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1. Why go to a mortgage broker instead of a bank? Answer
2. I have not yet begun my search for a new house.  What are the benefits of getting a "pre-approval" or "pre-qualification"? Answer
3. How do I know how much house I can afford? Answer
4. How does my credit rating affect my ability to buy a home? Answer
5. How much cash will I need to purchase a home? Answer
6. How do I know which type of mortgage is best for me? Answer
7. What is the difference between a fixed-rate loan and an adjustable-rate loan? Answer
8. What does my mortgage payment include? Answer
9. What is an APR? Answer
10. What are points? Answer
11. What is an LTV? Answer
12. What are debt ratios? Answer
13. What is "A, B, C, and D paper"? Answer
14. How is an index and margin used in an ARM? Answer
15. What is the difference between Mortgage Insurance, Mortgage Disability Insurance, and Mortgage Life Insurance? Answer
16. I often hear the terms "Freddie Mac" and "Fannie Mae."  Who/what are they, and what do they do? Answer

Q : Why go to a mortgage broker instead of a bank?
A : As a broker, we treat our clients as if they are the only client in the world!  We work for our client, not for a group of stockholders.  A mortgage broker has a great advantage in that we represent a large number of lenders, and each provides a variety of mortgage programs and interest rates to choose from.  We can offer our clients options that may not be available at a local bank, and we can often offer financing to clients who have been turned down by banks.
 
Q : I have not yet begun my search for a new house.  What are the benefits of getting a "pre-approval" or "pre-qualification"?
A : There are many benefits to being pre-approved before your home search.  First, it gives you the comfort of clearly knowing how much you can afford.  This way, you can save time by targeting only those homes that are within your price range.  Second, a pre-approval tells sellers you are a serious buyer, and gives you bargaining power!  Third, a pre-approval should help speed along the final approval process, as most of the work is already done!
 
Q : How do I know how much house I can afford?
A : 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 upon your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. You may also be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value. Give us a call, and we can help you determine exactly how much you can afford.
 
Q : How does my credit rating affect my ability to buy a home?
A : One's financial ability to buy a home is determined by one's income, debt, and funds required for a down payment.  The home loan's interest rate will vary according to the risk factor.  Risk is determined by the amount of credit you may have, how much of that credit limit you are using, and whether or not you have made payments in a timely manner. Making payments on time is a key issue.  If one made payments in the last 12 months that were 30+ days late, that will hurt one's credit more than if the those late payments occurred more than 2 years ago.
 
Q : How much cash will I need to purchase a home?
A : The amount of cash that is necessary depends on a number of items. Generally speaking, though, you will need to supply:
  • Earnest Money: The deposit that is supplied when you make an offer on the house
  • Down Payment: A percentage of the cost of the home that is due at settlement
  • Closing Costs: Costs associated with processing paperwork to purchase or refinance a house
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    Q : How do I know which type of mortgage is best for me?
    A : There is no simple formula to determine the type of mortgage that is best for you. This choice depends on a number of factors, including your current financial picture and how long you intend to keep your house. Shaw Mortgage can help you evaluate your choices and help you make the most appropriate decision.
     
    Q : What is the difference between a fixed-rate loan and an adjustable-rate loan?
    A : A fixed-rate mortgage is a mortgage with an interest rate that stays the same for the life of the loan.  Therefore, the payments stay the same for the life of the loan as well.

    With an adjustable-rate mortgage (ARM), the interest rate changes based upon a predetermined time interval (usually in relation to an index), and payments may go up or down accordingly.

    While 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, and the best way to select a loan product is by talking to us.
     
    Q : What does my mortgage payment include?
    A : For most homeowners, the monthly mortgage payments include 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 fees will be paid by you directly to the County Tax Assessor and property insurance company.
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    Q : What is an APR?
    A : An APR, or Annual Percentage Rate, is the cost of credit expressed as an annual rate.  In other words, this rate includes a combination of the interest rate, points, and other fees paid to a lender when acquiring a mortgage.  The APR is the most meaningful measure for comparing the costs of mortgage loans offered by different lenders.
     
    Q : What are points?
    A : "Points", also called origination fees, are the fees imposed by a lender to cover certain processing expenses in connection with making a real estate loan.  A "point" is one percent (1%) of the amount of the loan.  For example, a fee of 2 "points" (2%) on a loan of $200,000 would equal $4,000.
     
    Q : What is an LTV?
    A : An LTV, or Loan-to-Value, is a ratio of the amount of the mortgage to the value of the home.

    Example:  If your home is worth $100,000 and your mortgage is $80,000, then your loan-to-value ratio (LTV) is 80%.  Your loan is 80% of the value of your home.  (Amount of the loan divided by the value of the home.)
     
    Q : What are debt ratios?
    A : Debt raios are guidelines used by lenders to ensure a borrower is not exceeding what he or she can afford.  There are two (2) ratios to consider:

    1)  The Housing Ratio (also called Payment-to-Income or Front-End ratio).  This ratio is the monthly housing payment ("PITI" - Principal, Interest, Taxes, Insurance) divided by one's gross monthly income.

    2)  The Total Debt Raio (also called the Obligations-to-Income or Back-End raio).  This ratio is a key factor in determining how much house you can afford.  This ratio is the housing payment PLUS all other monthly debt divided by one's gross monthly income (income before deductions).  All other monthly debt would include credit card and loan payments, but not utilities.  Generally, a borrower's Total Debt Ratio should be below 45-50%.  Contact Shaw Mortgage for more information or for help in figuring out your debt ratios.
     
    Q : What is "A, B, C, and D paper"?
    A : These letters represent levels of risk to the lender.  The "A" paper normally is for borrowers with good credit.  The "B" paper rating means there is more risk in making a loan than there is when making a loan to an "A" paper borrower.  The "C" and "D" paper ratings reflect still increasing levels of risk.  A greater level of risk usually brings with it a higher cost in interest, and a larger down payment.  There are many variables involved in these risk determinations, but a major factor is the credit score shown on the credit report.  Risk levels (or grades) below "A" are also referred to as "sub-prime" loans.
     
    Q : How is an index and margin used in an ARM?
    A : 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 a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR).
     
    Q : What is the difference between Mortgage Insurance, Mortgage Disability Insurance, and Mortgage Life Insurance?
    A : Mortgage Insurance (MI) is insurance written by an independent mortgage insurance company (MIC) protecting the lender against loss incurred by a mortgage default.  Often, MI is required when the Loan-to-Value (LTV) is greater than 80%.  Once an existing loan's LTV has dropped below 80%, the borrower who is paying MI may want to investigate having the MI removed.

    Mortgage Disability Insurance (MDI) is a disability insurance policy which will pay the monthly mortgage in the event of a covered disability of an insurance borrower, for a specific period of time. 

    Mortgage Life Insurance (MLI) is a term life insurance policy that covers the declining balance of a loan secured by a mortgage, and is payable upon the death of a covered borrower.

     
     
    Q : I often hear the terms "Freddie Mac" and "Fannie Mae."  Who/what are they, and what do they do?
    A : Freddie Mac is short for the Federal Home Loan Mortgage Corporation (FHLMC).  Freddit Mac is an agency which purchases first mortgages, both conventional and federally insured, from members of the Federal Reserve System and the Federal Loan Bank System.

    Fannie Mae is short for the Federal National Mortgage Association (FNMA).  Fannie Mae is a private corporation that deals in the purchase of first mortgages, at great discounts.