Frequently Asked Mortgage Questions
Find answers to your home loan questions
When it comes to getting a new home loan, there is a lot of information to digest. Read on to find answers to common mortgage and home equity loan questions.
Which type of home loan?
Do I need a home equity loan or a home equity line of credit?
Both products use your home as collateral. The main differences between the products are:
- The line of credit is accessible for a long–term draw period, usually by check or online banking. Once you pay down your balance, you then have more money available to spend again if necessary. A home equity loan disburses all funds at once when the loan term starts and you cannot access any further funds without refinancing.
- A line of credit has a variable interest rate. A home equity loan has a fixed rate.
- A home equity loan has payments that don't change. A home equity line of credit has a payment that can change every month, either because the balance changes (increases if you spend more; decreases if you pay down what you owe) or because the interest rate changes because of the Prime rate changing.
Do I need a fixed rate or an adjustable rate?
Fixed-rate loans have interest rates that don't change during the life of the loan. Adjustable-rate loans have rates that are linked to an index, Prime, and therefore can change over time. Consider factors that could affect your decision, such as how a higher monthly payment would impact your budget if the rate were to increase and the length of time you plan to stay in your home.
Do I want an interest-only loan?
Interest-Only loans allow you flexibility on monthly payments when your cash flow does not permit a fully amortizing loan payment. The minimum loan payment covers the interest portion of the loan only, so your principal only decreases if you pay above and beyond the interest. You have the flexibility to decide how much principal you pay each month, so you can pay little or none if times are tight, or a lot if you have extra that month.
Can I finance my rental property?
Yes, you can. The interest rate may be higher. This is because there's more risk for the bank when lending on a property that's not the customer's primary residence.
Why should I refinance?
There a numerous reasons customers refinance the loans they already have. Some of these are:
- To lower the monthly payment
- To lower the interest rate
- To switch from an adjustable rate to a fixed rate or vice-versa
- To refinance for a higher amount in order to pay off other debts or get cash
- To change the remaining term of the loan
Whatever your needs, we can help you decide what makes the most sense for you
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Can I get pre-approved?
Yes, you can. Your information is reviewed, and a decision is made as to whether you qualify. Contact us to see what information you need to provide. Once pre-approved, you can look for a new home with confidence, and sellers will feel more comfortable dealing with you.
Do I need a home appraisal?
Sometimes we do not need to conduct an appraisal; other times we have to conduct a full appraisal, and there are levels in between. Only after reviewing your application and collateral information will it be determined whether one is needed for your situation.
How fast will I get my money?
On a purchase, your funds are available on the day you close your loan. On a refinance, funds are normally disbursed on the fourth business day after you sign your loan documents. This is because federal regulations require a 3-day rescission period during which time you have the right to cancel your loan outright.
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Costs & fees
What are points?
Points are a one-time fee that a borrower pays to lower the interest rate. One point equals one percent of your loan amount.
What is the difference between interest rate and APR?
The interest rate is the cost to borrow the money disbursed in the loan. The APR is the total cost of the loan over its life, including costs, points and fees
Why do I pay pre-paid interest?
When you close your loan, interest accrues in between the closing date and the last day of that calendar month. This amount is added to the closing costs for your loan rather than making your first monthly payment larger in order to absorb the extra that would be due.
Should I pay my fees out of pocket?
If you are refinancing, you can either pay the fees in advance or roll them into the closing costs. For refinance loans only - if you have extra funds, like you would for a down payment on a car, for example, then it makes sense to consider paying them out of pocket as you will have a lower monthly payment. If you don't have the extra funds, it makes sense to roll the fees in. The difference in payment and total cost of the loan is usually nominal. (If you are purchasing, first lien mortgages typically do not permit fees to be included in the loan amount.)
What are the closing costs?
Closing costs include items like appraisal fees, title insurance fees, attorney fees, pre-paid interest and documentation fees – to name a few. These items are usually different for each customer due to differences in the type of mortgage, the property location and other factors. You will receive a good faith estimate of your closing costs in advance of your closing date for your review
Which amounts are included in my monthly payments?
If you have a fully amortizing first lien mortgage, portions of your monthly mortgage payment go toward loan principal and interest. Interest-only first lien mortgage payments include only the interest that is due on the outstanding principal balance. If your first lien mortgage carries mortgage insurance, a portion of your monthly mortgage payment will pay this also, unless the lender has paid your mortgage insurance or you have paid your mortgage insurance upfront. If you have set up an escrow account for your first lien mortgage, then portions also go toward your property taxes and homeowners insurance.
Home Equity Lines of Credit require monthly payments of the interest due on the outstanding principal, while Home Equity Loans are fully amortized payments that contain both principal and interest. HELOCs and HE Loans do not require mortgage insurance.
No matter the type of mortgage product you have, you can always make additional payments toward principal, which will help you pay off your loan more quickly.
What is PMI?
Private Mortgage Insurance (PMI) protects lenders against losses that can occur when a borrower defaults on a mortgage. PMI is required on first mortgage purchase transactions when the borrower has less than a 20% down payment. Likewise, it is required on first mortgage refinance transactions when the borrower has less than 20% equity in the property being refinanced. The cost of the mortgage insurance is typically added to the monthly mortgage payment.
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Do I need a down payment?
For first mortgage financing, Citizens Bank offers low downpayment financing. Opportunities are dependent on the loan product, loan purpose, occupancy and credit profile. Loans may be up to 90% of a property's current appraised value. A banker will assist you in understanding how this affects your loan.
Can I lock my interest rate when purchasing a home?
For first mortgages, Citizens does not always require a property address to lock a rate. The borrower, however, must provide the subject property address no later than 30 days after locking the rate.
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Equity in home
How do I figure out how much equity I have?
To understand how much equity you have in your home, just write down your home's value and then subtract all amounts that are owed on that property. The difference is the amount of equity you have. If you have a property worth $100,000, and the total mortgage balances owed on the property are $80,000, then you have a total of $20,000 in equity. When performing this exercise, just take your best guess as to what your property is worth, use a home value estimator, or ask a banker for other methods of determining value.
What is LTV and why does it matter?
LTV stands for loan-to value. It is the total amount of liens on the property divided by its fair market value. If the subject property is a purchase transaction, fair market value will be based on the lower of purchase price or estimated market value as established by the appraisal.
Why should I use my equity?
Using the equity in your home is a great way to improve your property, consolidate high-interest debt, finance important life events, or even cover unexpected emergencies. The interest you pay is usually tax deductible. (Consult a tax advisor for more information.)
How do I find out my home's value?
When you first apply for a loan, use a home value estimator or ask a banker for other methods as to your home's value. If you want to try to be more specific, you can use a home value estimator or ask a banker for other methods of trying to determine this amount. The bank will determine the value during your application process.
Is my interest tax deductible?
Interest you pay on a loan which is secured by your primary residence may very well be tax deductible. You should consult with a tax advisor to determine whether this applies to your situation.
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Getting a loan decision
How is the lending decision made?
When reviewing your application information, an underwriter examines your credit history, your property value, and your debt-to-income ratio. These are the main factors which describe you as a mortgage applicant. This perceived level of risk determines your loan decision as well as your interest rate in some cases.
What will my rate be?
Rates are based on a variety of factors such as the loan purpose, your credit history and ability to repay, the value of the collateral, and the loan amount, to name a few.
How much money can I get?
The two main factors in answering this question are your debt-to-income ratio, and the amount of equity you have in your home.
To calculate your debt-to-income ratio, write down all of your monthly debts (don't worry about utilities or your television service), then divide that amount by your monthly gross income. The underwriter will take a look at the percentage that results and determine how much you can afford to pay per month. Then, within the amount of equity you have available to you, it can be determined how much you could borrow and still be within what you can afford.
Do I have to have perfect credit?
While it is true that if your credit score is high you may receive better rates and have more options available to you, this doesn't mean you can't obtain a mortgage if you've had some slips in the past. Credit is only one factor in the underwriting process, so don't think that this alone will stop you from getting a loan; however, your credit history needs to demonstrate both willingness and ability to repay on time.
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