Frequently Asked Questions
Q. What is RESPA?
A. RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process, thereby protecting borrowers from abuse by lending institutions. RESPA mandates that lenders fully inform borrowers about closing costs, lender servicing and escrow account practices, and business relationships between closing service providers and other parties in the transaction.
Q. Do I rent or do I own?
A. Renting vs. owning a home is a big decision. Owning a home has many benefits. You can expand and create your dream home as you wish. When you make a mortgage payment, you have the opportunity to build equity, have a stable payment, own pets, make improvements and the potential to qualify for a tax break.
Q. How do I begin the process of buying a home?
A. Talk to your PRM mortgage banker so you can see how much home you can afford and how much space you need.
Q. How are pre-qualifying and pre-approval different?
A. Pre-qualification is an informal way to see how much you may be able to borrow. You can be ‘pre-qualified’ over the phone without any obligation. This helps you arrive at a ballpark figure of the amount you may have available to spend on a house. A pre-approval gives you a clear idea of what you can afford and shows sellers that you are serious about buying.
Q. What is a loan estimate?
A. It’s an estimate that lists all fees paid before closing, all closing costs and any escrow costs you will encounter when purchasing a home.
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 included in a monthly mortgage payment?
A. The monthly mortgage payment mainly pays off principal and interest, but it may include local real estate taxes, homeowner’s insurance, and mortgage insurance.
Q. What factors affect mortgage payments?
A. Factors that affect the mortgage payment are the amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule.
Q. How large of a down payment do I need?
A. There are mortgage options that require only a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you’ll have. Mortgages with less than a 20% down payment generally 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 decorating.
Q. How does the lender decide the maximum loan amount that you can afford?
A. The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include long-term and short term debts, such as car or student loan payments, alimony or child support. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.
Q. What is a Loan to Value (LTV) and how does it determine the size of my loan?
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, 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.
Q. What are discount points?
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 1/4 (or.250) of a percentage point. When shopping for loans ask lenders for an interest rate with 0 points and then ask how much the rate decreases with each point paid. Discount points are a good option if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are likely to be tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.
Q. What is the difference between interest rate and APR?
Your interest rate is the monthly cost you pay on the unpaid balance of your home loan. An Annual Percentage Rate (APR) includes both your interest rate and any additional cost or prepaid finance charges such as the origination fee, points, private mortgage insurance, underwriting and processing fees.
Q. What does a home inspector do and how does an inspection figure in the purchase of a home?
A. An inspector checks the safety of your potential new home. Home inspectors focus especially on the structure, construction, and mechanical systems of the house and will make you aware of repairs that are needed. The inspector does not evaluate whether or not you’re getting good value for your money. Generally, an inspector checks (and gives prices for repairs on) the electrical system, plumbing and waste disposal, the water heater, insulation and ventilation, the HVAC system, water source and quality, the potential presence of pests, the foundation, doors, windows, ceilings, walls, floors and roof. Be sure to hire a home inspector that is qualified and experienced.
Q. What is an escrow account? Do I need one?
A. An escrow account is a place 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.
Q. Can I pay off my loan ahead of schedule?
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.
Q. What types of loans are available and what are the advantages of each?
- Fixed Rate Mortgages: Payments remain the same for the life of the loan and are available at a 15, 20, or 30 year fixed.
- Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases are subject to limitations.
- ARMS: linked to a specific index or margin.
- Balloon Mortgage: Offers very low rates for an initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically).
- Two-Step Mortgage: Interest rate adjusts only once and remains the same for the life of the loan.
Q. When do ARMS make sense?
A. 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.