According to a recent survey by Zillow, almost half of home buyers do not know the answers to some of the key mortgage information. A home purchase is one of your most important financial decisions you will make. How do you stack up on knowledge? Take the true/false test below. 1. The Annual Percentage Rate (APR) is the real cost of your loan taking into account the interest rate, points, mortgage insurance, and other fees. 2. A 5/1 Adjustable Rate Mortgage will always increase after 5 years. 3. FHA (Federal Housing Authority) loans are open to everyone. 4. If your lender offers you points you should always take them. 5. At 9:00am EST the banks set the interest rates for the next 24 hours. 6. The Federal Government does not govern the fees that lenders may charge for appraisals and credit reports so all lenders can charge whatever they wish. 7. A pre-qualification letter means the bank has reviewed your application and is making a commitment to lend you money. 8. Your interest rate on a low is highly influenced by your annual income. So, did you write down your answers? Let us see if you can do better then most others that took a similar test. Annual Percentage Rate (True) The annual percentage rate was created to allow borrowers to understand the true costs of the loan. This true rate takes into account all fees like points, mortgage insurance, misc fees on top of the interest rate of the loan. Using the APR you can compare the complete package from multiple lenders are have 1 common method of measurement to determine the best deal. When you are shopping for lenders always compare the APR and not the stated interest rate. 5/1 Adjustable Rate Mortgage (ARM) (False) At the end of 5 years your adjustable rate mortgage will adjust but not always up. An adjustable rate mortgage is determined by 2 factors: the Index and the Margin. The margin is typically fixed and represents the profit for the lender. The Index fluctuates; it can go up and it can drop. If the Index is lower at the 5 year mark than it was when you got the loan then your rate will drop. FHA Loans (True) It is a very common misperception that FHA loans are only for first time home buyers. The truth is that many people could benefit from a FHA loan. Check out my article here that I wrote about FHA loans. Loan Points (False) Points are a great thing, in certain situations. The statement to always take points is incorrect. When a person pays a ‘point’ they pay an upfront fee in order to lower their mortgage insurance rate. The key consideration is how long you will carry that loan. Typically is you plan to have that loan 7+ years then points are a good option. The calculation is a little more involved than that and a professional like me can help you determine the answer for your particular situation. 9:00AM EST Rates Are Set (False) Interest rates are fluid. The rate at 9:00am might not be the same rate at 4:00pm. Financial news and world news does have an affect on rates and rates therefore can change during the day Appraisal and Credit Report Fees (True) The government does not regulate how much a lender can charge for appraisals and credit reports. A lender can charge whatever they wish. But be careful, a lender can say ‘no appraisal fees’ or ‘no credit report fees.’ Does this make them a better deal? Maybe. The key is back to question #1, what is the APR. The APR must include all fees including appraisal and credit report fees. Always check the APR not just the hype of ‘free.’ Prequalification Letters (False) A ‘pre-qual’ letter carries very little weight. A pre-qualification letter is only a surface examination of the credit worthiness of a person. Typically it is a short phone conversation that will result in a ‘yes we might loan you money’ or ‘no we will not loan you money.’ In a pre-qual there are no loan applications and no credit reports pulled. To be in the best position you want a pre approval letter not a pre qualification letter. Interest Rates & Income (False) The amount you make per year has little influence on the rate of your loan. Rather, your loan is more influenced by three items: 1. Loan to Value (Loan amount verses the fair market value of the home) 2. Credit Score (aka your FICO score) 3. Debt to Income (Your total debt compared to your income) You can make a lot of money and not get a loan or get a loan with high interest rates if any (or all) of the 3 items above are not acceptable to the bank. So, how did you do? If not too well don’t worry. Nearly 50% of those that took the test didn’t do well. If you did not do well do not despair. A professional like me can help you purchase a home and protect/educate you along the way. In case you are wondering I got 8/8 correct. Whew!
Posted on: Mon, 07 Oct 2013 20:55:36 +0000
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