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Financing Basics

What is ”loan to value” (LTV) and how does it determine the size of my loan?

The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay,$2,500 as a down payment.

The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash home buyers are required to pay out of their own funds. To protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.

When do ARMS make sense?

An ARM may make sense If you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren’t concerned about potential increases in interest rates.

Are there special mortgages for first time home buyers?

Yes. We offer several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don’t have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

How large does my down payment need to be?

When considering the size of your down payment, consider that you’ll also need money for closing costs, moving expenses, and – possibly -repairs and decorating. There are mortgage options now available that only require a down payment of 5% or less of the purchase price.

The larger the down payment, the less you have to borrow, and the more equity you’ll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan.

What are discount points?

Discount points allow you to lower your interest rate. They are essentially prepaid interest, With each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

What is an escrow account? Do I need one?

Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for home owner’s insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property tax or homeowner’s insurance, make sure you are not penalized for late payments since it is the lender’s responsibility to make those payments.

What is a Good Faith Estimate, and how does it help me?

It’s an estimate that lists all fees paid before closing, all closing costs, and any escrow costs you will encounter when purchasing a home. The lender must supply it within three days of your application so that you can make accurate judgments when shopping for a loan.  See Borrower’s Rights.

What is mortgage insurance?

Mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. It’s required primarily for borrowers making a down payment of less than 20%.

How does mortgage insurance work? Is it like home or auto insurance?

Like home or auto insurance, mortgage insurance requires payment of a premium, is for protection against loss, and is used in the event of an emergency. If a borrower can’t repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.

What is PMI?

PMI stands for Private Mortgage Insurance or Insurer. These are privately-owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMI’s usually have stricter qualifying ratios and larger down payment requirements than the FHA, but their premiums are often lower and they insure loans that exceed the FHA limit.

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