FAQ

FAQ

Below are some frequently asked questions to assist you with your home purchase planning. Question - How do I know how much house I can afford? Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend on your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. Give us a call, and we can help you determine exactly how much you can afford. Question - What is the difference between a fixed-rate loan and an adjustable-rate loan? With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage. Question - How is an index and margin used in an ARM? An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and the specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th Destrict Federal Home Loan Bank, (COFI), and the London InterBank Offering Rate (LIBOR). Question - What does my mortgage payment include? For most homeowners, the monthly mortgage payment includes three separate parts: Principal - Repayment on the amount borrowed Interest - Payment to the lender for the amount borrowed Taxes & Insurance - Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes. This feature is sometimes optional, in which case the amounts will be paid by you directly to the County Tax Assessor and property insurance company. Question - How much cash will I need to purchase a home? The amount of cash necessary depends on a number of items. Generally speaking, you will need to supply: Earnest Money - The deposit supplied when you make an offer on a house Down Payment - A percentage of the cost of the home that is due at settlement Closing Costs - Costs associated with appraisal, attorney fees, title insurance, processing fees, and related expenses to purchase a house. Question - How Can I improve my credit score? More than ever before, your credit score determines if you will be able to be approved for a home loan as well as the interest rate you qualify for. Fortunately, there are several simple steps you can take to improve your credit score. 1. Pay your bills on time. On time payments count for 35% of your total credit score. 2. Keep your total credit card usage under 20%. 30% of your credit score is based partially on available credit. Say, for example, you have three credit cards each with a spending limit of $1,000. Your total current credit card debt is $600. If you put the entire $600 on one credit card and carry a zero balance on your other two cards, you are actually hurting your credit score since the card with the $600 balance is at a credit usage of 60%. You are better off having $300 on each of the three cards which keeps you at the threshold of 20% credit usage on each of your cards. 3. Do not close credit lines you have paid off. While it might be a great feeling to cut that newly paid off credit card, closing that line of credit will hurt your score because you will be lowering your available credit limit. A good rule of thumb is to use each credit card twice a year to keep the account active in the eyes of the credit bureaus. It does not have to be a big purchase. Just keep it active. 4. Check your credit report yearly for accuracy. By federal law, you are permitted to check your credit report once per year from each of the three credit reporting agencies for free at http://www.annualcreditreport.com.
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Question - How do I know how much house I can afford?

Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend on your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. Give us a call, and we can help you determine exactly how much you can afford.

Question - What is the difference between a fixed-rate loan and an adjustable-rate loan?

With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage.

Question - How is an index and margin used in an ARM?

An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and the specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th Destrict Federal Home Loan Bank, (COFI), and the London InterBank Offering Rate (LIBOR).

Question - What does my mortgage payment include?

For most homeowners, the monthly mortgage payment includes three separate parts:

Principal - Repayment on the amount borrowed

Interest - Payment to the lender for the amount borrowed

Taxes & Insurance - Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes. This feature is sometimes optional, in which case the amounts will be paid by you directly to the County Tax Assessor and property insurance company.

Question - How much cash will I need to purchase a home?

The amount of cash necessary depends on a number of items. Generally speaking, you will need to supply:

Earnest Money - The deposit supplied when you make an offer on a house

Down Payment - A percentage of the cost of the home that is due at settlement

Closing Costs - Costs associated with appraisal, attorney fees, title insurance, processing fees, and related expenses to purchase a house.

Question - How Can I improve my credit score?

More than ever before, your credit score determines if you will be able to be approved for a home loan as well as the interest rate you qualify for. Fortunately, there are several simple steps you can take to improve your credit score.

1. Pay your bills on time. On time payments count for 35% of your total credit score.

2. Keep your total credit card usage under 20%. 30% of your credit score is based partially on available credit. Say, for example, you have three credit cards each with a spending limit of $1,000. Your total current credit card debt is $600. If you put the entire $600 on one credit card and carry a zero balance on your other two cards, you are actually hurting your credit score since the card with the $600 balance is at a credit usage of 60%. You are better off having $300 on each of the three cards which keeps you at the threshold of 20% credit usage on each of your cards.

3. Do not close credit lines you have paid off. While it might be a great feeling to cut that newly paid off credit card, closing that line of credit will hurt your score because you will be lowering your available credit limit. A good rule of thumb is to use each credit card twice a year to keep the account active in the eyes of the credit bureaus. It does not have to be a big purchase. Just keep it active.

4. Check your credit report yearly for accuracy. By federal law, you are permitted to check your credit report once per year from each of the three credit reporting agencies for free at http://www.annualcreditreport.com.