I've developed a list of questions that are commonly asked by my clients. Just click on the question below to go to my comments on that question. Thanks for looking. If you have questions not covered here, please call or email me, or fill out my EZ Mortgage Inquiry form; it's confidential and I'll contact you at the time you request. I'll be glad to help. Whenever you're available I'm available.

Should I Pay Points?

What's My Credit Score?

What is a Rate Lock?

Does it Cost to Lock in a Rate?

When is a Rate Locked?

What is Private Mortgage Insurance?

Why should I use a mortgage broker? Won't that cost me more money?
Why do lenders use mortgage brokers?

What are points?

What is an Annual Percentage Rate (APR)?

What is Prepaid Interest?

What is an escrow account?

Should I refinance?

The most common reason for refinancing is to save money. Saving money through refinancing can be achieved in two ways.

1. By obtaining a lower interest rate that causes one's monthly mortgage payment to be reduced.

2. By reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total of the payments made during the life of the loan can be reduced significantly.

People also refinance to convert their adjustable loan to a fixed loan. The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments.

A third reason why homeowners refinance is to consolidate debts and replace high-interest loans with a low-rate mortgage. The loans being consolidated may include second mortgages, credit lines, student loans, credit cards, etc. In many cases, debt consolidation results in tax savings, since consumers loans are not tax deductible, while a mortgage loan is tax deductible.

The answer to the question "Should I refinance?" is a complex one, since every situation is different and no two homeowners are in the exact same situation. Even the conventional wisdom of refinancing only when you can save 2% on your mortgage is not really true. If you are refinancing to save money on your monthly payments, the following calculation is more appropriate than the rule of 2%:

1. Calculate the total cost of the refinance––example: $2,000

2. Calculate the monthly savings––example: $100/month

3. Divide the result in 1 by the result in 2––in this case 2000/100 = 20 months. This shows the break-even time. If you plan to live in the house for longer than this period of time, it makes sense to refinance.

Whatever you choose to do, consulting with a seasoned mortgage professional can often save you time and money. Make a few phone calls, check out a few web sites, crunch on a few calculators and spend some time to understand the options available to you.

Should I pay points?

The best way to decide whether you should pay points or not is to perform a break-even analysis. This is done as follows:

1. Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000.

2. Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month

3. Divide the cost of the points by the monthly savings to come up with the number of months to break even. In the above example, this number is 40 months. If you plan to keep the house for longer than the break-even number of months, then it makes sense to pay points; otherwise it does not.

4. The above calculation does not take into account the tax advantages of points. When you are buying a house the points you pay are tax-deductible, so you realize some savings immediately. On the other hand, when you get a lower payment, your tax deduction reduces! This makes it a little difficult to calculate the break-even time taking taxes into account. In the case of a purchase, taxes definitely reduce the break-even time. However, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all, so there is little or no effect on the time to break even.

If none of the above makes sense, use this simple rule of thumb: If you plan to stay in the house for less than 3 years, do not pay points. If you plan to stay in the house for more than 5 years, pay 1 to 2 points. If you plan to stay in the house for between 3 and 5 years, it does not make a significant difference whether you pay points or not.

What's My Credit Score?

Your credit score is one of the most important factors in getting a mortgage loan. A few points, in some cases, can mean the difference between getting and not getting a loan, or the difference between the best rates and higher rates. Below will help you understand some of the factors that affect your credit.

First, a credit score is a numerical method of rating an individual’s “creditworthiness”. Scores can range from approximately 300 to 800, with higher scores being lower credit risks. Fair Isaac Company (FICO) developed a formula for calculating credit scores, which is used by each of the 3 major credit bureaus—Experian, Equifax, and TransUnion. Each of the 3 bureaus stresses different factors, so a FICO score from Experian will rarely be exactly the same as Equifax or TransUnion, but a majority of the time the scores will be similar. Because of the variation in the scores, some lenders rely solely on one bureau’s FICO score, while others rely on the middle of the three scores.

Fair Isaac Company considers the scoring formula to be proprietary information, and refuses to release the exact formula for determining credit scores. However, it is generally accepted that the factors listed below are the most influential on your credit score:

1. Payment History: This takes into account then number of late payments you have on your credit report, to all creditors you have, including mortgage, credit cards, auto loans, and sometimes even cellular phone companies. The late payments are broken down into several categories—30 days late, 60 days late, or 90+ days late. A single late payment will not kill your credit score, but several can. A very delinquent debt (90+ days) will also negatively affect your score.

2. Amounts Owed: This category is one of the most confusing. The total outstanding debt to all debtors considered, as well as your total available credit limits, and the number of credit lines available. This may be oversimplifying, but having a few credit lines, with low balances, is much better for your credit score than having several credit lines with high balances.

3. Length of Credit History: This is the simplest factor. The longer you’ve had credit, the better. The longer your credit lines have been established, the better. The average “age” of all open credit lines is the major factor.

4. New Credit: This looks at you recent history to view the number of credit lines that have been recently opened. Typically, having several recently opened credit lines lowers your score, as well as having too many inquiries on your credit.

5. Types of Credit Use: This looks for a “healthy” credit mix. The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have one of each, and it is not a good idea to open credit accounts you don't intend to use.

Some things you can do to improve your credit score:

Keep an eye on your credit. Periodically check your credit score at sites such as FreeCreditReport.com. Check for any inaccuracies, and notify the appropriate credit bureaus if any are on your record.

Have a few credit lines, with low balances. Don’t max out your credit cards.

Don’t open too many lines of credit in a short amount of time.

Don’t try to clean up your credit by closing unused lines of credit, or opening new lines of credit. Doing so may have adverse negative affects.

ALWAYS PAY YOUR BILLS ON TIME! If you will be applying for a mortgage loan/refinance loan, history on your previous mortgage is critical.

What is a Rate Lock?

A rate lock is a lender's commitment to give you an interest rate for a specified period of time. "Locking In" the terms of the loan guarantee that if rates go up, that you will have the rate at time of locking. The loan must be completed within the lock period, if for some reason your loan is not completed before the lock expires, the terms of the loan will either be those at the time of closing or at the time of the lock, whichever is higher.

Does it Cost to Lock in a Rate?

There is no lock in fee for loans locked for a period of 30, 45 or 60 days. If you require extended locks, please be sure to call me.

When is a Rate Locked?

Once your loan application is submitted, you are eligible to lock in your interest rate. Your rate lock is officially locked when acknowledged by phone, FAX, e-mail, or US mail. Rates can be locked until 4 p.m. on business days.

Back To Top

What is Private Mortgage Insurance?

Private Mortgage Insurance (PMI) is required when the down payment is less than 20% of the purchase price. PMI protects the lender against losses in case of default (foreclosure) by the borrower.

Why should I use a mortgage broker? Won't that cost me more money?

Mortgage brokers represent you, the borrower, in obtaining financing from a variety of lending sources. If mortgage brokers are middlemen between you and the lender, how can they save you money? Don't you have to pay extra for using a mortgage broker? The bottom-line answer is NO.

Independent surveys have shown that mortgage brokers do NOT cost you more than direct lenders. In most cases, they are able save you money. Mortgage brokers increase competition in the market place, resulting in lower rates for everyone. Since mortgage brokers obtain their funds from a variety of sources, they allow you access to a large number of lenders. When you apply for a loan with me you are, in effect, applying for loans with the leading enders we represent!

Some of the advantages to using the services of a mortgage broker such as myself over going directly to an institutional lender are:

I can provide financing which is customized to your needs. A direct lender has a limited number of their own loan programs to offer and their loan agent can only sell you their loan programs. In contrast, I represent many lenders and hundreds of different loan programs that can be custom tailored to your specific borrowing needs and not be limited to the constraints of one particular lender.
I act as advocate and intermediary for you. I will often step in to negotiate terms and conditions which are more favorable to you than the terms you would normally receive by working directly with the lender.
I do most of the work for the lender and therefore, the lender gives me a "discounted" wholesale rate on the loan. That rate is then marked up to a retail price which is often the same price the lender would charge you to go to them direct. The result is a better loan program for you without an additional cost or even lower cost!

There are numerous competitive lenders that only accept loans from mortgage brokers. You can only gain access to these competitive lenders and their programs by using a mortgage broker like myself. These "wholesale only" lenders frequently price their loans more aggressively in your favor than institutional retail lenders.

I work for you, always. On the occasion where a loan is declined by the intended first lender of choice, or when that lender imposes unacceptable conditions, then I can re-package the file and easily submit the loan to another lender within a day or two. This is because we process a package that is generic to all lenders with whom we work. If you went directly to a lender and subsequently wanted or needed to switch lenders, you would need to start all over with your new lender and you would lose 2-3 weeks in processing time.

Back to Top

Why do lenders use mortgage brokers?

The bottom line is that lenders use mortgage brokers because they save the lenders time and money. The mortgage broker, does all the legwork of finding customers, pre-qualifying them, and compiling and submitting their loan package. As a result, lenders are able to offer discounted pricing.

Mortgage brokers offer the lenders an alternative to branch offices. Since personal contact with the customer is usually required, my office at Goldwater Mortgage Company serves as a lender's branch office. This saves the lender tremendous amounts of time and money.

Mortgage brokers act as a matching service - they match the right clients with the right lenders. I know what each lender is looking for and submits loans that a particular lender is likely to approve. This saves the lender a lot of time and expense since they approve a higher percentage of loans.

Mortgage brokers generate about 50% of all loans. In fact, lenders have established wholesale divisions and have account representatives on staff just to service their mortgage brokers. There is a lot of competition between wholesale lenders to get broker-generated business. My relationship with these lenders gives me a competitive edge in getting you a competitive loan!

Mortgage brokers are responsible for all the sales and marketing required to find clients. Lenders in effect have a large sales force with little overhead cost.

Back to Top

What are points?

Points are loan fees that are paid to lenders and mortgage brokers. 1 point = 1% of the loan amount. There are two different types of points: origination points and discount points. Origination points are charged by a mortgage company as a fee to process and approve your loan, while discount points are used to buy down the rate of interest, and typically are passed through to the investor to secure that lower interest rate.

What is an Annual Percentage Rate (APR)?

The annual percentage rate (APR) is an interest rate that reflects the cost of your mortgage loan as a yearly rate and is different from the actual note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires that mortgage companies disclose the APR when they advertise a rate. For example:

30-year fixed with 8% interest and 1 point = 8.107% APR.

The APR does NOT affect your monthly payments. Your monthly payments are calculated by your note interest rate and the length of your loan.

The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and then hiding fees that increase your costs. The APR rate is generally higher than the rate stated on your mortgage note because the APR includes other costs, such as origination fee, loan discount points, and pre-paid interest. The APR allows you to compare, in addition to the interest rate, the total cost of financing your loan, among various lenders.

Unfortunately, there is no uniform method of calculating APRs and the rules for computing APRs are not clearly defined, so different lenders calculate APRs differently! In general, the following fees are usually included in the calculation of the APR: discount and origination points; pre-paid interest (most companies assume 15 days of interest in their calculations, but some may use any number between 1 and 20); loan processing fee; underwriting fee; document preparation fee; private mortgage insurance costs; appraisal fee; and credit report fee. Sometimes, the loan application fee and credit life insurance costs may also be included in the APR calculation.

In general, the following fees are usually NOT included in the calculation of the APR: title or abstract fee; escrow fee; attorney fee; notary fee; closing document preparation fee (charged by the closing agent); home inspection fees; recording fee; and transfer taxes.

Also, many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs! Therefore, a loan with a lower APR is not necessarily a better rate.

Back to Top

What is pre-paid interest?

This is interim interest that accrues on the mortgage loan from the date of the settlement to the beginning of the period covered by the first monthly payment. Since you pay interest in arrears, your mortgage payment made in June actually pays for interest accrued in the month of May. Because of this, if your closing date is scheduled for June 25, your first mortgage payment will be due August 1 (and will pay for the interest for the month of July). The lender will then calculate an interest amount per day that is collected at the time of closing (hence the name pre-paid). This amount covers the interest accrued from June 25 to July 1.

What is an escrow account?

An escrow account is typically established at the time you close your mortgage loan. This account is held by the lender for the future payments of recurring items relating to the mortgaged property, such as real estate taxes and insurance premiums (hazard and mortgage), as they become due. Lenders usually require you to pay an initial amount for each of those items to start the reserve account at the time of closing. Below an 80% loan to value, you are not required to have an escrow account. You always have the option of paying your own property taxes and home owners insurance thereby reducing the amount of money you would need to pay at your time of closing. In Arizona, most lenders charge a fee to waive these escrow accounts.

Back to Top