Mortgage FAQs: Part 1

February 1, 2019 By ,

Frequently Asked Questions About Mortgages

We know that mortgages may seem complicated, but with decades of experience under our belts, we also know how to navigate just about any home loan. There are some common questions we think are important to understand before you start the home-buying process. Here is Part 1 of a multi-part series with some of the most commonly asked questions we get about mortgages.

What Are Debt Ratios/DTI Ratios?

  • During your loan process, your mortgage banker will likely refer to your “DTI” or “debt-to-income” ratio. You might also hear the terms “housing ratio” or “front end” or “back end” ratios.
    • Housing Ratio, or front end ratio, is your total monthly housing expense divided by your pre-tax monthly income.
    • Debt ratio, debt-to-income, or back end ratio, is your total monthly housing expense plus any recurring debts such as car payments, credit cards, or other loan payments, divided by your pre-tax monthly income.
    • Your debt ratios are important to your loan qualification because the lender uses the DTI as part of the overall risk assessment in giving you a loan.

What Are Reserves?

  • Reserves are the extra funds available in your asset accounts (bank, retirement, investments) after your loan closes.
    • Most of the time the lender will analyze reserves in terms of how many months of housing payments the available reserves will cover. In general, it is a good idea to have at least two months of reserves available after accounting for all the funds to close your loan.
    • Different loan programs have different requirements for how much reserves are required, so your mortgage banker will go over this with you during your prequalification process.

What is Mortgage Insurance?

  • Mortgage insurance helps protect the lender in case the borrower defaults on their loan.
    • This is not the same as homeowners insurance.
    • It does not pay the mortgage for you if you lose your job.
  • Mortgage insurance is typically required for loans with a down payment less than 20%
    • Oftentimes, mortgage insurance can be canceled once you reach a specific amount of equity in your home. There are certain requirements which must be met before that happens. You can read more about canceling Mortgage Insurance on our website.

What Are Mortgage Points/Discount Points?

  • Mortgage Points/discount points are a one-time fee you can opt to pay in exchange for a lower interest rate.
    • One mortgage point equals one percent of your total loan amount. Your mortgage banker will discuss market rates with you, as well as your options to pay points to lower your interest rate. Lenders are required to provide a free written fee estimate for the fees tied to your loan financing. This will most likely come in the form of a Loan Estimate, which will specifically show the amount of credit or cost associated with the interest rate disclosed. These fees will also be disclosed again in the Closing Disclosure statement you will receive at the end of the process.

What is APR? Why is it Different than the Interest Rate?

  • Annual Percentage Rate (APR) is the total of the interest rate plus other costs such as fees, discount points, and some of the closing costs expressed as a percentage.
  • The interest rate calculates what your actual monthly mortgage payment will be, whereas the APR measures the total cost of a loan.
    • After you’ve applied for a home loan, you’ll receive a Loan Estimate from your lender. The Interest rate will be listed toward the top of the first page, in the section where the payment is broken out. The APR will be listed on page 3 in the comparisons section. Usually, you will notice a difference between your APR and your interest rate right away. The APR is frequently higher than the interest rate because of added fees. APR is a comparison tool. Interest rates, loan fees, and points can vary from lender to lender and depending on the loan program. The APR can always be used to compare multiple loan products accurately.
    • Try comparing a loan’s APR to its advertised interest rate. An APR that’s significantly higher than the interest rate might indicate a red flag that added costs are attached to the loan. You can read more about the difference between APR and interest rates on our website, and your Mortgage Banker can also help you compare and better understand your loan fees and the APR.

 

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