General Home Loan Information

What is the difference between a fixed-rate and adjustable rate mortgage?
A fixed-rate mortgage maintains the same interest rate over the life of the loan, resulting in a consistent monthly payment. The interest rate on an adjustable-rate mortgage will adjust over time based on the terms of the loan and rates market. The monthly payments usually increase or decrease along with the interest rate.

Should I choose a fixed-rate or adjustable-rate mortgage (“ARM”)?
If you are looking for the stability of a consistent interest rate and monthly payment, a fixed-rate mortgage has the benefit of remaining constant over the life of a loan. An adjustable-rate mortgage (“ARM”) offers an interest rate that fluctuates, either increasing or decreasing, based on the terms of the loan and a predetermined financial index. Since the interest rate affects monthly payments, an adjustable-rate loan carries the possibility of either an increase or decrease in monthly mortgage payments. Some ARM loans feature a lower initial interest rate than fixed-rate loans, but that potential benefit needs to be weighed against the possibility of an increased monthly payment should interest rates rise.

How do I know what loan is best for me?
There are many factors going into choosing the right home loan. Both your long-term and short-term goals should be addressed. The following questions will enable your mortgage consultant to give you information that will help you determine the direction you may wish to take. Here are some questions for you to consider: 

1. How long do you expect to live in the home?
2. Would you rather have low monthly payments, or low closing costs?
3. Are you looking for a low initial interest rate that may increase as time passes? Or a rate that is stable over the long-term?
4. Do you expect a change in your income in the next few years, or a change in expenses (children, education, etc.).

Basic Loan Terminology

What is the difference between the interest rate and APR (Annual Percentage Rate)?
The following fees are generally included in calculating the APR: discount points, prepaid interest (the interest paid from the date the loan closes to the end of the month), lender fees (which vary by lender) such as:

• Origination fee
• Processing fee
• Underwriting fee
• Private mortgage insurance
• Mortgage broker fees

APR regulations are subject to interpretation, and all lenders do not calculate APR exactly the same. However, the APR is a good tool to use to compare loans. The Good Faith Estimate from each lender is a helpful tool for comparing costs.

How the APR is determined
An interest rate is based solely on the interest accrued on a loan and is directly related to the monthly mortgage payment. It does not take into account any fees or costs associated with the loan itself. The APR (Annual Percentage Rate) factors additional monies associated with the loan, such as points, pre-paid interest and lender fees, providing a better indication of the true cost of a loan. This is useful when comparing one loan rate to another.

What are points?
A "point" is a mortgage lending measurement that is equal to 1% of the loan amount. “Points” may also be called “pre-paid interest” and are most commonly referred to as "discount points." Discount points reflect an upfront fee that borrowers may pay to lower their interest rate. The more points paid on a loan, the lower the interest rate. Borrowers should calculate the “break-even” timeframe if considering choosing discount point(s). The break-even point is how many months it will take to total the monthly payment savings from choosing the discount point(s) vs. not choosing point(s).

What are debt-to-income ratios?
Debt-to-income ratios help a lender determine the financial status and repayment risk of a potential borrower. Factors such as the person’s monthly housing expense, income and recurring financial obligations, such as car payments, credit cards, etc., are considered in this calculation. The ratio is obtained by dividing your monthly debt payment by your monthly gross income.

What is a loan-to-value ratio?
Loan-to-value is the relationship between the value of the property and the loan amount or current principal balance. For instance, a property valued at $400,000 with a loan amount against the property of $300,000 will result in a 75% LTV (loan-to-value). The ratio is obtained by dividing the current principal balance on your mortgage by the appraised value of the property.

What are cash reserves?
The amount of money a borrower will have available after the funding of their loan is often called cash reserves. Many lenders require at least two months of mortgage payments in reserve to qualify for a home loan.

Approval Process

How do I get Pre-approved?
When you start shopping for a home, it's nice to know just how much home you can afford. Even better, wouldn't you like an edge over non-pre-approved buyers interested in the same home you are? Highland Loan Source’s UpFront Approval† provides proof to real estate agents and sellers that you're pre-approved for a specific loan amount. It is based on a verification of your income, credit and assets. We offer UpFront Approval that is subject to satisfactory property and title review and no change in financial condition.

What is a Pre-qualification?
Pre-qualification is a general estimate of the amount that a buyer can expect to borrow before applying for a loan, based on a verbal statement of household income and monthly obligations.  Pre-qualification is established on the borrower’s estimate and not on verified figures and is not a loan approval or pre-approval.

How is Pre-qualification different from Pre-approval?
A pre-qualification is an estimate of the amount of money that a buyer may borrow, based upon unverified information, but it is not a commitment from the lender. A pre-approval is a lender's written commitment to fund a loan, subject to certain conditions that can include: satisfactory appraisal and title review and no change in financial condition.

What documentation will need to be provided for a loan application?
When applying for your loan, the most common documents that will help the process are the most current information on your monthly income, monthly debt, a total of assets, your social security number, driver’s license or other photo ID, and past two years’ of W-2 tax forms, employment information (address, phone number) and history. Other information may be required.

How long will the entire loan process take?
Loan approval and funding time frames vary depending on the type of transaction and the complexity of your personal finances. On average, the entire process can take anywhere from 10-60 days. Important factors include the type of loan, how timely documentation is provided, loan program requirements and seller stipulations in purchase transactions.

†UpFront Approval is subject to satisfactory appraisal and title review and no change in financial condition.  If the rate is not locked or rate protection expires, any rate increase may lower the loan amount for which the borrower has been pre-approved.

Down Payment & Closing Costs

How much of a down payment should I make?
The amount of down payment that you pay can vary. Highland Loan Source offers multiple down payment options and loan amounts to qualified borrowers, ask for details. It is important to know that the lower the down payment, the more you will have to pay each month, the higher the interest rate may be, the higher the likelihood you will need to pay mortgage insurance and/or the possibility that you may owe more than the home is worth if the home declines in value.

How do I determine what my closing costs will be?
Generally closing costs are approximately 3% of the home sale price. Highland Loan Source provides borrowers with an upfront estimate of closing costs.

Credit

What is a credit report?
A credit report contains a person’s payment history, shows whether or not they paid their debts on time, if they have ever been late in making payments, or ever failed to make payments. (Not all types of payments are reflected in the reports of the three major credit bureaus.) Lenders like Highland Loan Source use the credit report to help assess a potential borrower’s ability to make timely payments, and as one factor in judging whether or not the person would make a good prospect for a home loan.

Should I check my credit prior to purchasing a home?
Yes. There are errors that may occur on your credit report without your knowledge and through no fault of your own. A similar name or incorrect social security number may result in credit blemishes that were placed within your credit file in error. You can work directly with the credit bureaus to discharge these items and ensure you have your best possible credit score when you are ready to purchase a home.

What if I am new on my job?
Many lenders look for a 2-year job history within the same field of work when a borrower applies for a loan. However, a job transition for a more favorable position or increase in salary can work to your benefit from an underwriting standpoint.

Interest Rates

What is a rate lock?
A rate lock secures a loan's interest rate during the loan approval process, and is protected as long as the loan is processed prior to the rate expiration date. When obtaining a loan, be sure to inquire as to the rate lock expiration timeframe. Until the borrower specifically requests a rate lock, the rate and points are not secured and may change due to market fluctuations. Rate locks typically carry a fee that depends on the length of the lock period.

How do I lock an interest rate?
A borrower can protect their buying power by locking in the interest rate at the time of application. Consult your Mortgage Consultant on the timing of the loan.

How long is my rate lock valid?
Highland Loan Source can protect an interest rate for up to 60 days, allowing adequate time for processing. Longer rate locks are available for an additional fee if the home is under construction or when circumstances require more time to close.Rate lock timeframes may vary and can be as short as 10 days or as long as 24 months, depending on the type of transaction. Contact your Highland Loan Source Mortgage Consultant for additional information about time periods and fees.

Why and how do interest rates change?
Interest rates are directly affected by shifts in financial markets and various lending rates or “indexes” and may vary on a daily basis, sometimes adjusting multiple times a day.

What is a buy-down?
A buydown is a payment made to a lender to lower the interest rate on a mortgage and may be referenced as permanent or temporary. A permanent buy-down lowers the rate for the entire term of the mortgage, while a temporary buy-down lowers the rate for a shorter period. The buyer, seller, or another interested third party may contribute to a buydown.

Additional Mortgage Terminology and Information

What is an impound account?
An impound account, also known as an escrow account, is set up by the lender to assist homeowners in automated payments for hazard insurance and property taxes.  Typically, a percentage of the estimated amount is included in your monthly payment. From this account, the lender forwards payments on your behalf to the appropriate tax collection and hazard insurance agencies.  Impound accounts are usually an option to be considered by the borrower.

What is PITI?
PITI stands for the following components of a mortgage payment: Principal, Interest, Taxes and Insurance.

What is title insurance?
When applying for a loan, a title search is performed to ensure no claims or liens are currently held against the purchase property. At the loan’s closing, a one-time title fee is paid toward an Alta Title Policy. An Alta Title Policy insures the lender that their lien is in the correct position and that there are no existing judgments against the homebuyer.

What is escrow?
Escrow is a neutral third party in a property transaction that handles all of the documents and funds.

What is hazard insurance & is it required?
Hazard insurance safeguards a property in the event of damage against such disasters as fire or storm. The insurance policy covers the costs to repair a home should such a catastrophe occur. Most lenders mandate a hazard policy be in the place prior to closing a loan.

What is an appraisal?
An appraisal is a professional estimate of the market value of a property.  Factors that are considered by appraisers include recent local sales, equivalent property types (“comparable” recent home sales, also known as “comps”) as well as the real estate market performance.

What is a foreclosure?
A foreclosure is a legal proceeding that occurs when a homeowner is unable to pay the mortgage and falls into default. The lender will generally reclaim title and force sale of the property to recuperate costs against the home.

What is the FHA?
The FHA, or Federal Housing Agency, is a division of the Department of Housing and Urban Development (HUD). Approved lenders, such as Highland Loan Source, can offer FHA insured loans in accordance with HUD regulations. An FHA loan is also referred to as a “government” loan.

Can I qualify for a VA loan?
Veterans Administration (VA) loans are available to veterans who meet the guideline criteria. These loans do not require a down payment and offer more flexible guidelines than conventional loans. Active military may also be eligible for a VA loan. Ask your mortgage consultant for more information.

What is Private Mortgage Insurance (PMI)?
When a homebuyer has less than 20% for a down payment, most lenders require the buyer to obtain Private Mortgage Insurance. This insurance protects the lender against financial loss should the buyer default on payment of the loan. It is paid for by the buyer and is generally included as part of the monthly mortgage payment.

What is the difference between list price, sales price and appraised value?
The price a homeowner would like to receive in the sale of the property is known as the list price. The sales price is the amount a buyer is willing to purchase the home for, and is agreed upon by both buyer and seller. An appraised value of a property determines the current market value, taking into account comparable sales and other various factors.

Refinance

What is refinancing?
Refinancing is the process of taking out a new loan to pay off an existing home loan. This is done for numerous reasons, including lowering an interest rate and monthly payment, or to obtain cash from the available equity that has accumulated in a home.

When should you refinance a mortgage?
Our Refinance Calculator can be utilized to help borrowers determine whether or not it is a good option for you. By entering basic information such as zip code, original loan amount, property value, date of loan, interest rate, cash available and estimated length of time planned to own the property, the calculator can provide a variety of refinancing options for consideration when contemplating refinancing an existing mortgage.

Home Equity

What is a home equity loan and what is it used for?
A homeowner who qualifies can tap into their home's available equity leaving their home loan in place and taking out a second mortgage on the home. The money can be used to consolidate high interest debt, finance home improvement projects, pay for tuition, etc. Tapping into the equity built in a home can be a wise choice that allows the homeowner to take advantage of interest rates that are often lower than credit card interest rates.* Interest on both a home equity loan and line of credit may be tax deductible (consult your tax advisor about your personal situation).

What is the difference between a line of credit and a fixed home equity loan?
A home equity line of credit is a  line of credit from which money up to the credit limit may be drawn. Terms are typically 25 years, with either a 5 or 10-year interest-only payment period.  The loan’s interest rate is tied to a common index such as the Prime Rate and is adjustable, usually monthly. One of the most attractive aspects of a home equity line of credit is that the interest rate is typically lower than most credit cards and the interest paid might be tax deductible. (Consult your tax advisor about your personal situation).

Most fixed-rate home equity loans are simply called second mortgages. They have fixed rates with varying terms over a period of time. These loans are fully amortized, so your monthly payment is applied to principal and interest. You receive the amount of money you borrow in one lump sum. For this reason, home equity loans can be ideal for short-term financial goals.

* The relative benefits of a consolidation loan may vary over time and will depend on individual circumstances. The longer the property and loan at a new lower rate and term is kept, the more interest savings can be realized when compared to your current situation. The repayment period of a mortgage loan can generally be shortened when additional funds above scheduled monthly mortgage payments are consistently paid and applied to reduce the loan balance.