Mortgage FAQ

1. What are the most commonly made mistakes in buying or refinancing a home?

Purchasing a home is most likely the biggest investment you will ever make. If you are considering buying a home, you should be aware of the complexity of the endeavor. Because of the numerous factors to consider when purchasing a home, it is important to be as prepared as possible. Common home-buying principles and caveats are presented here, but these Top Ten lists are by no means exhaustive. Keep them in mind and you will have a more successful and enjoyable experience applying for a mortgage. Your home could cost you 25 to 40 percent of your gross income, so it is important to conduct research, ask questions and study the mortgage loan process carefully.

Buying a home

1. Looking for a home without being pre-approved. As a potential buyer you are often competing for a property. You have a better chance of getting your offer accepted if you are prepared. Consider this hierarchy of preparedness:
   • Pre-approved
   • Pre-qualified
   • Neither pre-qualified nor pre-approved
   
   The benefits of each level can be easily understood when viewed from the seller's perspective. Imagine you are a seller in receipt of multiple offers for your property. A complete stranger (a potential buyer) is asking you to take your property off the market for at least the next two to three weeks while they apply for a loan. As the seller, think about the type of buyer you would prefer to deal with.
   
   Neither pre-qualified nor pre-approved
   The buyer provides no evidence that they can afford to purchase your property. You may wonder how serious they are since they are not at least pre-qualified.
   
   Pre-qualified
   The buyer has met with a mortgage broker (or lender) and discussed their situation. The buyer has informed the broker of their income, expenses, assets and liabilities. The broker may also have seen their credit report. The buyer has a letter from the broker stating an opinion of what the buyer can afford.
   
   Pre-approved
   The buyer has provided a broker with written evidence of income, expenses, assets, liabilities and credit-and the information has been verified by a lender. As a result, much of the paperwork for the loan has been completed. The buyer should be able to close quickly. They have a letter (pre-approval certificate) from the lender. You, the seller, are as certain as you can be that this buyer can close.
   
   As a potential buyer, you can see that being pre-approved will give you the best chance of getting your offer accepted. This is critical in a competitive situation.
2. Making verbal agreements. Do not sign a document containing instructions that go against your verbal agreement. For example, the seller verbally agrees to include the washing machine in the sale, but the written contract excludes it. The written contract is binding and will override the verbal contract. More importantly, your state may require that contracts for the sale of property be in writing. Verbal agreements are rarely enforceable.
3. Choosing a lender just because they have the lowest rate. Getting a low rate is important, but you need to consider the total cost of your loan including the APR , loan fees, discount and origination points. When receiving a quote from a lender or broker, always insist that the discount points (charged by the lender to reduce the interest rate) be distinguished from origination points (charged for services rendered in originating the loan).
The cost of the mortgage, however, should not be your only criterion. Have confidence in the company you select-make sure they are reputable and will deliver the loan with the terms and costs they promised. If in the final hours of the transaction you find that the lender has suddenly increased their profit margin at your expense, you will not have time to start again with a different lender. Ask family and friends for referrals, and interview prospective mortgage companies.
4. Not receiving a Good Faith Estimate. Within the three business days after the broker or lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is the law, but it is also the best way to determine what you will pay for your loan. Bring the Good Faith Estimate (GFE) with you whenever you sign loan documents. You should not be expected to pay fees that are substantially different from those quoted in your GFE.
5. Not getting a rate lock in writing. Once a mortgage company tells you they have locked in your rate, get a written statement detailing the interest rate, length of the rate lock, and program details.
6. Using a dual agent--i.e., an agent who represents the buyer and the seller in the same transaction. Buyers and sellers have opposing interests. A seller wants to receive the highest price, while a buyer wants to pay the lowest price. In standard real estate transactions, the seller pays the real estate agent a commission. When an agent is representing both the buyer and the seller, the agent may try to negotiate more vigorously on behalf of the seller, in order to secure a higher commission. As a buyer, you should have an agent represent you exclusively. The only time you might want to consider a dual agent is if you are guaranteed a price break. Even then, proceed cautiously and do your homework!
7. Buying a home without professional inspections. Unless you are buying a new home, complete with warranties on most equipment, you should get property, roof and termite inspections. This ensures that you know exactly what you are buying. Inspection reports can be great negotiating tools when you are asking the seller to make necessary repairs. If a professional inspector is recommending certain repairs, the seller is more likely to agree to do them. If the seller has agreed to do repairs, before the close of escrow you should have your inspector verify that they were completed. Do not assume that everything was done as promised.
8. Not shopping for home insurance until you are ready to close. Start shopping for home insurance as soon as the seller accepts your offer. Waiting until the last minute means you will not have time to shop around and may end up paying more than you need to.
9. Signing documents without reading them. Review in advance the documents you will be signing whenever you can. (You may not know all the specifics of your transaction early on, but the documents you will need to sign are standard forms that are available for review.) Usually you will not have sufficient time to read all the documents in their entirety during the closing appointment, so come prepared.
10. Not allowing for delays in the transaction. Ideally, all real estate transactions close on schedule. In reality, transactions are often delayed a week or more. Suppose you had asked your landlord to terminate your lease on the exact day your purchase transaction was scheduled to close. Then, a few days before the scheduled closing date, you find out that your transaction is delayed a week. Hopefully, no one is inconvenienced and your landlord is willing to accommodate you. However, it is much more likely that your landlord is inconvenienced and angry. Could you be thrown out? Will you be able to find interim housing? The eviction process takes time, so you will not be forcibly removed right away. This whole stress-producing scenario can be avoided by terminating your lease one week after your real estate transaction is scheduled to close. If there is an unforeseen problem or delay in closing your transaction, you have some leeway. This approach may or may not cost a little more, but the security and peace of mind is worth it.

[ Top of page ]

Refinancing your home

1. Refinancing with your existing lender without shopping around. Your current mortgage lender may not have the best rates and programs for refinancing. Many people mistakenly believe that it is easier to work with your current lender, but this is not always true. Most of the time, your current lender will require the same documentation as any other company. Because most loans are sold on the secondary market, they have to be approved independently. This means that even if you have made all your mortgage payments on time, your current lender will still have to verify assets, liabilities, employment, etc. all over again.
2. Not doing a break-even analysis. First, determine the total cost of the transaction, and then calculate how much you will save every month. By dividing the total cost of the transaction by how much you will save each month, you get the number of months you will have to reside in the home to break even. Example: if your transaction costs $2000 and you save $50/month, you divide 2000 by 50. 2000/50 = 40. So, in 40 months, or 3 years and 4 months, you would break even. In this case you should refinance if you plan to stay in your home for at least 40 months.
   
   Note: This is a simplified break-even analysis. If you are refinancing and considering switching from an adjustable to a fixed loan, or from a 30-year loan to a 15-year loan, the analysis becomes much more complex.
3. Not getting a written good-faith estimate of closing costs. See item number four above.
4. Paying for an appraisal when you think your home value may be too low. Appraisal companies will usually prepare a desk review appraisal at no charge. The desk review shows you with a range of possible appraisal values. Your mortgage company's appraiser might do this for you as well. Do not waste your money on a full appraisal if you are unsure of the value of your home.
5. Using the county tax-assessor's value as the market value of your home. Mortgage companies do not use the county tax-assessor's value to decide whether or not they will approve a loan. They use a market-value appraisal, which can vary drastically from the assessed value.
6. Signing your loan documents without reviewing them. See item number nine above.
7. Not providing documents to your mortgage company in a timely manner. Your mortgage company may require documentation beyond what you have already given them. Provide any additional documents as soon as you can get them together. They are necessary to get your loan approved and closed. Delays in providing documents can result in a costly hold-up in the loan process.
8. Not getting a rate lock in writing. When a mortgage company tells you they have locked your rate, get a written statement. This statement should specify the interest rate and the length of the rate lock, and also provide details about the program.
9. Pulling cash out of your credit line before you refinance your first mortgage. Many lenders have cash-out seasoning requirements. These requirements stipulate that if you pull cash out of your credit line for anything other than home improvements, the mortgage lender can consider the refinance to be a cash-out transaction. This usually results in stricter requirements and can even break the deal.
10. Getting a second mortgage before you refinance your first mortgage. When you are trying to refinance a mortgage, many mortgage companies will look at both the first and second loans, or what is called the combined loan amount. If you plan on refinancing your first loan, check with your mortgage company to find out if getting a second loan could jeopardize your chances for refinancing your first loan.

[ Top of page ]

Getting a home-equity loan/line

1. Not knowing if your loan has a pre-payment penalty clause. Hefty pre-payment penalties are included in most "NO FEE" home-equity loans. You should avoid loan with these penalties if you are planning to sell or refinance in the next three to five years.
2. Getting too large a credit line. If you get a credit line that is too large, you could be turned down for other loans. Some lenders calculate your payments based upon the available credit, not the used credit, so even when your equity line has a zero balance, your large equity line indicates a large potential payment. This has the potential to make it difficult to qualify for other loans.
3. Not understanding the difference between an equity loan and an equity line. An equity loan is closed--i.e., you get all of the loan money up front and make fixed payments until it is paid if full. An equity line is open--i.e., you can get any number of advances for various amounts as you need or want them. Most equity lines are accessed through a checkbook or a credit card. You will only be charged interest on the outstanding principal balance, whether you have an equity loan or an equity line. An equity loan is ideal for home improvements, debt consolidation or anything else where you will need all the money up front. An equity line is better for future events or periodic expenses, such as a child's college tuition.
4. Not checking the lifecap on your equity line. Many credit lines have an 18 percent lifecap. Be prepared to make payments at the highest potential rate.
5. Getting a home-equity loan from your local bank without shopping around. Many consumers get their equity line from the bank with which they have their checking account because it is a convenient and trusted source. Your bank may be your best option, but shop around before making a commitment.
6. Not getting a good-faith estimate of closing costs. See item number four above.
7. Assuming that your home-equity loan is fully tax-deductible. Your home-equity loan is NOT always tax deductible. Do not depend on your mortgage company for information regarding tax deductions-check with an accountant or CPA.
8. Assuming that a home-equity loan is always cheaper than a car loan or a credit card. Compare the effective rate of your home-equity line with the rate on your credit card or auto loan to find out which is ultimately the cheapest. Even after deducting interest for income tax purposes, a credit card can be cheaper than a credit line. Effective rate = rate * (1 - tax bracket) Example: The rate of the home-equity line is 12 percent, your tax bracket is 30 percent, your effective rate is: .12 * (1 - .3) = .12 * .7 = .084 = 8.4 percent. If your credit card is higher than 8.4 percent, the equity loan is cheaper.
9. Getting a home-equity line of credit when you plan to refinance your first mortgage in the near future. Many mortgage companies look at both the first and the second loan, or what they call the combined loan amounts, when refinancing the first mortgage. If you plan on refinancing your first loan, check with your mortgage company to find out if getting a second could cause your refinance to be turned down.
10. Getting a home-equity line to pay off your credit cards when your spending is out of control! If you open an equity line to pay off your credit cards, do not continue to abuse your credit cards. If you cannot manage your finances using credit cards, get rid of all except one for emergencies.

[ Top of page ]

MyBestMortgage.com Provides the Best Rates in California

MyBestMortgage.com is much more than just great rates. We work with you to create a home mortgage loan that costs the least amount over time, saving you money in the long run. Check today’s rates to see how much you could be saving.