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Mortgage FAQs: 

What is a mortgage?

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.

What is LTV (Loan-to-Value)?
The loan to value ratio is the amount of loan compared with the purchasing price or appraised value of the property.

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

What are the advantages and disadvantages of each type of loan?
Fixed rate mortgages - 15 year and 30 year:
Advantages - an extremely stable choice. payments of principal and interest remain the same for the life of the loan; protected from rates going up. can refinance if rates go down.

Disadvantages - higher interest rate; rate could not change if interest rates drop.

Advantage of a 15-year fixed mortgage is that loan is made at a lower interest rate. Higher monthly payments pay more principal, which means principal will be paid off sooner and save in interest payments.

Disadvantage of 30 year fixed mortgage, in the first 23 years of the loan, more interest is paid off than principal.

Adjustable rate mortgages - 3/1 ARM, 5/1 ARM, and 7/1 ARM:
Advantages - lower initial interest rates, lower initial monthly payment; qualify for a larger loan amount.

Disadvantages - more risk if rates go up; payments may change over time.

Can I pay off my loan ahead of schedule?
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.

How large of a down payment do I need?
There are mortgage options now available that only require 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 to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, ect.

What is prepaid 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 interest is paid in arrears, a 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 15, the first mortgage payment is due August 1. The lender will calculate an interest amount per day that is collected at the time of closing. This amount covers the interest accrued from June 15 to July 1.

Do I need title insurance?
The lender will check the title to the property to make sure there are no outstanding liens or title problems. The lender requires, and sometimes will arrange for, title insurance to protect the property against unforeseen problems. This is called a “lender’s” title insurance policy. You may want to obtain title insurance to protect your own interest in the property. This is called an “owner’s” title insurance policy. These policies ensure that your property is free and clear of any title defects, claims or encumbrances.

When do I have to pay PMI?
If the down payment on your home is less than 20%, your lender will probably require that you get private mortgage insurance (PMI). This insurance insures the lender against possible default on the loan. It is not to be confused with mortgage life insurance or homeowners insurance.

The cost of PMI is divided into two parts. The first part is a payment made at the loan closing. The second part is an ongoing payment made each month along with the principal and interest payment.

Normally, PMI may be removed if your LTV (loan to value) is less than 80%. It also may be removed if you have obtained an independent appraisal stating that amount of the loan to appraised value is 80% or lower.

Some lenders do not require PMI. Instead, they may increase their origination fee and/or the interest rate on the loan. This can represent a significant advantage to the borrower since PMI premiums are not deductible for tax purposes and mortgage interest is usually deductible.

What are closing costs?
Closing costs and procedures vary from state to state and from county to county. In some jurisdictions, an attorney represents the lender. In others, the title company represents the lender. There may be state or county transfer taxes to be paid. There may also be fees for recording certain documents. There are also standard charges that are paid at all closings. Taxes, title insurance premiums, and interest on the loan pro-rated from the closing date to the end of the month.

Prior to closing, be sure to inquire if the lender requires an escrow account set up for the payment of the real estate taxes and homeowners insurance. Some lenders will waive the escrow requirements if the down payment is above a certain limit. Depending on when you close and when real estate taxes are paid in your jurisdiction, the cash required to set up the real estate tax escrow could represent one-half to three-quarters of the annual real estate tax bill.

It is important that you review what the closing costs will be with your lender and attorney. This should take place far enough in advance of the closing to allow yourself time to obtain the necessary funds to pay the closing costs.

What is an Escrow Account?
A n 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. If you use an escrow account to pay property tax or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.

Who are involved at closing?
T the final step before you own your new home or complete the refinancing of your current home. At the closing, you, the seller, the lender and the attorneys for all involved validate, review and sign all documents relating to the purchase or refinance. The lender provides the check for the loan amount. You receive the title to your property and the keys to your new home.