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Questions and answers that may be helpful

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Mortgage Loan Frequently Asked Questions (FAQs)

What is a pre-qualification? A pre-qualification is a basic review of your finances to determine if you would qualify for a mortgage. In general, a pre-qualification is based on unverified information you provide and does not include a credit check or any documentation.  Thus, this is not a firm guarantee of a loan.

What is a pre-approval? Unlike a pre-qualification, a pre-approval can be a highly useful tool in the homebuying process. It’s essentially the same thing as applying for a mortgage, just without a specific home attached to it. As part of a pre-approval, a lender will check your credit, verify your income and employment, and commit to lending a certain amount of money. A pre-approval can show sellers that you’re serious about buying a home, and that you’re likely to be able to follow through on a bid, and close on their property.

Do I need great credit to get a mortgage?  Not necessarily, but it will certainly help. It is possible to get a conventional mortgage with a FICO credit score as low as 620, and you can obtain a higher-cost FHA mortgage with a score in the 500s. However, be aware that the lower your score, the higher your interest rate will be.

Should I lock my interest rate?  Locking your rate means that you are guaranteed today’s mortgage interest rate for some predetermined period, generally between 30 to 60 days. If interest rates have been trending upward, it’s typically a good idea to lock in your rate. While the prevailing mortgage rate does not usually make a big move in a month or two, it’s certainly possible.

What is the difference between interest rate and annual percent rate (APR)?

The interest rate is the percentage that the lender charges for borrowing the money. The annual percent rate (APR) reflects the actual cost of borrowing. The APR calculation includes fees and discount points, along with the interest rate.

What are discount points, and should I pay them? Discount points are money that you pay up front on your mortgage in exchange for a lower interest rate. It is an optional fee. A lender may add them to a loan offer to make their interest rate seem more competitive. It’s up to you to decide if paying an additional upfront charge is worth it.  For example, one point is equal to 1% of the loan amount, so on a $400,000 mortgage, one discount point would be $4,000. Discount points generally are tax-deductible but check with the IRS guidelines at www.irs.gov regarding tax updates.  If the interest savings over the life of the loan is greater than the points paid, it can be worth it. Using the mortgage calculator and do the math can help you determine whether discount points are a good idea by comparing the effect of various interest rates on your mortgage.

How much of a down payment do I need? The short answer is that you can get a conventional mortgage with as little as 3% down, an FHA loan with 3.5% down, and a VA or USDA loan with no money down at all. However, with a conventional or FHA loan, you’ll have to pay private mortgage insurance, if your down payment is less than 20% of the home’s sale price.

What are closing costs, and how much should I expect them to be? closing costs include charges you will need to pay before your loan is completed. This can include origination fees, title insurance, prepaid escrows, and more. The costs can vary significantly, but generally, expect to pay around 2% to 3% of the purchase price in closing costs.

How do you know which home mortgage option is right for you? There are a number of mortgage types you can choose from.  It can be hard to know how each would impact you in the long run, but the common ones include Adjustable-Rate Mortgage (ARM), Federal Housing Administration (FHA) Loan, Department of Veterans Affairs (VA) Loan, and Fixed-Rate Conventional Loan.

How is my mortgage payment determined? Depending on your situation, there are typically three or four parts of your mortgage payment: Principal, Interest, Taxes, and Insurance.  Based on these four items, your mortgage payments are sometimes referred to as PITI.

When should I consider refinancing? You should definitely think about refinancing if you can lower your interest rate enough to justify the closing costs, and if you can refinance from an adjustable-rate mortgage to a fixed-rate mortgage.  It’s probably not worth it to refinance if you could lower your interest rate by half a percent. But let’s say it’s going to take another eight years for you to pay off your house and you could lower your interest rate from 6% to 4%.  When it comes to adjustable-rate mortgages, refinancing to a fixed-rate mortgage is almost a good idea. An adjustable-rate mortgage can go up and down, drastically changing your monthly payment.

Do you need to find a home before applying for a home?  No, you do not need to find a house before applying.  Getting started before you find a home may be the best thing you could do. If you get started before you have a property to purchase, we will work with you to get a pre-qualification subject to you finding the perfect home.  You can use it to assure real estate brokers and sellers that you are a qualified buyer. Getting pre-qualified for a mortgage will even give more weight to any purchase offer you make.