What is the difference between fixed rate and variable rate mortgages?

A fixed rate mortgage is a loan where the principal and interest payment never change during the life of the loan. A variable rate mortgage, also known as an adjustable rate mortgage is a loan where the interest rate can change periodically. The changes in the interest rate are tied into the market rates that exist at the time the rate is subject to change. They usually offer lower interest rates than fixed rate mortgages, but can adjust upward if interest rates go up. There is a predefined cap which defines how high the interest rate can adjust.

Fixed rate mortgages are beneficial to those who are on a fixed income, (adverse to interest rate change) and those who prefer fixed payment schedules. Adjustable rate mortgages are advantageous for those who do not plan to stay in their home for a long time, for those borrowers who do not qualify at higher fixed interest rates, and those who can financially handle fluctuating payments or those who plan on refinancing within a specific time frame.

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What kind of documentation will I need to provide so my loan can be processed?

Different loan programs require different types of documentation. And, depending on your personal situation, you may select a loan program that requires no documentation at all. Typically, you may be required to provide some or all of the following documents:

Contracts

• If purchasing: A copy of the contract of sale. If you are selling your current residence, provide a copy of the sales contract.
• If refinancing: A copy of the deed, survey and title policy

Employment

• If you are employed: A copy of the most recent month's pay stubs. Complete copies of your 1040 tax returns for 2 years (including all schedules) W-2 forms from the last 2 years.
• If you are self-employed: Year-to-date profit and loss statements prepared and signed by your accountant. Complete copies of the last 2 years‘ signed and completed partnership tax returns, including all schedules and K-1‘s.

Other Income Sources

• If you are relying on child support or alimony income to support your request for credit Evidence of income (i.e., 12 months of cancelled checks or bank statements showing deposits).
• If you receive social security or pension income: A copy of the entitlement letter and terms of payment. A copy of the most recent social security or pension check.

Current Financial Situation

• Assets (including checking and savings accounts, money funds, stocks, bonds, investment properties, etc.) Copies of the statements for all accounts for the last 2 months (all pages) If you are receiving a gift for any part of your down payment or closing costs, provide a gift letter and proof of the donor's ability to provide the gift (i.e., the donor's bank statements, etc.) If you are leasing your current residence, provide a copy of the lease
• Debts and liabilities (including personal loans and charge accounts, mortgages, stock pledges, etc.) Explanations of any derogatory credit items
• If divorced, provide a copy of the divorce decree/separation agreement

Other Items Needed

• If you are not a US citizen, provide a copy of your Green Card or Visa.

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How do adjustable rate mortgages work?

There are many types of adjustable rate mortgages, but all have some common features. One common feature of adjustable rate mortgages is an interest rate change that occurs after a stipulated number of payments have been made. The interest rate can increase or decrease depending on how the new interest rate is calculated. Typically, the interest rate change is based upon a predetermined index value and a margin. If a borrower currently has an interest rate that is pending adjustment, the new rate would be calculated by adding the current index rate and a margin. For example, if the borrower's current rate was 6.0% with a 2.0% margin, the new rate would be determined by adding the current index rate (5.0% as an example 5.0% + 2.0%) to the margin. In this example the new interest rate would be 7.0%.

The maximum amount the interest rate can change during any adjustment period is usually fixed. This maximum adjustment is called the cap. Adjustable rate mortgages also have a lifetime cap, preventing the interest rate from exceeding a predetermined rate.

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What are escrow accounts and how much do I need in my escrow account?

Escrows are payments made by a borrower to a lender for the purpose of paying the borrower's taxes, insurance, and other payments associated with home ownership. The lender is responsible for the timely disbursement of escrow funds to pay the borrower's bills as they come due.

Usually, a mortgage company collects funds for placement into the borrower's escrow account with the borrower's periodic payment for principal and interest. An escrow account has sufficient funds if there is enough to pay all bills when they come due.

It is common practice for mortgage companies to hold an escrow cushion for a borrower. The cushion is kept by the mortgage company to assure that if the cost of any escrowed item were to increase in the future, there would be sufficient funds to pay all bills as they come due.

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What's the difference between mortgage insurance, mortgage disability insurance, and mortgage life insurance?

Mortgage Insurance (also know as MI) is insurance that is provided by an independent mortgage insurance company. It protects the lender from any loss due to a borrower defaulting on their mortgage. It is usually required when a borrower takes out a mortgage for more than 80% of the value of the home.

Mortgage Disability Insurance is insurance that pays the monthly mortgage payment if an insured borrower is affected by a covered disability that prevents him/her from making mortgage payments.

Mortgage Life Insurance is a term life insurance policy that covers the declining balance of a mortgage loan, and is payable upon the death of an insured borrower.

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What is the difference between the interest rate and the APR (Annual Percentage Rate)?

The interest rate is strictly the cost of borrowing the lender's money. The APR is the total yearly cost of the mortgage, including closing costs, points, the interest rate, and mortgage insurance (if applicable). The APR is a percentage look at the funds you are borrowing.

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What can I do if my credit history is not perfect?

My Mortgage Charity offers a number of mortgage programs specifically designed for borrowers with imperfect credit. Our Non-Conforming Lending Department can provide you with a mortgage if you have poor credit, bad debt, or unique property characteristics, such as renovations without a certificate of occupancy. We can judge your credit history based only on how you have paid your mortgage. And, as your credit improves, we can refinance you to a lower interest rate. We also have programs that can help you consolidate your debt and save money every month.

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What fees are included in my closing costs?

Closing costs include lender fees such as points, appraisal, credit report, underwriting, settlement and tax service; prepaid expenditures such as interim interest, real estate taxes and escrow, and insurance premiums and escrow; and settlement costs, such as title insurance, settlement/attorney fees, city/county/state taxes, recording fees, and messenger fees.

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What is the Truth In Lending (TIL) Disclosure?

The Truth-in-Lending disclosure, also know as a TIL is the statement of the total cost of financing. It provides you with the following:

The total amount you will have paid after you have made all payments on the loan, assuming you do not pay off the loan prior to the original term.

What your initial monthly payments will be

The annual percentage rate or APR, - this is what the effective interest rate of your loan would be if you were to include with the interest rate other fees and advance payments (i.e., lender's attorney fee, underwriting fee, flood certification fee, tax service fee, interim interest, mortgage insurance and points) into a single figure that projects the annual cost of the mortgage as a percentage.

An itemization of the amount financed - this section breaks out the estimates on the Good Faith Estimate into total prepaid finance charges and total amount paid to others. You will note that the total amount financed is the loan amount minus the total prepaid finance charges.

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What is a mortgage pre-qualification?

A mortgage pre-qualification states that a buyer is able to afford a home at a certain price. This is determined by the buyer providing a loan consultant with information about their income, employment, assets, and liabilities. This pre-qualification is based on the information represented to the loan officer and an in house credit report. A pre-qualification is subject to verification of all the information represented and therefore, is not a commitment to lend.

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What is a mortgage pre-approval?

A mortgage pre-approval (sometimes called a pre-approved mortgage) is an actual mortgage commitment prior to finding a home. In this case, the buyer applies for a mortgage, all supporting documentation is verified with regard to income, employment, assets, liabilities and credit, and a written commitment is issued. However, this commitment is subject to a fully executed contract of sale and property appraisal. A pre-approved mortgage assists the buyer in their negotiations for a home because it shows the seller that they are serious and it reduces the time to closing.

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