Arizona Mortgage Pro - Mortgage FAQs

A1.  How does the mortgage process work?

Every mortgage process will be a little different because each person or couple has a unique financial situation and schedule.  However, almost all loans follow the same timeline of events.

1. The Application.  In order to begin the loan process, you must first fill out an application.  There are three simple and easy methods you can choose from to complete portion of the loan process; an online application, a face-to-face interview, or a phone interview.  You will likely know most of the information contained in the application off the top of your head, but some things you may have to find in your paperwork.  The completed application must then be signed and the original copy returned to your mortgage professional.
2. The Appraisal.  The next step in the process would be to order and schedule the home appraisal.  Appraisers are very willing to work with each individual's schedule and the appraisal requires little of a potential borrower's time or effort.  This step is very important to obtain financing in a timely manner.  The title work is also ordered for you by your mortgage professional during this step.
3. Documentation.  Following up the application with the specific documents your lender asks for is also a crucial part of getting your loan closed quickly and efficiently.  For a list of common documents required for a new home loan, please click here. 
4. Loan Approval.  The loan officer and processor will package up your paperwork and submit it to the underwriter.  The underwriter is the person who approves, suspends, or denies the home loan.  Nearly all loans submitted are approved because a reputable mortgage professional should not submit a loan that he/she doesn't believe will be approved.  There are two types of loan approvals, conditional and final.  Conditional approval means that the underwriter requires a few more items to fully approve the loan.  Final Approval (sometimes known as "clear to close") means that you are ready for the next step.
5. The Signing.  This is the final step in the process.  It is time to schedule the signing of the final paperwork, which includes the new note and mortgage.  Up until this point in the process, nothing you have signed is a binding lien on your house.  For purchase loans, this is the final step and you should receive the keys to your new house within 24 hours or so.  For refinance loans, this will begin the three day right of recission period, in which you will have three days to look over the documents.  After this three day period, the loan will be completed or "funded."

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A2.  Should I refinance my current home mortgage?

This is a difficult question to answer without analyzing each person's unique situation.  However, there are a few guidelines that may help you decide whether or not to refinance.

If you are refinancing into the same loan program you are currently in, the first thing to do is a break-even analysis.  To determine your break-even analysis, you must calculate how much the refinance will cost you and divide that number by the monthly savings from the refinance.  This will give you the number of months before you "break-even" from the process.  Let's look at a quick example:  The cost of refinancing your home is $2500 and it saves you $75 a month.  Your break-even point would be about 33 months or 2 years, 9 months.  If you plan on being in your home longer than 2 years, 9 months, you will realize interest payment savings.  Important note: When doing a break-even analysis, do not use prepaid insurance, taxes or interest (collectively known as prepaids) in your cost calculations.  Your financing will not affect the amount of taxes and insurance you pay each year and you will pay approximately 365 days of interest every year to one bank or another (refinance or no), so the prepaids should not affect your decision regarding a possible refinance.

If you are switching to a different loan program, for instance a 30 year fixed mortgage to a 15 year fixed mortgage, the issue is not necessarily when you will break even.  Long term savings are the real goal of switching between these two programs.  One quick example of this:  You got a 30 year fixed mortgage last year at 7% on $150,000 making your monthly payments about $1,000.  You want switch to a 15 year fixed program because the current rate is 6%, making your payments about $1,265.  You might be asking yourself why anyone would want higher mortgage payments.  The answer is long term interest payment savings.  In this example, the old 30 year fixed mortgage would have cost you about $348,000 over it's term (348 more payments of $1,000).  Since the new loan only has 180 payments of $1,265, the total figure for those payments is only around $228,000.  That's right, $265 a month more for 15 years would lower the total cost of financing by approximately $120,000, in this example.  Important Note: This method of determining savings does not take into account future value of money today. 

There are so many other issues that affect a person or couple's decision to refinance that I couldn't possibly cover them all here.  Some people know that their financial situation will be changing for better or worse in the future and they plan for it by choosing financing to fit that change.  Some investors believe that $20 today is worth more than $20 tomorrow.  Others would rather pay off debts as quickly as possible and become debt-free.  If you are not sure how to proceed or just have some questions, feel free to contact me to discuss your specific situation and together we can decide the best plan to meet your goals. 

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A3.  What documents will I need to provide for the loan process?

Some loans will require more or less documentation than this, but these documents will suffice for many loans:

Employees:

1. Two most recent years of W-2 forms
2. Most recent 30 days worth of paystubs
3. Current mortgage statement (if refinance)
4. Purchase contract and copy of earnest money check (if purchase)
5. Statements for any liquid asset accounts (checking, savings, 401k, IRA, etc.)
6. Homeowner's Insurance agent's name and number

Self-employed:

1. Two most recent years of tax returns
2. Year-to-date Profit and Loss Statement
3. Current mortgage statement (if refinance)
4. Purchase contract and copy of earnest money check (if purchase)
5. Statements for any liquid asset accounts (checking, savings, 401k, IRA, etc.)
6. Homeowner's Insurance agent's name and number

These documents will differ in certain situations (the obvious being stated income or no documentation loans) and the underwriter (the person who approves a loan) may require additional documentation.  If any of the terminology is unclear or you have any specific questions, please do not hesitate to email or call me.

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A4.  What are the most common mistakes made during the mortgage process?

There are some pitfalls that many people fall into because they are unfamiliar with the mortgage process.  These mistakes can prove costly, so it may help to learn from other people's errors.  Here are the most common mistakes people make and how you could possibly avoid them. 

1. Not asking mortgage professionals for Good Faith Estimates.  When you have decided on a lender for your mortgage or you are comparing lenders, ask them for a Good Faith Estimate of the figures you have discussed.  Any reputable mortgage professional will be happy to provide you with this document to back up their rate and fees.  Important Note:  When comparing the Good Faith Estimates of the same loan program from two different mortgage companies, the only figures you should be concerned with are the lender fees (contained in section 800 if filled out correctly) and the rate.  Do not be fooled by low-ball tax, title, and/or insurance figures which make your closing or monthly payment numbers artificially low.
2. Using the mortgage company referred by your realtor without shopping at least one other source.  Many realtors will refer you to a mortgage professional when you decide to put in an offer on a house.  This realtor most likely has your best interests in mind, but, unfortunately, some do not.  They may seem very professional and helpful, but they are more interested in closing the purchase than they are in finding you the best loan for your situation.  I am not, repeat, not saying your realtor is a crook or is trying to steer you into a bad deal.  I am simply saying your realtor is not a financial expert and you owe it to yourself to call at least one other mortgage professional to make sure you have the best program and rate to meet your goals.
3. Comparing mortgage companies based only upon rate.  All other things being equal, of course you want the lowest rate, however, there are a few different components to the right loan, and rate is only one of them.  Some other important aspects are cost, program, and service.  Make sure that if you are getting the lowest rate that it isn't costing you an arm and a leg in other fees or points.  Make sure that the rate is tied to the right program for you.  Just because a 5 year ARM has the lowest rate, doesn't mean it's the best program if you plan on living in your house for 10 or more years.  Service is more important than people understand.  What if you choose a cut-rate national lender, but every time you call you deal with a new person and have to explain your situation over and over?  Perhaps you go with the lowest rate quote and your loan doesn't get the attention it deserves.  This could lead to expired locks and missed closing dates.
4. Not providing information or documentation to your mortgage professional in a timely manner.  This may seem like a trivial thing to add to this list, but it is very important.  Nine times out of ten when you are asked to provide documentation or information, it was requested by the underwriter (the person who approves your loan).  If you put off providing the information, the underwriter will put off your approval, grinding the whole process to a halt until you get around to it.  This can also result in expired locks and missed closing dates and you will have no one to blame but yourself.
5. Not shopping for homeowner's insurance until right before the closing.  As soon as you have your offer accepted or if you are switching insurance companies during a refinance, start shopping immediately.  If you wait until the last minute it could hold up the process or you could get stuck with high cost insurance because you didn't leave enough time to compare.
6. Choosing a 30 year fixed mortgage when you only plan on being in the house 5 or less years.  This is one of the most common mistakes people make.  If you are not planning on staying in your house very long or you know exactly how long you will be there, take advantage of the lower rates that ARMs offer.  These loans are fixed for a certain amount of time and have yearly caps on how much they can change.  This will save you money and the risk is very low (assuming you know you will be moving).

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A5.  What is an Annual Percentage Rate (APR)?

This question isn't nearly as simple as it sounds.  Annual percentage rate, by definition, is calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate.  It includes the interest, points, mortgage insurance, and other fees associated with the loan.  In basic terms, the more points, fees, and mortgage insurance a loan has, the higher the APR is. 

APR was developed by regulatory agencies to help the average consumer compare different rates, points, and programs.  The idea behind it is pure, but it has one inherent flaw, brokers and lenders don't always use the same formulas to calculate their own APR.  While it is a good starting point, don't believe every APR you see listed, especially on competitive mortgage websites.  Rather than comparing loans using APR, you should be concentrating on payments, upfront costs, and terms.  An honest mortgage professional should be able to help you decide which program is best for you without any bias towards one or another. 

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A6.  What is an ARM and should I choose one for my home loan?

ARM stands for Adjustable Rate Mortgage.  This designation can actually be a bit misleading.  Most ARMs are fixed loans for a certain period of time and then they adjust at specific intervals, not solely adjustable as the name suggests.  Most ARMs are shown in the following format: 3/1.  The two figures on either side of the / stand for adjustment periods for the loan.  The first figure is the time period for which the loan is fixed.  In a 3/1 ARM, it is fixed for 3 years.  In a 5/1 ARM, it will be fixed for 5 years.  The number behind the / is the amount of time between adjustments.  For both the 3/1 and 5/1 ARM, the adjustment period is 1 year.  So now you know that the 3/1 ARM is fixed for 3 years and will adjust once a year after that.  Let's move on to how the loan will adjust.

After the fixed period of an ARM, the rate on the loan will adjust according to an index plus a margin.  The margin is determined at the beginning of the loan and remains constant over it's life (the average margin is about 2.75%).  An index is a published number or percentage that cannot be affected by one person or entity and an ARM will be specifically tied to one.  Some common examples of indexes are the LIBOR (London InterBank Offered Rate), the One Year Treasury Security, and the COFI (Cost of Funds Index).  These indexes are all widely available and not subject to change solely by any person or entity.  They are generally affected by the economy and supply and demand.  So to figure out what an ARM's rate is after the fixed period, you simply add the margin on the loan to the current index it is tied to.

Another component of an ARM is a cap.  In order to prevent an extreme rate jump if one of the indexes were to suddenly move very high, ARMs have 3 different caps, usually written in 2/2/5 notation (sometimes written in 2/6 notation, meaning that the first two digits are the same).  The first digit refers to the maximum percentage the loan can adjust the very first time it adjusts (right after the fixed period is over).  In this case, 2/2/5, the loan can't adjust more than 2% on it's first adjustment.  The second digit refers to maximum percentage that the loan can adjust each adjustment period (usually, but not always, one year) after that.  In this case, 2/2/5, the loan can't adjust more than 2% for each adjustment period after the first.  The final digit refers to the total amount the loan can ever adjust or lifetime cap.  In our example, the loan cannot adjust more than 5% over it's start rate over the life of the loan.   So to recap, the maximum amounts an ARM with 2/2/5 caps can adjust is 2% the first adjustment, 2% any adjustment after that, and 5% over the life of the loan.

Now that you know all about ARMs and how they adjust, should you choose one for your home?  If you know you will only be in your home for a certain number of years, it makes this question fairly easy to answer.  Suppose you know you are only going to live in your current house for four more years because you are getting transferred for work or you know you will outgrow your home.  A 5/1 ARM would suit your needs perfectly and save you money because it will be fixed for five years, of which you only plan to stay four.  If you plan to stay for longer than five years, the question becomes more complicated and you will have to look at other factors.  One important factor is how low or high rates are currently compared to historically.  If rates are low historically and you plan on being in your home for quite a while, a fixed rate mortgage is likely your best plan.  If rates are high historically, you may want to start with an ARM to save some money short term and refinance when rates drop into a range you are more comfortable with.  As always, if you have any questions on ARMs or any other mortgage issue, please call or email.

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A7.  What are points and should I pay them on my new mortgage?

A point is equal to 1% of your loan amount and is paid upfront at the time of closing (in a refinance, the points may or may not be rolled into the loan amount).  For example, one point on a loan of $150,000 would equal $1,500, two points would be $3,000, etc.  Points are generally paid for one reason, to get a lower interest rate. 

The question of whether you should pay points or not depends on your unique situation.  In order to determine whether this is the best plan of action, it is best to do a break-even analysis (also covered above in Should I Refinance?).  To do a break-even analysis, you must first determine how much the point(s) are costing you upfront.  Let's use an example of $3,000 (two points on $150,000).  The next step is to determine your monthly savings from paying points versus not paying points.  For the same example, we'll say that the $3,000 you are paying in points is saving you $75 per month.  To calculate your break-even point, you would divide the amount you are paying upfront ($3,000) by the monthly savings ($75) you are receiving as a result.  That number will equal the amount of months it will take you to break even by paying points.  In this example the break-even date would be 40 months or 3 years and 4 months.  If this person were planning on being in their house for longer than 40 months, paying points makes sense, any less, it would not make sense

If this seems like too much information, you can use a general rule of thumb.  If you are planning on being in the house for less than 5 years or are unsure how long you will be there, your best bet is not to pay points.   If you plan on being in your house for more than 5 years, you will probably benefit from paying points.  Admittedly, this is a bit of an oversimplification, but it is a good starting point.  There are other issues such as tax implications which make an exact break-even analysis difficult.  If you have questions regarding paying points and how it affects your taxes, it is best to consult a tax professional.

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A8.  What are the pros and cons of an interest only mortgage?

First let's cover the basics of an interest only mortgage.  As the name suggests, you are only required to pay the interest on your loan each month.  Interest only loans only behave this way for a fixed period of time (usually, but not always, 5 years).  Example:  You have a 6% interest only loan for $150,000.  Your yearly interest is $9,000 ($150,000 x 6%).  Your monthly payment would be $750 ($9,000 yearly interest divided by 12 months).  After 5 years of payments, you would still owe $150,000 because you were literally paying "interest only."  No part of your monthly payment was going towards principal.

Why choose an interest only loan?  First of all, the same payment buys a more valuable house with an interest only loan than it does with a fully amortized (meaning the loan will be paid off over time) loan.  By owning a more valuable home, appreciation will be magnified.  Or, an interest only mortgage could provide a lower payment for a house of the same value when compared to fully amortized loans.  This allows people to pay less monthly and use the extra money for savings, investing, etc.  These points are especially important to a real estate investor, but also important to the average homeowner as they become increasingly financially savvy. 

Sounds great, why wouldn't I choose an interest only loan?  Interest only loans can be more complicated or risky than conventional fully amortized loans, which scares many people.  Many times, interest only loans are adjustable rate mortgages and sometimes the fixed portion of the ARM and the fixed period of interest only can be different lengths.  Also, when you have an interest only loan for 5 years, you still owe the exact same amount after five years.  This can be disheartening to a lot of people.  The general rule of thumb is similar to that of ARMs.  If you plan on being in your home for an extended period of time (6-7 years and beyond), you may want to go with a fixed product and lock in a low rate for the life of the loan rather than an interest only product.  This is not, however, set in stone.  Extenuating circumstances may make an interest only loan your best choice, even though you plan on being in your home long term.  Example: You cannot afford fully amortized payments on the house of your dreams, but you expect to have a pay increase in a few years.  Interest only loans would allow you to get into the house today and refinance in the future with your increased income.  It is best to consult a mortgage professional if you are unsure about choosing an interest only mortgage. 

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A9.  What are bi-weekly payments and do they help me?

Bi-weekly payments are made every two weeks and are equal to half of your normal monthly payment.  Bi-weekly payments are actually a subtle way of paying more to your principal each year, but can be very beneficial.  Most people hear that they have to pay 1/2 a monthly mortgage payment every two weeks with bi-weekly and decide that it is really no different than normal.  The reality is that if you make 26 half mortgage payments a year (52 weeks divided by 2), you are really making 13 payments each year (26 half payments).  How much of a difference does this make over the long term?  Quite a bit.  Let's take an example of a 30 year fixed mortgage for $150,000 at 6%.  If you paid the loan off in the usual fashion, you would make 360 payments of about $900 a month.  The total that you would have paid over the life of the loan is about $324,000.  Now the same loan at the same rate with bi-weekly payments would mean that you pay $450 every two weeks.  You would make 638 of these payments (26 per year) and pay off the loan in 24.5 years or so and the total amount you would have paid over the life of the loan is about $287,000.  You can now see how powerful bi-weekly payments are.  In the example above, the interest savings over the life of the loan were $37,000 and the loan was paid off 5.5 years early.

Bi-weekly payments are commonly accepted by most mortgage companies and banks around the US.  You may be able to set up a bi-weekly payment system with your current bank without having to refinance.  You may want to set up bi-weekly payments with a new lower rate by refinancing.  One word of caution, make sure you can afford bi-weekly payments and that you realize you are paying extra each year.  Many people are paid every two weeks, so if you can afford it, it's a easy way to cut down the interest you pay over the life of your mortgage without changing your budget drastically.

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A10.  Why is my payoff higher than the balance on my current loan?

The interest on a home mortgage is paid in arrears.  This means that you pay interest for each month with the next mortgage payment (meaning you pay the interest for January with the payment on February 1).  Therefore, whenever you pay off your loan, you will owe a certain amount of interest to your old bank from the last payment up until the closing.  This amount will vary depending on the interest rate of the loan you are paying off and the day you close your new loan or sell your house.  A good guess is to add about 75% of your monthly payment on the old loan to the current principal balance of that loan.  This should give you a good cushion and be close to the final figure for your payoff amount.  The other side of interest in arrears is that when you close on a new loan, you "skip" a payment, meaning that the first of the month passes one time without you paying a mortgage payment.  The truth is that between the higher payoff and interest per diem or "prepaid interest" on your new loan, you have already paid those 30 days of interest. 

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A11.  How often do interest rates change and how can I keep track of them?

Interest rates, like many other aspects of the economy, are controlled by many different factors.  Whenever the major markets are open (especially the bond markets), interest rates can change.  This means that rates could go up or down within minutes or hours.  Asking a mortgage professional if rates are going to go up or down is like asking a stock broker what the market is going to do the next day.  You will likely get a guess from most people, but no one can tell you for sure.  The best way for the average consumer to keep track of what rates are likely to do, is to follow the 10 year bond market.  When the yield on the bond goes up or down, interest rates are likely to follow very shortly.  I emphasize likely in the previous two sentences because interest rates are not guaranteed to follow the bond market.  You can also follow my rates here on AZ Mortgage Pro anytime.

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A12.  Do I have to pay mortgage insurance if I don't have 20% to put down?

No, mortgage insurance is not required on all homes with less than 20% down.  There are two choices to avoid mortgage insurance with a smaller down payment.  Mortgage insurance is not always a bad thing.  It was developed to allow people to buy houses with less than 20% down.  Before mortgage insurance, these loans were very risky for a bank because they could usually only get about 80% of a home's value through foreclosure.  Sometimes it still makes sense in certain situations and it allows people to get homes they may not have gotten otherwise.  However, one large drawback of mortgage insurance is that it is not tax deductible, so it is best to avoid it if possible.

The first and most popular choice to avoid mortgage insurance with less than 20% down is obtaining a first and second loan simultaneously on your new purchase or refinance.  A common term for this type of financing is a piggyback mortgage because the second mortgage "piggybacks" the first.  The first loan is equal to 80% of the value of the home and the second loan is for the remainder, minus your down payment.  A popular choice is to get a first mortgage for 80%, a second mortgage for 15%, and put down 5% for the remainder of the purchase price (the 5% could be your equity in a refinance).  This method of financing is referred to as an eighty-fifteen-five (80/15/5) mortgage.  Another popular choice is an eighty-ten-ten (80/10/10), which means an 80% first mortgage, a 10% second mortgage and 10% down payment.  Even though the rate on the second is higher, it is an interest payment so it may be tax deductible, unlike mortgage insurance.

The second choice is what is called a self-insuring loan.  It is just one loan at a little higher rate than normal to cover any losses the bank may incur.  These loans accomplish the same objective as the piggyback loan as far as possible tax benefits.  These loans are widely available, even up to 100% of a home's value, but many people do not choose them because it is tough to grasp the concept of paying a higher rate on purpose.

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A13.  Is it possible to buy a home without a down payment?

Absolutely.  If you have good credit there are endless options available to you as a borrower.  You could choose one mortgage with private mortgage insurance at a very low rate, two mortgages (the first for 80% of the home value and the second for the remaining 20%), or, in certain cases, one loan for the whole amount without private mortgage insurance.  Each choice has advantages and disadvantages.  There are some options available for bruised credit or stated income borrowers to obtain 100% financing, but they are fewer in number and generally have a little less favorable terms.  To find out if you qualify for a zero down loan or which programs you qualify for, call a trusted mortgage professional for a consultation.

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A14.  I've had credit problems, what types of loans are available to me?

Many people have been victims of circumstances (car accidents, job layoffs, sudden illnesses, and other situations beyond their control) that have adversely affected all aspects of their lives, including their credit.  There are loans available for people with challenged credit.  Admittedly, the options are fewer, but there are programs out there for many individuals who don't believe they can get a mortgage because of their credit history.  The loan programs for people with bruised credit are usually referred to as B-C or subprime loans (A and prime loans usually refer to good credit).  Lenders for subprime loans will generally ask for a higher down payment or charge higher rates because they are taking on more risk.  Many times (not always) the programs will fall into three general categories, 2 year ARMs, 3 year ARMs, and fixed rate mortgages. 

The first two types of mortgages (ARMs with short fixed periods) are the most common choice for subprime loans.  There are two reasons for this.  First, because of the nature of subprime loans, the rates are going to be higher than prime loans.  A short fixed period on the loan keeps the rate lower, therefore keeping the monthly payments within reach of the average borrower.  Second, most people with bad credit are doing their best to repair it.  The idea behind a 2 or 3 year ARM is that you will make your payments on time for 2 or 3 years and improve your credit rating in the meantime.  After the fixed period is up, you may be able to refinance into a loan offering lower rates and better terms.

Fixed rate subprime mortgages are less common because the rate is relatively high compared to the ARMs or prime loans.  Many times people can't afford the payments or wouldn't want to.  Also, many people believe their situation will improve in a few years, so they opt for the ARMs with lower rates planning to refinance into something better shortly.  Like many of the topics discussed above, this is not an absolute.  Sometimes you can get a decent rate on a subprime loan for a fixed period of time and remain in that loan.  One important part of getting a subprime loan (especially the ARMs) is that you make your payments on time and re-establish your credit.  If not, you may find yourself in the same situation in 2 or 3 years, when your goal was to get a loan with better terms.

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A15.  Is it possible to get a home loan after my bankruptcy?

Yes and no.  The answer depends on how long it has been since your bankruptcy discharge.  If your chapter 7 bankruptcy is not yet discharged, getting a mortgage is almost, if not impossible.   Also, while it is possible under certain circumstances, it is difficult to get a home mortgage within twelve months of the discharge of a chapter 7 bankruptcy or filing of a chapter 13.  If you have a lot of money to put down for a purchase or a lot of equity in your house for a refinance, it may be possible to get a mortgage 1 day after your chapter 7 discharge or chapter 13 filing (depending on how your credit was affected).

If your bankruptcy was 12 months ago or longer, there are more options available.  Many subprime lenders (see question above) have programs for people with recent bankruptcies.  If you have filed for chapter 13 at least 12 months ago or discharged your chapter 7 at least 24 months ago, FHA will lend you money with as little as 3% down as long as you have been paying your obligations on time each month.  There are many factors involved in obtaining financing after a bankruptcy.  The best thing to do is consult a trusted mortgage professional.  Most will give you a free consultation on your current options and give you an idea of what you need to do in the future to make yourself more credit-worthy.

Again, if you have any other questions or just want to find out more about your specific options, please do not hesitate to call or fill out the info request form.