These answers to Frequently Asked Questions have been compiled for your convenience.
If you can't find what you are looking for or have other questions, please contact me at owen@acsresources.com.

Q: What is a mortgage?

A: Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage" itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.

Q: What is APR?

A: The Annual Percentage Rate is the cost of credit expressed as a yearly rate. The APR combines interest rate, points, and related fees.

A: The Finance Charge is the cost of credit expressed as a dollar amount. It includes any charge payable directly, or indirectly, by the applicant, and imposed directly, or indirectly, by the lender, as a condition of receiving credit.

A: Established by your lender, an escrow account is used to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property taxes or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.

A: The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: with a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay $2,500 as a down payment.

The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV ratio, the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.

• Fixed Rate Mortgages:
  • Payments remain the same for the life of the loan.
  • Repayment periods are generally 15 or 30 years.
  • Predictable
  • Housing costs remain unaffected by interest rate changes and inflation.

• Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases are subject to limits.

• Balloon Mortgages- Offer very low rates for an initial period of time (usually 5, 7, or 10 years); when the time has elapsed, the balance is due or refinanced (though not automatically).

• Two-Step Mortgages- Interest rate adjusts only once and remains the same for the remaining life of the loan.

A: A mortgage that permits the lender to adjust its interest rate periodically based on the movement of a specific index. Example: 1-3-5 year Treasury Bill. There are usually limitations to the adjustments, such as a maximum of 2% on the amount the mortgage interest rate can go up or down at any one time.

A: ARMS (Adjustable Rate Mortgages) are linked to a specific index.
• Generally offer lower initial interest rates
• Monthly payments can be lower
• May allow borrower to qualify for a larger loan amount.

An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.

15-year:
• The loan is usually made at a lower interest rate.
• Equity is built faster because early payments pay off more of the principal.
30-Year:
• In the first 23 years of the loan, more interest is paid off than principal, resulting in larger tax deductions.
• As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

A: Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so.  Ask your lender for details.

A: Yes. Lenders now offer several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

A: There are mortgage options now available that only require a down payment of 5% or less of the purchase price.  Remember, the larger the down payment you make, the less you will need to borrow and the more equity you'll have.  Mortgages with less than a 20% down payment usually require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and possibly repairs and decorating.

A: The monthly mortgage payment mainly pays off principal and interest, but most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).

A: The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and the payment schedule will all affect the size of your mortgage payment.  When you know these factors you can use a Mortgage Payment Calculator to estimate your monthly mortgage payments.

A: A lower interest rate allows you to borrow more money than a higher rate, for the same monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate "lock-in" which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage and other fees included in the loan.

A: Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. For example: on a $100,000 loan amount that equals $1,250. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

A: An origination fee is the fee paid to the company originating your loan to cover their costs associated with creating, processing, and closing your mortgage. Origination fees are expressed as points or as a percentage. A one point or one-percent origination fee is therefore equal to 1% of the loan amount.

A: If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.

A: Credit scores were created for general use in making lending decisions and are based on credit data only. FICO* scores are one type of generic credit score. FICO scores range from approximately 400 to 900. The lower the score the greater the risk of default on a loan. A credit score below 620 gives a lender a strong indication that a borrower's credit reputation is not acceptable.

Under the Fair Credit Reporting Act all consumers can obtain a copy of their credit reports by calling:

*FICO: a credit score developed by Fair Isaac & Co.  Credit bureaus do not reveal how these scores are computed, and the Federal Trade Commission has ruled this to be acceptable.

A: Private Mortgage Insurance is a type of insurance provided by a private mortgage insurance company, to protect the lender in the event of loan default. This type of insurance is required when a borrower has less than 20% equity in a home. Private mortgage insurance is paid monthly.

A: PITI is an acronym for the items included in a monthly payment: principal, interest, taxes, and insurance.

A: Generally, you should qualify for a loan at a monthly housing expense (PITI, or the monthly payment for mortgage principal, interest, property taxes and property insurance) equal to 33% of your gross monthly income.  An Affordability Calculator can help you to estimate what price property you can probably afford, but the best way to know with confidence is to get pre-approved by a lender.

Owen Cooke