Frequently Asked Questions
Most people have a lot of questions when it comes to financing a home. For a first-time home buyer, the process can seem particularly daunting. Even for those who have financed a home in the past, with all the news lately you may have questions about what has changed. The best way to get all of your questions answered is always to talk to one of our trusted loan advisors. If you choose the location nearest you from the panel at the left, you can find a list of advisors at each of our location that can help answer all of your questions. Answers to some of the most commonly asked questions are below.
What is a rate lock?
A rate lock is a lender's guarantee of an interest rate for a set period of time, usually between loan application and loan closing. A lock period can be anywhere between 15 days to 90 days during which time you, as a borrower, are protected against rate fluctuations. Rate locks can be expensive for lenders, so it is usually true that the longer the lock-in period, the higher the cost is for you. Our trusted loan advisors can help you understand which choice is best for you.
How long does the mortgage process take?
The length of the mortgage process depends on a number of things. Some types of mortgage loans have pre-determined timeframes. The closing date on a purchase loan is determined by the escrow closing date agreed upon by the buyer and the seller or builder. Usually, purchase escrow periods range between 30 to 90 days. On refinance transactions, the process can take anywhere from 5 to 30 days depending on whether there are any special circumstances involved in the transaction. At RMS, we control the entire mortgage process in-house which means you'll receive accurate information and faster closing times.
What items are typically needed at application?
Is a fixed rate or adjustable rate mortgage better?
There is no loan type that is better for everone, all the time. The best mortgage for you depends on a variety of factors, including your financial situation and housing goals. Generally speaking, adjustable rate mortgages (ARMs) offer lower initial interest rates than fixed rate loans, but also have the potential to fluctuate every month, every six months, or every year, depending on the type of adjustable mortgage you get. An ARM therefore may be more attractive to homeowners who plan to sell their home in the timeframe before the adjustable rate surpasses a fixed-rate loan. On the other hand, homeowners who plan to remain in their home, or who want more stability in their rate and monthly payments, may find a longer-term 15, 20, or 30 year fixed rate more attractive. A fixed interest rate provides homeowners with a stable mortgage payment that does not change. Ask one of our trusted loan advisors about our adjustable, short term fixed, and long term fixed rate loan programs to see what can best help you with your individual goals.
What is an APR?
Annual Percentage Rate, or APR can be defined as the annual cost of a loan, expressed as a yearly rate. APR is designed to measure the "true cost of a loan," and to prevent lenders from hiding fees from you. Although the rules to compute APR are not clearly defined, the fees it generally includes are pre-paid interest, points, origination fees, and private mortgage insurance (PMI), so APR will be slightly higher than the actual interest rate on the loan. However, different lenders calculate APR differently, so you want to be careful when you are shopping for your loan to make sure you understand what fees are computed. It can be more practical for you to compare lenders by the interest rate they offer for the same loan type and term, and then compare the applicable points and total closing fees. Our loan advisors will take the time to make sure you fully understand all of the costs associated with your loan, and how they affect the APR.
What are points?
Paying points is a way to reduce your interest rate when you purchase or refinance your home. In essence, you are paying up front for a lower interest rate to reduce your monthly payment over the life of your loan term. One point is equivalent to one percent of your loan amount, so one point on a $100,000 loan amount is equal to $1,000. As a general rule, it makes sense to pay points if you intend to keep your home for a long enough period of time where the savings in your monthly payment eventually makes up for the extra fees you pay up front. To find out if paying points makes sense for your situation, call one of our loan advisors for an evaluation of your individual housing goals.
What is Loan to Value?
Loan-to-Value (LTV) refers to the amount of the loan as a percentage of the current market value of your home. You can calculate your LTV fairly easily by dividing your existing loan amount by current value of your home. For example, if you borrow $200,000 and your home is valued at $400,000, your loan to value is 50%. LTV is important when it comes to qualifying for a refinance loan, and will determine whether you will be required to get private mortgage insurance (PMI) on your purchase or refinance transaction.
What is PMI?
Private mortgage insurance (PMI) is purchased by a buyer when the down payment is less than 20% of the purchase price or the loan amount is more than 80% loan-to-value. Mortgage insurance is designed to protect the lender against default. Homeowners will continue to pay mortgage insurance even after they refinance their home, as long as the loan-to-value remains above 80%.
What is an escrow or impound account?
An escrow or impound account is set up by your lender during the loan closing to pay property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items on a monthly basis. Escrow accounts make sure that there is always enough money to pay these bills when they are due, and that these important payments are made on time. Escrow accounts also protect homeowners like you from having to come up with several large, lump sum payments at different times throughout the year.
What are Freddie Mac and Fannie Mae?
Mortgages made by lenders and banks are generally sold on the secondary market to produce cash so the lenders can make more mortgages. The largest purchasers on the secondary market are the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). These two organizations, called government-sponsored enterprises, or GSEs, were originally created by the government to make mortgages available to more people with low and moderate incomes, although both organizations are now privately run.
Freddie Mac and Fannie Mae have specific requirements for the loans they will purchase from banks and lenders, including a loan limit for single-family homes in the United States. Loans within this limit are the "conventional" or "conforming" loans you may hear about in the news.
What is the difference between a conforming and jumbo loan?
Conforming loans have a well-established secondary market which is provided by the two government sponsored entities, Freddie Mac and Fannie Mae. A jumbo loan is any loan that exceeds the conforming loan amounts and the rates for these loans are typically higher than for conforming loans.
