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mortgage week

signing_documents You found a broker, chose to get a fixed rate mortgage, and locked in a killer interest rate, what happens now? Your broker is going to set you up with a Title company who is going to close your loan.

What is a Title Company

A Title company is responsible for clearing your title and closing the loan. They will perform title searches in an attempt verify a “clean title”. They will also provide the title insurance policy to the lender, conduct all appropriate title work, and schedule your closing. Much of the paperwork prepared by your broker will have been updated during underwriting, and finalized by the title company.

The Closing Documents

When people say that you are signing your life away at closing, it really does feel like you are signing your life away. The documents from my refinance stand a good half inch thick. Lets look at what each of these documents are and what they are for.

Notice of Right to Cancel: This is notice telling you that within 3 days of entering into the agreement you have the right to cancel it. This gives you three days from signing to change your mind and back out. You will receive one for each signor on the loan. My friend who has been brokering mortgages for quite a long time now has never had anyone back out.

Truth In Lending Disclosure: This document lists the pertinent information from your loan in a single page document:

  • APR as a yearly rate, (will not match your quoted APR)**
  • total amount of finance charges to be paid,
  • amount of the loan,
  • total of the payments,
  • payment amount,
  • first payment due date,
  • prepayment penalty information, and
  • late charge information.


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This is the third installment of Mortgage Week here at Suburban Dollar. Now that you have found a good broker and decided to get a fixed rate mortgage, you did decide on a fixed rate right, we are going to talk about how your rate is determined, what points are, and why you may or may not have to pay Principal Mortgage Insurance (PMI).

What is a Par Rate and How is it Determined

Par rate is the base rate charged by a lender, this rate requires no buy down and the broker gets no Yield Spread Premium (YSP). This rate is pre-adjustments, fees, or yield spread premiums charged by the broker. The Par Rate is then adjusted based on several factors such as:

  1. Credit Score: Your Fico is going to play a part in determining your base rate, the better your score the better your rate is going to be, a 720 or higher is going to provide the best rate without penalty. Lower than 720 and you are looking at potentially .50 to .75 point penalties depending on the lender.
  2. Loan to Value: Your percentage of equity vs your mortgage is taken into consideration in determining your base rate. While everyone tells you to shoot for no more than 80%, the rate schedule I am referencing actually penalizes you more for being between 75%-80% LTV.
  3. FHA Vs. Conventional: Whether or not you choose to go conventional vs. FHA is going to affect the base rate, FHA loans are more limited in the funding options than conventional mortgages.
  4. Lock Period: The length of time you choose to lock your rate for could also affect your final rate. Where par may be 4.625% for a 21 day lock, it could be 4.750 for a 35 day lock.  You have a better chance of getting a lower rate the less time you need to get your loan funded.

The below screenshots are of an actual wholesale lender rate sheet. 100.00 is par, anything below will cost the buyer money to get to that rate, anything over will result in the lender paying the broker (and he has a wife and kids so he needs to get paid):


The following is the adjustments based on credit score, negatives cost you and positives will save you a little:


What are Points

Points are essentially fees paid by you to the lender/broker. Points are essentially just a percentage of the loan amount so 1 point will cost you 1% of the value of your loan. Points could show up either in the form of Origination Points or Discount Points.

Typically you will pay origination points in the form an origination fee, the origination fee is typically going to be around 1-2% of the value of your loan. As we discussed yesterday origination points are for the brokerage/lender to recoup the administrative costs of completing your paperwork and the amount of these fees may be negotiable.

Discount points are points paid to buy down the rate on the loan. Using the above lender rate sheet if you wanted a 50 day lock at 4.5% you are looking at at least .75 points to buy down the rate, this does not include any additional buy down charges by the broker. With discount points you are paying upfront to reduce your rate over the life of the loan. If you aren’t planning to stay in your house for an extended period of time it may not be worth the upfront cost to buy down your rate.

Principal Mortgage Insurance (PMI)

Back in the middle of the real estate boom, when I got my loan, it was very common for people to be getting 100% financing from lenders basically for just showing up at the door. The most common way of doing this was to finance a first mortgage for 80% and a second mortgage for 20%. This allowed you to keep your Loan to Value (LTV) below 80%. This type of loan arrangement is pretty hard to come by these days so more people are having to deal with the dreaded PMI which comes into play when the value of your mortgage is greater than 80% of the value of your house.

PMI is a type of insurance placed on your mortgage by lenders, (think AIG here), that ensures that you are going to pay your loan back and not go into default on the note. Most lenders will require you to pay for that PMI if your loan to value is above 80% on the loan for which you are applying. This is a pretty steep fee to be paying, in addition to interest, principal, and escrow. It is in your best interest to be able to bring enough of a down payment to the table to keep from paying PMI, but all is not lost. If at any point during the paying down of your mortgage your LTV gets to that magic 80% mark you can pay for an appraisal and get the mortgage company to take the PMI off.

The Rest of Mortgage Week:

05/05 – What is a Mortgage Broker

05/06 – Fixed Vs. ARM Rate Mortgages

05/08 – What to Expect When Closing Your Loan

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Welcome to the second installment of mortgage week, inspired by my recent refinance. If you missed yesterday’s post be sure to check it out to learn about Mortgage Brokers and how they get paid. Today we are going to look at the two main types of mortgages available and tomorrow we will cover Par Rates and Points.

Fixed Rate Mortgages

Fixed rates are exactly what they sound like, fixed. When you get a fixed rate mortgage you are locking in the current available rate for the length of the loan, if you want to to get a lower rate you are going to have to refinance. Refinancing is going to cost you in closing costs again as well as the hassle of the paperwork.

One advantage of a fixed rate is a steady payment amount for the life of the loan.  You will always know what you are going to be paying and it will never change. The amount of your payment going to principal is going to slowly increase, while the amount you pay in interest slowly decreases. These amounts are known when you book the loan, you will be provided with a payment schedule called a loan amortization. The amortization shows you each and every payment laid out for the rest of the loan, the only variable will be your escrow which will change only if your insurance premiums or your tax appraisal changes. If you make extra payments on your mortgage the amortization is going to be off from your initial statement but as long as you don’t have a pre-payment penalty, and you shouldn’t, extra payments are in your best interest.

With a fixed rate mortgage the easiest way to pay less interest is to get a shorter term loan. A 15 year loan is going to offer you a lower initial interest rate with a higher payment than a 30 year mortgage, but you will be paying considerably less in interest over the life of the loan.

Adjustable Rate Mortgages

Adjustable rate mortgages are trickier than a fixed rate mortgage. You are basically placing a bet on the interest rates at a set point in time. The rate on the ARM loan is actually variable and subject to adjustments. This is partially what has caused the mortgage mess we have found ourselves in. People were taking on homes they couldn’t afford and financing them with ARM loans so the payments were affordable. When rates went up and their payments adjusted they could no longer afford the payment and POW foreclosure. With that said, ARM loans aren’t exactly the devil they can be beneficial in some respects.

As I previously alluded to an ARM loan could actually allow you to afford to purchase a house you wouldn’t otherwise be able to buy if you were getting a fixed rate. If you know for certain your income is definitely going to increase in the near future than this may be an option so you can get in that dream house. The rates for an ARM loan are usually initially lower than those of the fixed rate loans. They are tied to some form of market index, the example wholesale lender table I looked at was using the 1-yr T-Bill index. They take the base index rate and then add several percentage points to arrive at your rate. Most ARM loans have caps in place which state the maximum amount a rate can increase at one time, or a payment cap which states the payment can never exceed a given amount.

Head to Head

In my opinion this isn’t even a contest. You are talking about your dwelling, the roof over your head. Why would you risk the possibility of losing your house and not being able to afford your payment? You should stick to looking for a fixed rate mortgage for the home you are living in. If you can’t qualify for a fixed rate loan, or can’t afford the payment, then you don’t need to buy the house. Be smart about your decisions and don’t over extend yourself on your house payment.

Stay tuned tomorrow for more from Mortgage Week at Suburban Dollar. Do you have an ARM or Fixed rate mortgage? Why did you/would you consider an ARM loan I would love to hear about it.

The Rest of Mortgage Week:

05/05 – What is a Mortgage Broker

05/07 – Par Rates, Points, and PMI

05/08 – What to Expect When Closing Your Loan

Photo: (WoodleyWonderWorks)

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What is a Mortgage Broker

May 5, 2009

As I mentioned in my Net Worth Update yesterday, I am going to cover mortgages this week at Suburban Dollar. Today is a post dedicated to those people who make their living selling mortgages, the Mortgage Brokers. They aren’t your bank, or any bank for that matter. They have gotten a bad rap lately and […]

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