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| Frequently
Asked Mortgage Questions |
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| 8.
What does my mortgage payment
include? |
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For most homeowners, the monthly
mortgage payments include
three separate parts:
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Principal: Repayment on
the amount borrowed
• Interest: Payment
to the lender for the amount
borrowed
• Taxes & Insurance:
Monthly payments are normally
made into a special escrow
account for items like hazard
insurance and property taxes.
This feature is sometimes
optional, in which case
the fees will be paid by
you directly to the County
Tax Assessor and property
insurance company.
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| 9.
How much cash will I need to purchase
a home? |
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The amount of cash that is
necessary depends on a number
of items. Generally speaking,
though, you will need to supply:
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Earnest Money: The deposit
that is supplied when you
make an offer on the house
• Down Payment: A
percentage of the cost of
the home that is due at
settlement
• Closing Costs: Costs
associated with processing
paperwork to purchase or
refinance a house
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| 10.
What is an Annual Percentage
Rate (APR)? |
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The annual percentage
rate (APR) is an interest
rate that is different
from the note rate.
It is commonly used
to compare loan programs
from different lenders.
The Federal Truth in
Lending law requires
mortgage companies to
disclose the APR when
they advertise a rate.
Typically, the A.P.R.
is found next to the
rate. For example:
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The APR does NOT affect
your monthly payments.
Your monthly payments
are a function of the
interest rate and the
length of the loan.
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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 hiding fees.
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Ideally, one should
be able to compare APRs
from various lenders,
and then select the
loan with the lowest
APR.
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Unfortunately it's not that
simple. Various lenders calculate
APRs differently! A loan with
a lower APR may not be the
best choice. A good way to
compare different lenders
is to ask them to provide
a Good Faith Estimate of closing
costs. Be sure you compare
the same loan program (e.g.,
30-year fixed), interest rate
and rate lock period. You
may ignore fees that are independent
of the loan, such as homeowners
insurance, title fees, escrow
fees, attorney fees, etc.
Pay particular attention to
loan fees. The lender with
the lowest loan fees will
likely have the best deal.
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The reason why APRs are confusing
is because the rules to compute
APR are not clearly defined.
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What fees are included
in the APR?
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The following
fees ARE generally
included in the
APR:
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Points - both
discount points
and origination
points
• Pre-paid
interest. The
interest paid
from the date
the loan closes
to the end of
the month. Most
mortgage companies
assume 15 days
of interest
in their calculations.
However, companies
may use any
number between
1 and 30!
• Loan-processing
fee
• Underwriting
fee
• Document-preparation
fee
• Private
mortgage-insurance
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The following
fees are SOMETIMES
included in the
APR:
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•
Loan-application
fee
• Credit
life insurance
(insurance that
pays off the
mortgage in
the event of
a borrowers
death)
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The following
fees are normally
NOT included in
the APR:
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•
Title or abstract
fee
• Escrow
fee
• Attorney
fee
• Notary
fee
• Document
preparation
(charged by
the closing
agent)
• Home-inspection
fees
• Recording
fee
• Transfer
taxes
• Credit
report
• Appraisal
fee
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Calculating APRs on
adjustable and balloon
loans is even more complex
because future rates
are unknown. The result
is even more confusion
about how lenders calculate
APRs.
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Do not attempt to compare
a 30-year loan with
a 15-year loan using
their respective APRs.
A 15-year loan may have
a lower interest rate,
but could have a higher
APR, since the loan
fees are amortized over
a shorter period of
time.
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Finally, 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.
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| Use
the APR as a starting point
to compare loans. The APR
is a result of a complex
calculation and not clearly
defined. There is no substitute
to getting a good-faith
estimate from each lender
to compare costs. Remember
to exclude those costs that
are independent of the loan. |
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