MORTGAGE 101

Frequently Asked Questions

What is a mortgage?

A mortgage is another word for a home loan. Mortgages are designed to help people purchase real estate where there is an existing home or for building a new home. When you take out a mortgage, you’re borrowing money from a financial institution with the promise to repay the loan over time. It’s secure home financing that can help people achieve their homeownership goals and dreams.

What will my monthly payment be?

Your monthly payment will depend on several factors. Every mortgage payment is made up of four main costs: principal, interest, taxes, and insurance (also known as PITI). Let’s break it down:

  • Principal is the loan amount you borrow, then the remaining balance throughout the life of the loan.
  • Interest is the fee you pay to borrow the money expressed as a percentage rate.
  • Taxes are the property taxes you pay on the home. These are set by your local government.
  • Insurance on your home is required. The rate will be set by your insurance provider.

Many homeowners choose to have their taxes and insurance paid using an escrow account. This can be a convenient way to pay those bills by taking your estimated tax and insurance costs and rolling them into your monthly mortgage payment. These funds are then taken out of your escrow account and the bills are paid when they’re due by your loan servicing company. All you have to do is make your monthly mortgage payment and your servicer will take care of the rest.

What is an appraisal?

An appraisal is an estimate of a property’s fair market value. Depending on the loan program, an appraisal is required by a mortgage lender before they approve the loan to ensure that the loan amount is not more than the value of the property. The appraisal is performed by an appraiser—typically a state-licensed professional and unbiased third party who is trained to give an expert opinion concerning property value, considering its location, amenities, physical conditions, and more. They walk through the home, surveying the property and looking for issues that may affect the value of the home. During this part of the property valuation, the appraiser also researches the recently sold comparable homes (or comps) in the area to help determine the value. The resulting appraisal report should help you make an educated decision as to whether you should purchase the home.

What is PMI?

On a Conventional mortgage, when your down payment is less than 20% of the purchase price of the home, your mortgage lender will require you to get private mortgage insurance (PMI) to protect them in case you default on your mortgage. Some borrowers have to pay up to one year’s worth of PMI premiums at closing, which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment or ask about other loan program options.

What does it mean to lock in your interest rate?

The market can be unpredictable. From the day you apply for a mortgage to the day you close, mortgage rates could change. And if they rise, it can increase your payment dramatically. That’s why mortgage lenders offer the ability to “lock in” your interest rate. This guarantees a specific rate for a period of time, usually 30 to 60 days and sometimes for a fee. Locking in your interest rate helps you get a great rate even if the market shifts.

What is an APR?

Your annual percentage rate (APR) is the total yearly cost of your mortgage expressed as a percentage. Not to be confused with interest rate. APR gives you a bigger picture of what it costs to finance your loan by accounting for the interest rate and finance charges. This is also why your APR is likely to be higher than the rate stated on your mortgage. What’s great about APR is that, by comparing APRs from different lenders, home buyers can get an idea of the true cost to borrow. And, it prevents lenders from advertising a low rate while hiding fees.

How is paying a mortgage different from paying rent?

As a renter, you don’t own the place you live in. When you pay rent, you’re paying the owner a fee so you can live there. Essentially, what you pay in rent each month contributes to the mortgage the homeowner or property owner pays.

However, when you pay a mortgage, you’re not paying rent to the homeowner. Since you are the homeowner, your monthly payment goes to your mortgage lender. This cuts out the middleman. Your mortgage lender loans you enough money to purchase the home and, over an agreed upon period of time, you pay back the loan (plus interest, taxes, and other fees). The biggest difference is ownership, and who owns the home you live in determines who pays whom.

What are points?

A point (also called discount point) is a percentage of the loan amount. One point equals 1% of the loan. That means one point on a $100,000 loan is equal to $1,000. Points are fees a borrower can pay the lender at closing to buy down the mortgage interest rate.

Should I pay points to lower my interest rate?

Yes, if you can afford it and if you plan to stay in your home for a least a few years. Paying points to buy down your interest rate is a viable way to lower your monthly payment and possibly increase the loan amount that you can afford to borrow. However, if you only plan to stay in your home for two years or less, your monthly savings may not be enough to recoup the cost of the points you paid up front. This is a good subject to talk about with your loan officer and your financial advisor before making a decision.

When should I refinance?

As a general rule of thumb, it’s a good time to refinance when mortgage rates are 2% lower than your current rate. But any reduction can lower your monthly mortgage payments. For example, on a 30-year $200,000 loan with a 5% interest rate, your payment (excluding taxes and insurance) would be about $1,074 per month. But if you refinanced and lowered your rate to 3%, your new monthly payment would be about $843, saving you roughly $231 per month. Check out our refinance calculator to estimate your savings. And you can always talk to a loan officer if you want help calculating savings and weighing your options.

Does my co-borrower’s credit score matter?

Yes, it does. We will look at both of your scores and use the lowest. You can avoid this by only putting the person with the highest credit score on the mortgage, if the co-borrower’s income isn’t required to qualify. Having a co-borrower isn’t always financially beneficial.

Can I buy a house even if I have student debt?

It’s possible! We’ll look at your debt-to-income (DTI) ratio and if it’s not too high, we may be able to approve you for a mortgage, depending on the loan product. Different loan products have different DTI ratio requirements. There are also loan products that can help refinance your student debt and down payment into a mortgage.

Can I buy a house if I’m self-employed?

Yes! We accept business tax returns for the two most recent tax years, regulatory information, your business license, and a letter of certification from a CPA. For a complete list of requirements for self-employed borrowers, visit cardinalfinancial.com/documentation.

Can I get a mortgage without a credit score?

It’s possible to get a mortgage without a credit score, but you’ll have to go through manual underwriting. Manual underwriting simply means you’ll be asked to provide additional paperwork for the underwriter to personally review. Your loan process may take a little longer, but buying a home without the strain of extra debt is worth it!

What’s the difference between being pre-qualified and pre-approved?

Getting pre-qualified is a quick and informal conversation with your lender about your income, assets, credit score, debt, and down payment. Then, they’ll give you an estimated amount you may be approved to borrow. It’s purely informative. Getting pre-approved, however, is a more formal process. Your lender will consider all of the same financial information, but they will submit your loan for preliminary underwriting, which can potentially result in loan approval. A pre-approval takes a little more time and effort, but it also carries a lot more weight.

How does the interest rate affect your mortgage?

High interest rates bring higher monthly payments and increase the overall interest you’ll pay over the life of your loan. A low interest rate saves you money in the short and long run. When it comes to interest rates, the lower the better!

How long does it take to close on a house?

It depends! On average, it takes about 30 days, but factors such as your loan type, financial situation, and the length of your contract can either lengthen or shorten that time frame. We’ve seen highly proactive borrowers get closed in seven days!

When do you lock your interest rate?

Locking your rate is an important part of the mortgage process. It guarantees a certain interest rate for a period of time, usually between 30 and 60 days. In most cases, you can lock your interest rate as soon as your initial loan is approved, but most buyers wait until they’ve found the home they want to buy.

What is a mortgage note?

A mortgage note is a contract or agreement for your loan that includes the terms of your loan, such as loan amount, interest rate, term, repayment, late fees, and other penalties.

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