
The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.
If life were easy, all you would have to do is compare APRs from the lenders/brokers you are working with, then pick the easiest one and you would have the right loan. Right? Wrong!
Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not necessarily a better rate. The best way to compare loans in the author's opinion is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. Then delete all fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.
The reason why APRs are confusing is because the rules to compute APR are not clearly defined.
What fees are included in the APR?
The following fees ARE generally included in the APR:
-- Points - both discount points and origination points
-- Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
-- Loan-processing fee
-- Underwriting fee
-- Document-preparation fee
-- Private mortgage-insurance
The following fees are SOMETIMES included in the APR:
-- Loan-application fee
-- Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)
The following fees are normally NOT included in the APR:
-- Title or abstract fee
-- Escrow fee
-- Attorney fee
-- Notary fee
-- Document preparation (charged by the closing agent)
-- Home-inspection fees
-- Recording fee
-- Transfer taxes
-- Credit report
-- Appraisal fee
An APR does not tell you how long your rate is locked for. A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock!
Calculating APRs on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APRs.
Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time.
Finally, many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs!
Conclusion: Use the APR as a starting point to compare loans. The APR is a result of a complex calculation and not clearly defined. There is no substitute to getting a good-faith estimate from each lender to compare costs. Remember to exclude those costs that are independent of the loan.