There are so many contributing factors to landing a loan and becoming a homeowner, your brain is probably still teeming with questions – even after reading Part 1 and Part 2 of this series.
That’s okay; we’re here to help.
We’ve compiled a few more common questions related to the home buying process to help you further understand what you might be getting yourself into and how to be better prepared before you begin.
Let’s get started.
What is the difference between receiving a pre-qualification and a pre-approval?
It’s easy to get caught up in the semantics associated with pre-qualification and pre-approval, but these words are generally interchangeable. In simplified terms, they let you know that based on the basic information you have provided (which may not include a formal credit check) a lender is willing to lend to you up to a certain amount, based on certain caveats. If, upon further investigation, your financial situation isn’t up to par, that pre-approval won’t mean much.
Why are the interest rate and the annual percentage rate (APR) different?
When it comes to discussing loan terms, you will hear mention of two numbers: the interest rate and the annual percentage rate (APR). So what do they both actually represent?
The interest rate is the cost of borrowing the principle loan amount. The type of loan you get dictates whether this is variable or fixed (an adjustable rate mortgage will change, for example), but it will still be offered as a percentage of the total loan amount.
The APR is expressed as a percentage and does include the interest rate, but it also includes several other costs and fees to show the total cost of the loan. This could include things like brokers fees and closings costs.
In other words, the interest rate will show you how much you’ll be paying monthly, while the APR will give you a bigger picture of how much you’ll pay for that particular loan overall.
What are mortgage points and why would I be required to pay them?
If you hear your lender talking about “points,” they are referring to one of two things: discount points or origination points.
Discount points will improve the monthly interest rate on your loan by allowing you to prepay some of that interest upfront. Generally each discount point costs 1% of the total loan amount and one point can lower your interest rate anywhere from 1/8th to 1/4th of a percentage. Discount points are tax deductible.
Origination points comprise the fee charged by the lender or broker for the work associated with putting your loan together. One point is 1% of the loan amount and the number of points you are required to pay depends on the broker or lender and are usually negotiable. These points are only tax deductible if they were used to obtain the mortgage, not pay other itemized costs.
What happens when (or if) my mortgage is sold to another party?
Your mortgage service provider is tasked with taking your monthly payment and allocating the money to each of the designated obligations tied to your mortgage – like paying property taxes to the government and Private Mortgage Insurance payments to the provider. This service will likely switch hands at least once during the life of your loan.
While it’s common for this to happen, your lender must let you know at closing that your service provider could change. In addition, if this does happen, you must be informed in writing, and you are protected by the original terms of your loan. Find out what other rights you have here: http://www.bankrate.com/finance/mortgages/mortgage-sold-to-a-servicer.aspx.