We certainly realize the mortgage process can be a bit confusing at times and we really didn’t mean for the process to be that way. Certainly not the entire mortgage approval process but there are some areas that seem to prompt the most common questions.
For those who are getting ready to buy and finance a home here in San Diego County and beyond, here are the questions we most frequently hear.
1: How much of a down payment do I need? That depends upon which type of loan program you select but a common misperception is that borrowers need at least 20% of the sales price of a home in order to be approved for a mortgage. That’s true in a certain respect, if you want to avoid mortgage insurance on your home loan then you would select a conventional loan- loans underwritten to Fannie Mae or Freddie Mac guidelines- and put 20% down. When a conventional mortgage is at 80% of the value of the property, there is no need for private mortgage insurance. But conventional loans will accept a down payment as low as 5.0% and even 3.0% for a special Fannie Mae loan referred to as the Fannie Mae HomeReady mortgage.
Another class of loans carries a government-backed guarantee and there are three of them, VA, FHA and USDA loans. VA loans don’t require a down payment at all. If you’re VA eligible and want a home loan that requires as little cash out of pocket as possible, the VA loan is your best choice. USDA loans also don’t require a down payment but the property must be located in a specific area and the borrower’s household income cannot exceed certain limits.
2. Why do interest rates change so often? We hear this lot and it takes a little explanation. Mortgage rates are set each and every day by a mortgage company but it’s anything but a random number. Interest rates are pegged to a specific index. In the case of a conventional Fannie Mae 30-year fixed rate loan, the rate is tied directly to a mortgage bond. This bond is traded throughout the day as with any other investment and if the price of that bond changes during the course of the day or from one day to the next, rates will change slightly. The 30 year fixed rate conventional is tied to what is referred to as the FNMA 30-yr 3.0 coupon. As these various indexes change, so too will mortgage rates.
3. Why do I need PMI and is it a bad thing? PMI is the acronym for Private Mortgage Insurance. With a conventional loan, if the loan balance is greater than 80% of the value of the property, lenders can require a mortgage insurance policy which essentially covers the difference between 20% down and what the borrowers actually have as a down payment. If the down payment is 5.0%, the insurance policy will cover 15%, which is the difference between 20% and 5%. Mortgage insurance isn’t necessarily a bad thing and allows borrowers to come to the closing table with less money and it’s not a permanent thing. Borrowers can later refinance an existing loan and if the value is lower than the 80% threshold, PMI can be dropped.
Government-backed loans also have their own form of mortgage insurance. The VA calls its insurance the Funding Fee, USDA has the Guarantee Fee and FHA loans have both an upfront mortgage insurance premium and an annual one paid in monthly installments.
4. Which should I choose, a 30 year fixed or a 15 year? Maybe neither. Most lenders advertise only a 30 year term and a 15 year but there are other choices available. For example, conventional loans can be in loan terms from 10 to 30 years in five year increments. The tradeoff with a shorter loan term means a higher monthly payment because the loan will be paid off in half the time a 30 year loan would. The 30 year term has a lower monthly payment but more long term interest paid to the lender. Yet borrowers can also choose a 10, 20 or 25 year term. Speak with your loan officer to compare your different options and compare the impact of a shorter or longer term on your monthly payment.
5. Which is better, a fixed rate loan or a variable? Neither is necessarily better than the other but is used in a particular situation based upon the borrower’s requirements and goals. For borrowers that intend to own and finance a property for the long haul, a fixed rate might be the better choice. With a variable or a hybrid loan, there is a bit of uncertainty about the future. If rates in general rise over time, so too will the monthly payment with the variable choice.
6. Is it better to rent or to buy? There are advantages with both depending upon your own situation. Mortgage loans offer certain tax deductions that renters don’t have such as mortgage interest deduction, property taxes, discount points and in certain instances an income tax credit. Yet with those deductions as well as acquiring homeowner equity over time, the only way to get out of the property is to sell it.
Renting provides flexibility that owning does not provide. Renters are typically bound by the term of the lease. If a renter wants to move to a different area or is moving for a job, there is no long term commitment as most leases range from six to 12 months. If you’re short term, it’s probably best to rent. If you’re ready to settle down, then buying works to your favor.
7. How much are closing costs? Your loan officer can provide you with a loan Cost Estimate which will itemize potential charges you will see at the settlement table. There are lender fees and non-lender fees. Lenders have control over what they charge and can give you a firm commitment on what those fees will be. Lenders do not have control over third party fees but do have a pretty good idea of what they will be.
These fees will be listed on the Cost Estimate and cannot vary within 10% from the original cost estimate as long as you have no control over who these third parties will be. For closing costs where you get to choose the service provider and you do so, the lender is not responsible for misquotes.
One more. These are the most common questions but we do realize there are so many others. That’s why we encourage you to contact us directly and let us answer each and every one of your mortgage loan questions and tailor a mortgage quote specifically for your situation.
