How is interest calculated on a mortgage loan?
Most mortgages originated today calculate interest in arrears, unlike consumer loans which calculate interest to the date of payment receipt. As an example, when borrowers pay their February mortgage payments, they are paying the January interest. This method of calculating interest is based on a 360 day year in which each month has 30 days.
How long does the loan process take?
The number of days from application to closing can vary from just a few days to 45 or more days, depending on a number of factors. Some of the factors include: loan type, whether an appraisal is needed, and title clearance. Time delays also occur if outside sources or the borrowers do not promptly provide documents to the lender.
What is a lock in?
A lock in guarantees a certain interest rate for a certain period of time.
How much time will it take to close my loan (sign the loan documents)?
Generally, the process takes as long or short as the borrower wishes. Explaining and signing the documents takes approximately 30 to 45 minutes. However, the borrower may choose to sign the documents and be on his/her way or ask a number of questions and spend more time. Closings may also vary from closing agent to closing agent.
Should discount points be paid to lower (buy down) an interest rate?
This question is best answered after careful consideration of your own personal financial goals. Buying down the interest rate (paying points on the mortgage – one point is one percent of your mortgage amount) may not be in your best interest. Here are some reasons why:
Mortgage interest paid is tax deductible in most cases (seek the advice of an accountant or the IRS).
The funds are no longer available to invest, save or use (ie. purchase an IRA, pay off credit card debt at a higher rate, etc.)
Falling interest rates can be taken advantage of sooner if discount points are not paid to buy down the interest rate (the original interest rate was higher).
In the past, if a consumer bought down the interest rate and then refinanced (buying down the rate again), it is possible not enough time will have elapsed to recover the |buy down| amount through the reduced monthly payment. This also occurs if the consumer sells the home before recovering the |buy down| amount.
Not only does the amount paid in discount fees (buy down amount) need to be recovered, the |time value| of the money spent or its |present value| also needs to be recovered. Present value is the income you could have earned or the satisfaction you could have received through alternative use of your money. Remembe to consider the tax consequences of your ultimate decision.
Individuals should do what best fits their own personal situation and goals.
Must I use the mortgage company that my builder directs me to?
No. It is your mortgage and you may decide upon the lender. However, most volume builders are effectively |forcing| their buyers to use their in-house mortgage company by refusing to pay certain fees or even altering upgrade packages based upon them getting or loosing the mortgage. This |forced-use| game most often spells higher interest rates for the buyer compared to what is available in the open marketplace.
What is an escrow account?
When borrowers make their monthly mortgage payments, they generally also pay one-twelfth of the anticipated annual amount needed to pay taxes and insurance premiums. These additional funds are deposited into an escrow account until the lender pays the taxes and
Why did my mortgage payment amount change?
There may be several reasons. Some mortgages, such as ARM loans, provide for periodic adjustments to your principal and interest payment amount. A second reason for a change may be due to an annual analysis of your escrow account. In compliance with the Real Estate Settlement Procedures Act (RESPA), you will receive an Annual Escrow Disclosure Statement, which shows the adjustment to your escrow payment based on current tax and insurance amounts.
What does Prepaid Interest mean?
Prepaid interest is typically paid at loan closing. It is the interest paid on a new loan from the day of closing through the end of the month. All future interest on a mortgage loan is then paid in arrears. For example, if your new loan closes on February 19th, prepaid interest would be paid at closing from February 19th through the end of the month of February. Interest would then be paid monthly with your first payment beginning April 1st which would pay March interest. Your payment on May 1st would pay April interest, etc.
What does the origination fee cover?
The origination fee is the fee some lenders charge to cover some of the costs of making the loan and is calculated by multiplying the total mortgage loan amount by the percentage shown. This fee is typically 1% or lower, but may also be influenced by market conditions or the type of loan being sought.
What is an ARM loan?
An ARM loan is an Adjustable Rate Mortgage. The interest rate on an ARM loan is adjusted periodically based on the terms of the mortgage documents. The interest rate is typically based on a common index published periodically, adjusted by a margin. The margin is an amount charged in addition to the index and typically does not change over the life of the loan.
What is an escrow account?
When borrowers make their monthly mortgage payments, they generally also pay one-twelfth of the anticipated annual amount needed to pay taxes and insurance premiums. These additional funds are deposited into an escrow account until the lender pays the taxes and insurance premiums as they come due. The borrower benefits for budgeting reasons because costs are spread through the year rather than as a lump sum. This method allows the lender greater control in avoiding tax delinquencies or lapses of hazard insurance coverage on the property. Mortgage documents often stipulate lenders that establish an escrow account.
Why is the Annual Percentage Rate (APR) on the Truth in Lending Disclosure higher than the rate shown on my note, which is the rate I thought I chose?
All lenders are required by the Real Estate Settlement and Procedures Act (RESPA) to show the rate which will be charged on the note signed at closing, including the total cost to obtain the loan. This includes, but is not limited to, the total interest paid over the life of the loan, assuming the full term is carried out at the note rate, plus certain closing costs. Closing costs could include prepaid interest, Private Mortgage Insurance/FHA Mortgage Insurance Premium/ or VA Funding fee, whichever may be applicable, and various miscellaneous costs including, but not limited to, underwriting fee and tax service fee, may be charged. All of these “Finance Charges” are taken into consideration when calculating the APR to give a more accurate picture of the total cost of the loan.
