Question 1:
What are some of the common mistakes made when buying or refinancing
a home?
If
you are like most people, purchasing a home is the biggest investment
you’ll ever make. If you’re considering buying a
home, you’re likely aware of the complexity of the process.
Because of the numerous factors to consider when purchasing
a home, it’s important to prepare as best you can. Some
common principles and pitfalls are presented here for your consideration.
By keeping them in mind, you’ll create a successful and
more enjoyable experience. You’re home may be the most
important purchase you ever make and could cost you 25 to 40
percent of your income. It’s important to conduct research,
ask questions and study the process carefully.
Buying
a Home
Mistake
– Looking for a home before being pre-approved.
As a potential buyer competing for a home, you’ll have
a better chance of getting your offer accepted by being as prepared
as possible. The sellers could potentially have three types
of buyers to choose from. Neither pre-qualified nor pre-approved
– This buyer provides no evidence that they can afford
to purchase your property. You may wonder how serious they are
since they’re not at least pre-qualified. Pre-qualified
– This buyer has met with a mortgage broker (or lender)
and discussed their situation. The buyer has informed the broker
regarding their income, expenses, assets and liabilities. The
broker may also have seen their credit report. The buyer provided
you with a letter from the broker stating an opinion of what
the buyer can afford. Pre-approved – this buyer has completed
a loan application, provided a broker or lender with written
evidence of income, expenses, assets, liabilities and credit.
All information has been verified by a lender. As a result,
much of the paperwork for his buyer’s loan has been completed.
This buyer will probable be able to close quickly. They provide
you with a letter (pre-approval certificate) from the lender.
The seller is as certain as they can be that this buyer can
close the transaction. This is the type of buyer you want to
be – PRE-APPROVED!
1. Mistake – Making verbal agreements.
If you’re asked to sign a document containing instructions
contrary to your verbal agreements – Just say NO! For
example, the seller verbally agrees to include the washing machine
in the sale, but the written purchase contract excludes it.
The written contract will override the verbal contract. Do not
expect oral agreements to be enforceable.
2. Mistake – Choosing a lender because they have
the lowest rate. While the rate is important, consider
the total cost of your loan including the APR, loan fees, discount
and origination points. Insist on understanding the point structure
in your loan fees. A below market or low interest rate quote
may indicate some hidden loan requirements, like a prepayment
penalty, a short 15 day rate lock or requiring a bigger down
payment. Make sure the rate quoted is for your specific loan
request. The cost of the mortgage, however, should NEVER be
your only criteria. Select a reputable company which will deliver
the loan as promised. Insist on a written pre-approval that
lists the conditions of your closing. If in the final hours
of your transaction you find that the lender has increases expenses
or has loan documents for you to sign that are different than
the terms agreed upon you will not have time to start again
with a different lender. The most important factor in choosing
a lender is to feel you are working with someone that is honest,
communicative, working with integrity and protecting your best
interest. A basic phone rate quote will not tell you this. Go
and interview your potential lender and as for referrals from
family and friends!
3. Mistake – Not receiving a Good Faith Estimate
(GFE) Within three business days after the broker or
lender receives your loan application, you must receive a written
statement of fees associated with the transaction. This is both
the law and the best way to determine what you’ll pay
for the loan. Your fees at closing should be very close to your
original GFE. Sometimes they alter a little due to changes that
may occur during the loan process; however this should be re-disclosed
to you prior to signing your loan documents.
4. Mistake – Using a dual agent – i.e. an
agent who represents both the buyer and the seller in the same
transaction. Buyers and sellers have opposing interests.
Sellers want to receive the highest price; buyers want to pay
the lowest price. In the standard real estate transaction, the
seller pays the real estate commission. When as agent represents
both buyer and seller, the agent can tend to negotiate more
vigorously on behalf of the seller. As a buyer, you’re
better off having an agent representing you exclusively. It
is possible to have an agent handle both sides of the transaction,
but it takes someone special who can operate with integrity
and negotiate fairness for all parties.
5. Mistake – Buying a home without professional
inspections. Unless you’re buying a new home
with warranties on most equipment, consider obtaining property,
roof, structural, pest control and other relevant inspections.
This way you will know what you are buying. Inspection reports
are great negotiating tools when asking the seller to make needed
repairs. When a professional inspector recommends that certain
repairs be done, the seller is more likely to agree to do them.
Always re-inspect to assure repairs are done, never assume.
6. Mistake – Signing documents without representation.
Whenever possible, your mortgage agent should attend your loan
document signing at the title company. If he or she is not available;
ask a seasoned family member or friend to join you who has signed
more than one set of loan documents. Go thru the papers carefully
and ask questions of the title and escrow officer. I anything
seems different than what you were expecting; stop signing and
insist on speaking with your mortgage agent or broker until
you understand.
Question 2:
Should I Refinance?
1.
When considering a refinance you should start by looking
for a good, reputable lender as described above in number 2.
Make an appointment for a consultation to ask questions and
determine if it is in your best interest at this time and what
positive things it would accomplish for you. Again, it’s
not only about rate. Take time to work with a Mortgage Planner
that would help you to evaluate your unique situation and work
with you with your best interests in mind. Does it benefit you
at this time? Does it make sense? Don’t make these decisions
without good professional help.
2. Not doing a break-even analysis. Determine
the total cost of the transaction, then calculate how much you
will save every month. Divide the total cost by the monthly
savings to find the number of months you will have to stay in
the property to break even. This calculation can also help you
determine how much money you should spend in points based on
how long you may be in the home. Remember to get a Good
Faith Estimate. (GFE).
3. Paying for an appraisal when you think your home
value may be too low. Have your mortgage agent supply
you with a list of comparable sales (typically at no cost) to
provide you with a range of possible values. This way you will
not waste your money on a full appraisal if you are doubtful
about the value of the home. There are times in a complex market
that an appraisal has to be done to get an accurate value.
4. Using the county tax-assessor’s value as the
market value of your home. Mortgage companies do not
use the county tax-assessor’s value to determine whether
they will make the loan. They use a market-value appraisal which
may be very different from the assessed value.
5. Signing your loan documents – Always
review them carefully and have experienced representation with
you at the title. Ask questions and stop signing if you see
verbiage that represents and different terms than what you were
expecting.
6. Not providing documents to your mortgage company
in a timely manner. When your mortgage company asks
you for additional documents, provide them immediately. They
are doing what’s necessary to get your loan approved and
closed. Delay in providing documents can be costly.
7. Pulling cash out of your credit line before you refinance
your first mortgage. Many lenders have cash-out seasoning
requirements. This means that if you pull cash out of your credit
line for anything other than home improvements, they will consider
the refinance to be a cash-out transaction. This usually results
in stricter requirements, a higher interest rate and in some
cases can break the deal!
8. Getting a second mortgage before you refinance your
first mortgage. Many mortgage companies look at the
combined loan amounts (i.e the first loan plus the second) when
refinancing the first mortgage. There are many programs where
you can apply for both a first and second at the same time.
This is referred to as a piggy-back loan.
Question 3:
Should I pay points? Does a zero point loan with no fees really
exist?
Should
I pay points? Does a zero point loan with no fees really exist?
The
best way to decide whether you should pay points or not is to
perform a break-even analysis.
This is done as follows:
1.
Calculate the cost of the points. Example: 2 points on a $100,000
loan is $2000.
2. Calculate the monthly savings on the loan as a result of
obtaining a lower interest rate. Example: $50.00 per month
3. Divide the cost of the points by the monthly savings to
come up with the number of months to break even. In the above
example, this number is 40 months. If you plan to keep the
home for longer than the break-even number of months, then
it makes sense to pay points, otherwise it does not.
4. The above calculation does not take into account the tax
advantages of points. When you are buying a home the points
you pay are tax-deductible, so you realize some savings immediately.
If
none of the above makes sense to you, consider this simple rule
of thumb: If you plan to stay in the home for less than 3 years,
do not pay points. If you plan to stay in the home for more
than 3 years, pay 1 point. If you plan to stay in the home for
over 5 years you may want to pay more than 1 point.
Zero
Point/ Zero-Fee Loans
Whatever
happened to the conventional wisdom of waiting for the rates
to drop 2 percent before refinancing?
You
have a 30 year fixed rate loan. A loan officer calls you up
and says you can refinance to a rate 0.50% lower than your current
rate, and there will be no points, no appraisal fee, no title
or escrow fees, etc. A No Cost loan, with a lower rate, lower,
lower payment and your loan balance stays the same.
Is
this a deal too good to pass up? How can a bank and broker do
this? Doesn’t someone have to pay? Who?
This
is not a scam. Thousands of homeowners have refinanced using
a zero-point/zero fee loan. Some refinanced multiple times in
a single year. This works due to rebate pricing, also known
as yield spread or service-release premium pricing to the lender.
You pay a higher rate in exchange for cash-up front,
which is then used to pay the closing costs. You are financing
the closing costs by paying a higher rate. In some
cases this is a beneficial way to finance.
What
are the disadvantages of a zero-point /zero-fee loan?
The
main disadvantage is that you’ll pay a higher rate than
you would, had you paid points and closing costs. If you keep
the loan long enough, you’ll pay significantly more due
to the higher rate. In a scenario where you plan to stay in
the home for more than five years, and if rates never drop (no
refinance opportunity), you will end up paying more money. If,
on the other hand , you plan to stay in the home just a couple
of years, there is likely no disadvantage to you with a zero
point/ zero fee loan.
Question 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 play their bills. Fair, Isaac began its pioneering
work with credit scoring in the late 1950’s and, since
then, scoring has become widely accepted by lenders as a reliable
le means of credit evaluation. A credit score attempts to condense
a borrower’s credit history into a single number.
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. 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
¨ Employment history
¨ Negative credit information such as bankruptcies, charge-offs,
collections, etc.
There
are rally three credit scores computed by data provided by each
of the three bureaus – Experian, Tran Union, and Equifax.
Some lenders use on of these three scores, while most lenders
may use the middle score of the three.
Question 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, Points, 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. If you lock your
rate and the lock date expires most lenders will let you re-lock
at the higher of the original rate/points or current rate/points.
In most cases you will not get a lower rate if rates drop.
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.
Question 6:
What is the difference between Pre-Qualified and Pre-Approved?
Pre-qualification
is normally determined by a loan originator. After interviewing
you, the loan originator determines the potential loan amount
for which you may be approved. The loan originator does not
issue loan approval; therefore, pre-qualification is not a commitment
to lend.
After the loan originator determines that you pre-qualify, he/she
then issues a pre-qualification letter. The letter is used when
you make an offer on a property. The pre-qualification letter
informs the seller that your financial situation has been reviewed
by a professional, and you will likely be approved for a loan
to purchase the home.
Pre-approval
is a step above pre-qualification. Pre-approval involves verifying
your credit, down payment, employment history, etc. Your loan
application is submitted to a lender’s underwriter, and
a decision is made regarding your loan application. Getting
your loan pre-approved allows you to close very quickly when
you do find a home. Pre-approval can also help you negotiate
a better price with the seller.
Question 7: Can my loan be sold? What
happens if my lender goes out of business?
Your
loan can be sold at any time. There is a secondary mortgage
market in which lenders frequently buy and sell pools of mortgages.
This secondary mortgage market results in lower rates for consumers.
A lender buying your loan assumes all terms and conditions of
the original loan. As a result, the only thing that changes
when a loan is sold is to whom you mail your payment. In the
event your loan is sold you will be notified. You’ll be
informed about your new lender, and where you should send your
payments.
If
your lender goes out of business, you are still obligated to
make payments! Typically, loans owned by a lender going out
of business are sold to another lender. The lender purchasing
your loan is obligated to honor the terms and conditions of
the original loan. Therefore, if your lender goes out of business,
it makes little difference with regards to your loan payments.
In some cases, there may be a gap between the date of your lender’s
going out of business and the date that a new lender purchases
your loan. In such a situation, continue making payments to
your old lender until you are asked to make payments to your
new lender.
Question 8: What is Private Mortgage
Insurance (PMI)?
PMI
is normally required when you buy a home with less than 20 percent
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 to protect
the lender. It enables lenders to offer loans with lower down
payments. In effect, mortgage insurance pays the lender a certain
percentage of your original purchase price to cover a lender’s
losses in the unfortunate event of foreclosure. Therefore, without
mortgage insurance, you would need to make a 20 percent down
payment in order to buy a home.
The
cost of PMI increases as your down payment decreases. Example:
The cost of PMI on a 10 percent down payment is less than the
cost of PMI on a 5 percent down payment. Your PMI premium is
normally added to your monthly mortgage payment.
Question 9: What is An Annual Percentage
Rate (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 does
NOT affect your monthly payments. Your monthly payments are
a function of the interest rate and the length of the loan.
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.
Ideally,
one should be able to compare APRs from various lenders, and
then select the loan with the lowest APR. Unfortunately it’s
not that simple. Various lenders calculate APRs differently!
A loan with a lower APR may not be the best choice. A good way
to compare different lenders is to ask them to provide a Good
Faith Estimate of closing costs. Be sure you compare the same
loan program, interest rate and rate lock period. Exclude costs
that are independent of the loan such as homeowners insurance,
property taxes, or attorney fees. Pay particular attention to
loan fees. 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
to compare.
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Susan