(Frequently Asked Questions)
 
Q: How do I know how much I can afford to purchase a home?

A: Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend upon your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. You may also be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value.

Q: What is the difference between a fixed-rate loan and an adjustable-rate loan?

A: With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage, and the best way to select a loan product is by talking to your broker.

Q: How is an index and margin used in an ARM?

A: An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR).

Q: How do I know which type of mortgage is best for me?

A: There is no simple formula to determine the type of mortgage that is best for you. This choice depends on a number of factors, including your current financial picture and how long you intend to keep your house.

Q: What does my mortgage payment include?

A: For most homeowners, the monthly mortgage payments include three separate parts:

• Principal: Repayment on the amount borrowed

• Interest: Payment to the lender for the amount borrowed

• Taxes & Insurance: Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes.

This feature is sometimes optional, in which case the fees will be paid by you directly to the County Tax Assessor and property insurance company.

Q: How much cash will I need to purchase a home?

A: The amount of cash that is necessary depends on a number of items. Generally speaking, though, you will need to supply:

• Earnest Money: The deposit that is supplied when you make an offer on the house

• Down Payment: A percentage of the cost of the home that is due at settlement

• Closing Costs: Costs associated with processing paperwork to purchase or refinance a house.

Q: What is private mortgage insurance (PMI)?

A: Private mortgage insurance protects the lender from loss due to payment default by the borrower. It is used with conventional financing only. It may be paid in a lump sum at the time of settlement or in monthly installments as part of the mortgage payment. PMI is typically required when the amount of your loan exceeds 80% of the subject property's value. This type of insurance should not be confused with mortgage life, credit life, or disability insurance which is designed to pay off a mortgage in the event of the borrower's disability or death.

Q: What are "points"?

A: Fees used to adjust the yield on a mortgage to current market conditions are called points. There is an inverse relationship between points paid and the interest rate on the mortgage. As the interest rate gets higher, the points get lower. A point equals 1 percent of the mortgage amount. For example, 1 point on a $100,000 mortgage would be $1,000.

Q: What is title insurance?

A: Title insurance protects the lender against loss due to problems or defects related to the title on the property being mortgaged. These problems would typically involve ownership claims against the property which were not identified by the title search. It is paid for with a one-time premium at the time of settlement.

Q: What is an FHA or VA mortgage?

A: Federal Housing Administration (FHA) or Veteran's Administration (VA) mortgages are loans insured by the respective governmental agencies. FHA programs enable lenders to arrange financing for the borrower with a minimal down payment. Similarly, VA programs (available to veterans only) can be made to a borrower who has little or no down payment. When borrowing under these programs, you will pay a Mortgage Insurance Premium (FHA) or a Funding Fee (VA) to insure the mortgage. This is similar to private mortgage insurance on a conventional loan. These insurance premiums may be paid out-of-pocket at the time of closing or financed by increasing the mortgage amount.

Q: What is a conventional mortgage?

A: A conventional mortgage is a loan not obtained under a government insured program such as FHA or VA. Conventional mortgage loans are typically held by institutional investors such as banks or insurance companies.

Q: What are escrows?

A: Escrows are funds collected with the borrower's monthly payment and accumulated to pay for items such as property taxes or hazard insurance as they come due. Escrows are also collected at settlement to start the escrow account. Escrowed funds can also be referred to as holdbacks, reserves, or impounds.

Q: What is an ARM?

A: Adjustable rate mortgages (ARMs) are loans on which the interest rate is periodically adjusted to coincide with prevailing interest rates. The interest rate is tied to an index which may go up or down during the life of the loan. The payment on an ARM will change at intervals defined by the loan contract. The borrower can have lower initial payments with an ARM, making it easier to qualify for a mortgage. Alternatively, a borrower could get a larger mortgage loan with an ARM than with a fixed rate mortgage.

Q: What is a fixed-rate mortgage?

A: Under the terms of a fixed-rate mortgage, the borrower's payment does not change over the life of the loan.

Q: What is the appraisal?

A: The appraisal is a statement of property value made by an independent, professional appraiser. It is done to insure that the value of the property is sufficient to secure the loan in the event that the borrower fails to repay the loan in accordance with the provisions of the mortgage contract. The value is set based on the home itself and on recent comparable sales of homes close to the subject property. The appraisal does not necessarily detect or discuss defects in the property or the title to the property.

Q: What is the loan origination fee?

A: This fee covers the lender's administrative costs in processing the loan. It is often expressed as a percentage of the amount borrowed (see "points").

Q: What is a flood certification/flood insurance?

A: A flood certification will identify a specific property as being within or not within a flood hazard area as defined by FEMA, a federal government agency. If the property is within a flood zone, you will be required to carry flood insurance, protecting you and the lender from loss due to flood damage.