What are origination and discount points?
One point origination or discount = 1% of the loan amount.
Discount points on conventional loans are used to improve your interest rate. For example, a lender may charge an interest rate of 8.5% with no discount points and an interest rate of 8.25% with 1% discount point. On a $150,000 loan the 1% discount point would cost the borrower $1,500. By paying the 1% discount point, the interest savings would be $9,529.20 over thirty years. Every borrower's situation is different, therefore, you may want to consider the length of time you plan to own the home in determining whether or not it is worth paying the discount points.
APR is the Annual Percentage Rate, not the rate of interest on your loan. The APR is a calculation of the actual cost of funds, should you carry your note to full term. This cost includes the actual interest rate on your note along with other costs including origination, processing and application fees, if applicable.
What are the most common loan programs?
There are three major types of mortgage loans: fixed, adjustable and balloon. (There are also short term loans, like a personal loan.
Fixed Rate Mortgages: The interest rate will remain the same during the entire term of your loan and are available for 10, 15, 20 and 30 years.
Adjustable Rate Mortgages (ARM): The interest rate can remain fixed for a period of time (6 months, 1 - 10 years), and then will adjust, usually every 6 or 12 months. Your adjustment will be tied to an index plus a fixed margin. These programs will generally have a minimum and maximum cap for each year and for the life of the loan.
Balloon: These programs are generally offered in 5 and 7 year terms. The interest rate will remain fixed for 5 or 7 years and then the balance will either be due, or you may have the option to reset the existing balance for the remaining years of the note. The payments are based on 30 year amortization.
What are the fees that Mortgage Lenders charge?
Private Mortgage Insurance is designed to protect the lender in case of default by the borrower(s). PMI is required when the loan is representative of more than 80% of the value of the home. In a purchase transaction, value is determined by appraisal or sales price which ever is lower. In a refinance, value is determined by the appraisal.
A rate lock is when the borrower and lender agree to "lock" in the interest rate and corresponding points on a particular loan. Once you lock-in your rate, if the market goes up or down, your rate will not change. Loans are generally locked for periods of 12 or 30 days depending on how long it will take to close and record that loan. If for some reason the loan does not close in time, the interest rate and points will be determined by those that were locked in, or those that are currently available, whichever is worse.
A rate lock is official when the borrower and load officer confirm the lock. It is the borrower's responsibility to lock their rate.
What is the Truth in Lending Disclosure?
Federal law requires that lenders mail to their borrower a Truth In Lending disclosure and Good Faith Estimate. These are often referred to as Regulation Z. The intent is to provide borrowers with an accurate representation of rates, fees and APR.
Are closing costs tax deductible?
Some closing costs on your loan will most likely be tax deductible. Generally, the origination and/or discount fees, pre-paid interest and pre-paid taxes are deductible. Always check with your tax professional before deducting any closing costs.
When will my first payment be due?
All mortgage payments are for principle and interest for the prior month. Unless otherwise agreed to, all loans closed will collect for interest due for the balance of the month in which you close. This will allow you to skip the month following your closing.
Example: You close your refinance loan on March 1st, 2000. This loan will actually record on March 5th because of the three day rescission period. Interest will be charged at closing for the balance of March, March 5th through March 31st, and your first payment will NOT be due April 1st, 2000 but May 1st, 2000.
There is a required three day right of rescission on all refinance loans for primary residences. The rescission is provided to allow the borrower an opportunity to get through their closing and still cancel the loan if there are any unacceptable changes to the original estimate. Rescission is not required on investment property refinances or any purchase transactions.
