The nuances of mortgage rates and home loans can be so intimidating, that it can drag you out from even investigating the possibility of owning a home. The long processes involved are so much so that even if you have a home already and want to find out whether refinancing is a good choice, the very thought of the processes involved drives you off. But here we have a set of explanations, guidance and tips to facilitate you to pay attention to the required details in a loan process and attain mortgage loan in the most effective and easiest way. Be prepared and well focused before you go in for any kind of loan.
1. How do I compare loans?
At Central Loan Center as you are aware we offer all kinds of mortgage loans for your convenience. Borrowers can feel at ease to approach us for any kind of financial assistance because our existence is solely for your service.
When you want to take a loan, first be clear and specific about your need. Then circle on a loan that will best fulfill your need. May be a good lender can point out other loan options you may not be aware of. Ask your lender for a general summation of the fees and commissions that will be required of you at the time of closing. Sometimes a loan is only available if you pay points, so it is always better to check with your lender if the loan quoted requires points. Be clear and get adequate information as to what items, such as property taxes and insurance, must be paid in advance.
You might also have a doubt whether you will be guaranteed the quoted price. It is always better to get it clarified with your lender for how long your rate can be reserved and if there's a fee involved. This is called locking-in a rate. Remember that the approval time of the loan varies, therefore, get an estimate. To be sure if your loan has a prepayment penalty, and if you think you may have to refinance or pay off the loan early, you should ask if there's a fee involved for doing so. Loan rates also vary based on the type and purpose of the loan, credit history and income, loan amount, value of the property, etc.
2. What is Loan-to-Value ratio (LTV)?
A very important aspect of your loan process is the Loan-to-Value ratio (or LTV). It is a percentage calculated by dividing the amount borrowed by the price or appraised value of the house/property to be purchased/refinanced. Usually when the Loan-to-Value ratio is higher, the down payment required to be paid by the borrower is less.
The LTV determines the limit within which your housing and debt ratios must fall for you to be approved, and the amount of fees you will be charged for your loan. It will also determine whether you must pay private mortgage insurance and use an escrow account or not.
3. What is meant by adjustable rate mortgage?
In short, it is called ARM. It's a kind of loan that offers a lower initial interest rate than most fixed rate loans. One aspect of ARM is that the interest rate changes periodically depending on the change in the index and therefore the monthly payment. It has a drawback that though it enables lower initial payments, the periodical increase in interest rate will lead to increased payments in future. Therefore, it's a trade-off for lower rate with risk involved.
It's the apt mortgage choice for people who plan to be at a house only for a maximum of five years or for those whose salary is likely to rise in the future. For an initial period of 3 or 5 years the interest remains the same and later, for every year there is a rise in interest rate.
The interest entrusted for ARM is usually related to the change in index. The use of an index to define the future rate adjustments would assure that rate adjustments will depend on the actual market conditions at the time of adjustments. To determine the interest rate on an ARM, lenders add a pre-disclosed amount to the index called the margin.
Also, be informed of the Interest-rate Caps. An interest-rate cap places a limit on the amount your interest rate can increase or decrease. There is something called the periodic or adjustment cap that limits the increase in interest rate from one adjustment period to the next. There is also overall or lifetime cap, that limits the increase in interest rate over the life of the loan.
4. What is equity?
Equity is nothing but the difference between a property's appraised or fair market value and the outstanding mortgage balance against the same. An individual's equity increases as the person pays off the mortgage or as the value of that particular property appreciates. At a time when a mortgage and any other debt against the property is paid completely, it defines that the homeowner has 100 % equity on that property.
Let's say for example that you bought a house for $90,000 and made 20% down payment. You then took a first mortgage to pay the remaining amount. The day you closed on your house, you had an equity of 20%. This implies that you gain equity as you pay off the principal and this in turn fetches you good value for your house.
5. What exactly is the difference between home equity loan and a refinance?
Winding off an existing loan with the proceeds from a new loan, which is more or less of the same size, by using the same property as collateral is termed as refinancing. In such cases, to make it worthwhile the savings in interest should be weighed against the fee associated with refinancing and it's difficult to conclude as to how much of the up-front money would be worth when the savings are received.
Some of the reasons for refinancing are to reduce the term of a longer mortgage, choosing between a fixed and adjustable-rate mortgage, etc. May be 10 years down the line you might want to refinance your home to get a better rate on your loan. Maybe you've seen that the rates have dropped to a very low level. Or, maybe you want to change the length of the loan. In some cases there might be some prepayment fees for the existing mortgage and in such cases refinancing is not worth it because it would lead to increase in cost for the borrower at the time of refinancing.
Whereas, a home equity loan is generally a second mortgage against your home, a loan that you take out using your home as collateral without paying off your first mortgage. At a time when a mortgage and any other debt against the property is paid completely, it defines that the homeowner has 100 % equity on that property.
6. What is a Home Equity Line of Credit?
It is a form of revolving credit in which your home serves as collateral. Usually a home equity line of credit is considered for the purchase of education, home improvements, medical bills, etc. This type of loan provides you with a fixed amount of money repayable over a fixed period of time. Usually the payment schedule calls for equal payments that will pay off the entire loan within that mentioned time. Since you can get approved for an amount of credit now and not access the funds until you need them, a home equity line of credit is a good choice if you simply want to possess the ability to access cash as you need it.
7. What are the factors that affect my mortgage rates?
In exchange for more money upfront, lenders are willing to lower the interest rate they charge, cutting the borrower's payments. A larger down payment of more than 20% will fetch you the best rate of interest. When you start with less equity as collateral then the rate would be high.
If you have a good credit position and that your monthly income exceeds your monthly debt obligations, then again there's a chance for lower interest rates. In general, the better the credit worthiness of a borrower and his ability to repay the loan amount highly influence the rate. But in some cases the rate varies from one lender to another.
8. What do I do when I am denied a loan?
Just because you did not get a loan from one financial institution doesn't mean you can't get one somewhere else. It's hard to accept that you are denied a loan. But you need to get it in writing that you are denied a loan by the lenders and the reasons for having rejected your loan application. Be sure to clarify why you were denied credit (or information on how to obtain those reasons) and if a credit report was used in making that decision, try to know the name and address of the credit reporting agency that supplied it.
If you don't understand the reasons given for rejecting your application, ask for more information. Sometimes it can be hard to determine exactly why your application was not approved, because these decisions involve a lot of different factors. The reasons for denial may include -
- not meeting the creditor's minimum income requirement
- not being at your address or job for the required amount of time.
- insufficient income to afford the house
- insufficient funds for closing costs and a down payment
- bad credit history, etc.
Once things reach you in writing and after you go through the terms and conditions applicable to your loan, its up to you how you wish to proceed further.
However, you can look forward to low and moderate income borrowers with lower down payment requirements for a loan. There is nothing to lose hope. In some cases where you feel that the appraiser had undervalued the property, you can suggest the lender to reexamine the appraisal. Attain a copy of your credit report and check thoroughly whether the credit information provided by them were all authentic and accurate. You can also follow up with the lender to find out if your application can be reevaluated.
All lenders have different approval standards. Try again with another company.
9.What are the advantages of using an online lender?
It is very advantageous to look out for an online lender for the purposes of your loan requirement. You gain a lot of time and it is extremely convenient to get things processed online. Its a matter of a few hours to get your loan process completed and your loan sanctioned.
The many advantages of shopping online for a mortgage are the following:
- Lower rates and fees Faster, and easier comparison of mortgage loans and lendersCan apply at your conveniencePersonal assistance whenever required
- Readily available loan applications and other details.
10. What should I look for in an Internet lender?
The prime objective of the lender is to make you feel comfortable and offer flexibility of terms, rates and other requirements. At a minimum, the following two standards should be required of any Internet lender seeking your business:
- Each day, the lender should post the current rates, points and fees on to the website that is designed for loan seekers. On the day you lock your rate, the lender should guaranty in writing (by e-mail or fax) your rate, points total loan fees, loan terms, whether the loan has a prepayment penalty and whether an impound account will be established or not.
- He/she should pay extra attention to specify the hidden terms in the loan program and get your consent on anything relating to the loan you are going to take from them.
11. What supporting documents do I need to provide?
Usually loan lenders ask for a few documents to ensure the borrower's credit worthiness and his ability to repay the mortgage loan that is to be borrowed. The standard documents required to be submitted by you are the following:
- You will generally be asked to support your income with a recent pay slip and W-2 Form for the past two years.
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Self-employed individuals will be asked to support their income with the past two years' tax returns.
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Funds needed to close the transaction are required to be supported with a copy of a recent bank statement or other liquid financial instruments.
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If proceeds from the sale of another property are being used for the down payment, an estimated closing statement on that transaction will be required to support the necessary funds to close.
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Some transactions may require additional documents.
However, this again varies from one lender to another. Each lender may be specific about a few things which may not be important to others. So, the required documents also vary in such cases.
12. What are the kinds of mortgages available in the market?
Fixed-rate mofaqrtgage: You pay the same interest rate and same monthly payment of principal and interest for the entire duration of the mortgage. The most common ones are of 30, 20 and 15 years duration. Fixed-rate mortgages are the best if you are planning of being in your home for a while.
Adjustable-rate mortgage (ARM): The interest rate stays fixed for an initial interest rate period, which ranges from 1 to 7 years. Then the rate will adjust up or down annually for the life of the loan based on a specified index. An ARM is a good option if you believe interest rates will go down over the next few years or if you plan to stay in your home for 5 to 7 years or less.
Combination loan: A loan where you receive a first mortgage together with a second mortgage. This option may help you avoid the costs of private mortgage insurance and others. The most popular combinations are 80-10-10 (80% first, 10% second, 10%down), 75-15-10 (75% first, 15% second, 10% down).
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