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| Frequently
Asked Mortgage Questions |
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| 1.
How do I know how much house I can afford? |
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Generally speaking, you can purchase
a home with a value of two or three
times your annual household income.
However, the amount that you can
borrow will also depend upon your
employment history, credit history,
current savings and debts, and the
amount of down payment you are willing
to make. You may also be able to
take advantage of special loan programs
for first time buyers to purchase
a home with a higher value. Give
us a call, and we can help you determine
exactly how much you can afford.
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| 2.
What is Private Mortgage Insurance
(PMI)? |
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PMI is normally required when
you buy a home with less than
20 percent down. Mortgage
insurance is a type of guarantee
that helps protect lenders
against the costs of foreclosure.
This insurance protection
is provided by private mortgage
insurance companies to protect
the lender. It enables lenders
to offer loans with lower
down payments. In effect,
mortgage insurance pays the
lender a certain percentage
of your original purchase
price to cover a lender's
losses in the unfortunate
event of foreclosure. Therefore,
without mortgage insurance,
you would need to make a 20
percent down payment in order
to buy a home.
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The cost of PMI increases
as your down payment decreases.
Example: The cost of PMI on
a 10 percent down payment
is less than the cost of PMI
on a 5 percent down payment.
Your PMI premium is normally
added to your monthly mortgage
payment.
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Cancelling your PMI:
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Federal law requires PMI
to be cancelled under certain
circumstances, and Fannie
Mae guidelines provide for
cancellation of PMI in additional
situations if the loan is
owned by Fannie Mae. In
general, PMI for a loan
originated on or after July
29, 1999, which is secured
by the borrower's one-family
principal residence or second
home will be cancelled at
the borrower's request when
the loan-to-value ratio
(LTV) reaches 80 percent
based on the value of the
home at loan origination.
In order to cancel PMI under
the rules of July 29, 1999,
the borrower must have a
good payment history and
the property value must
not have declined.
• PMI on mortgages
owned by Fannie Mae can
also be cancelled at the
borrower's request when
the LTV reaches 75 percent
based on the current value
of the home as established
by a new appraisal, provided
that the borrower has a
good payment history and
that the loan is at least
two years old.
• If the borrower
does not request PMI cancellation,
the PMI servicer must automatically
cancel PMI on these loans
when the LTV is scheduled
to reach 78 percent, based
on the value of the home
at loan origination, provided
that the loan is current
at that time. For loans
originated before July 29,
1999, which are secured
by the borrower's principal
residence or second home
and that are owned by Fannie
Mae, PMI will generally
be cancelled at the midpoint
of the loan term, provided
that payments at that time
are current.
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| 3.
What is the difference between
a fixed-rate loan and an adjustable-rate
loan? |
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With a fixed-rate mortgage,
the interest rate stays the
same during the life of the
loan. With an adjustable-rate
mortgage (ARM), the interest
changes periodically, typically
in relation to an index. While
the monthly payments that
you make with a fixed-rate
mortgage are relatively stable,
payments on an ARM loan will
likely change. There are advantages
and disadvantages to each
type of mortgage, and the
best way to select a loan
product is by talking to us.
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| 4.
How is an index and margin used
in an ARM? |
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An index is an economic indicator
that lenders use to set the
interest rate for an ARM.
Generally the interest rate
that you pay is a combination
of the index rate and a pre-specified
margin. Three commonly used
indices are the One-Year Treasury
Bill, the Cost of Funds of
the 11th District Federal
Home Loan Bank (COFI), and
the London InterBank Offering
Rate (LIBOR).
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