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Q.
What does APR mean? How does it work?
A.
Most people probably know that “APR” stands for “Annual
Percentage Rate,” but knowing how it is calculated is
another matter. By law, APR is calculated by using a
standard formula that discloses the cost of a loan
expressed as a yearly interest rate. Since the cost of a
loan includes the interest, points, mortgage insurance,
and other fees associated with the loan, the higher
these total amounts are, the higher the APR is. The
formula for calculating APR is defined by law to help
consumers more easily compare loan costs with different
rates, points, and fees.
The reasons for the regulations are well-intended, but,
unfortunately, not all brokers and lenders use the
formula in calculating APRs. Borrowers should be careful
to avoid being misled by advertised APRs and focus on
the amount of monthly payments, total costs, and terms,
such as whether the interest rate is fixed or variable.
A professional mortgage broker will help you select the
program that suits your needs
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Q.
What is an ARM? Is it better than a Fixed Rate
Mortgage?
A.
“ARM” or “Adjustable Rate Mortgage” refers to a loan
product that includes some period of time during which
the interest rate varies periodically according to the
changes in an independently published index that
reflects the underwriters’ cost of money. ARMs are
typically fixed for three to five years up front, and
then vary annually for the rest for the life of the
loan. For example a “3/1” ARM is fixed at a particular
rate for the first 3 years and is adjusted annually
thereafter. An important feature of an ARM is the cap
that limits the amount that the rate can change.
Typically, the cap limits the change at the first
adjustment point after the fixed period ends, the change
at each following adjustment point and the total change
over the life of the loan. The cap is usually expressed
like this: “2/1/5” – meaning that the rate on the loan
can only adjust up to 2% at the first adjustment point,
up to 1% at each subsequent adjustment point, and no
more than 5% over the life of the loan.
Whether an ARM is a better product for you than a fixed
rate mortgage is a question that you should discuss with
your mortgage broker. The advantage to someone who plans
to stay in a home for no longer than the initial fixed
period is clear – that rate is almost
always lower than a fixed rate mortgage. On the other
hand, borrowers who are going to stay in their homes for
a longer period, say five years or more, should weigh
the risks of future increases in mortgage interest
rates, the typical cycle of rates over the period of
time they plan to hold the property, and similar
factors. Again, your mortgage professional can help you
weigh these factors and decide on the product that is
best for you.
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Q.
What are points? Do I have to pay
them?
A.
A
point is part of the cost of a loan that a lender
charges up front at closing instead of in the monthly
interest rate (although the points can be capitalized
into the principal in some refinancing programs). One
point is equal to 1% of the loan amount. For example,
one point on a loan of $200,000 would equal $2,000, two
points would be $4,000, and so forth. Generally, a
borrower pays points in order to get a lower interest
rate, so whether a program that includes points is
better for you is determined by your situation. One
thing to look at, again, is whether you are going to
stay in the house long enough for the interest savings
to amortize the cost of the loan, which is primarily in
the points.
NOTE:
If you are considering a refinancing, look at our
article on “
Why To Refinance.”
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Q.
Are interest only mortgage loans
available? How do I know if one is right for me?
A.
Interest only loans are available, depending on each
borrower’s situation. Whether one is right for you
depends on your goals and the risks you are willing to
take. As the term implies, and interest only loan is one
that includes some period in which the borrower pays
only interest and nothing against principal. Usually,
that period is the first five years of the loan. The
advantage to an interest only loan is that the payments
will be lower during the interest only period. The
disadvantage is that the interest rate is usually
adjustable, so the borrower accepts the risk of rate
increases.
Interest only loans are attractive because they allow a
borrower to buy a more expensive property, but they are
more complicated and involve more risks. Seek the advice
of a professional mortgage broker to determine if it is
the right product for you.
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Q.
What is a biweekly payment
program? How does it work?
A.
A bi-weekly payment program is a method of leveraging
your payments to pay off your loan in a shorter period
of time and save substantially on the total interest
cost. By making half payments very two weeks, you wind
up making an extra payment each year. In addition, you
are reducing the principal more often, so the amount
that the interest accumulates each month is slightly
smaller. The total effect may be a savings of 15% to 20%
of the interest charges over the life of the loan and
shortening the term by several months.
Here is an example of how a bi-weekly program can make a
difference:
Assume that you borrow $100,000 on a conventional 30
year Fixed Rate Mortgage at 6%. If your payments are set
up on a monthly basis, they will be about $600. If you
set the payments up on a bi-weekly basis, you will pay
an additional $600 per year, the loan will pay out in
about 24.5 years, and you will save about $24,450 in
interest payments over the life of the loan.
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Q.
How often do interest rates change? Why? How much do
they change?
A.
Interest rates, like the stock and bond markets, are a
direct reflection of the state of the economy on any
given day. To be more precise, they are a reflection of
various markets’ perception of the economy, principally
the bond market. They can change from day-to-day or,
sometimes from hour-to-hour. Typically, rates do not
change more than a fraction of a point in a day, but in
some economic circumstances, such as those we saw in the
80s, rates can rise vary rapidly, sometimes as much as a
point in a day. As in the case of the stock and bond
markets, there are professionals who are in the business
of predicting interest rates; however, like all of those
who look into the future, they are wrong from time to
time. You can track the yield on 10 year bonds in the
bond market on a site like
http://www.mortgagemarketguide.com,
because interest rates will generally (although not
always) follow bond yields. You can also track rate
changes on this site. [?]
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Q.
Can I buy a home without a down
payment?
A.
Yes. There are a number of “zero down” or “100%
financing” options available to borrowers, depending on
the borrower’s credit, usually with private mortgage
insurance and simultaneous first and second mortgages.
Just as with loans with down payments, the options and
terms are less favorable with less attractive credit
ratings. To determine which programs you qualify for,
schedule an appointment with one of our representatives
for a confidential consultation.
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Q.
Can I get a loan if I have
problems on my credit report?
A.
Although
the options are fewer for borrowers with credit
challenges, there are a number of programs available.
“Subprime” loan programs usually charge higher interest
rates and will generally require larger down payments,
because the underwriters are accepting a higher level of
risk. Usually, the best choice is a short term ARM
because the rates on there products are generally lower
during the fixed period, which makes getting into the
loan easier and gives the borrower an opportunity to
repair his credit and refinance before the adjustment
period kicks in.
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Q.
Can I get a loan if I have a prior
bankruptcy?
A.
Yes, but…. A bankruptcy presents challenges, but
obtaining a loan is not necessarily impossible. We
should say up front, however, that generally it is
extremely difficult to
get a
mortgage loan until a year has passed since the
borrower’s Chapter 7 has been discharged, or in the case
of a Chapter 13, until a year after the filing of the
case. Some situations are better than others. For
example, if the borrower had good credit prior to the
bankruptcy, and the filing was caused by an
uncontrollable event like a major uncovered medical cost
or a divorce, it may be possible to get into a loan
program earlier, particularly if the borrower has good
income and money for a down payment. On the brighter
side, if the borrower’s Chapter 7 has been discharged
for at least 12 months, or his Chapter 13 was filed at
least 24 months prior, and the borrower has met all of
his obligations on time during those periods, an FHA
loan with a down payment as low as 3% is possible.
Each individual case is different, so schedule an
appointment with one of our professional mortgage loan
advisors to find out what your options are and which
program is best suited for you.
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