Talk the Talk – Know the Mortgage Lingo at Closing

Know the Mortgage Lingo at Closing

Most borrowers are completely at bay about the closing process- Sure they sign all the documents but when it comes to understanding what stage the process is in, they simply nod and smile through it all. You trust your real estate & mortgage team to do everything right, but its also important to understand the terminology that is being used. Here is some of the common lingo that is used at closing.

  • Docs Sent- Buyers are always very stressed out during the approval process and are eager to know whether they meet all the qualification requirements that have been laid-out by the lender. If you hear the term docs sent- it means you have made it and that the closing department has sent all the approved paperwork on to the closing agent- the title company or an attorney.

  • Docs Signed- This means the documents have been signed. This includes all the paperwork between the lender and borrower and will have details like the contracts and terms of the loan

  • Funded – It means that the funds have now been transferred from the lender to the concerned lending agent (with all the disclosures that are required). In the case of a home purchase, if the closing has taken place in the morning, the funds will be sent that same day. If the closing takes place in the afternoon, the fund transfer will take place the following day.

  • Recorded – This is related to the recording the deed transfers title or the legal ownership of that property to the buyer. The transaction will be recorded by the attorney or the title company, in the county register of the area where the property is located. This generally takes place soon after closing.

Gaining Clarity

It helps to understand the closing lingo as it gives you more clarity about what exactly is taking place and you will be feel a little less lost with the entire closing process. The more clarity you have, the more confident you will be while speaking with the different parties involved in the process. You can also contact ResMac Home Loans for more information about application approval and to understand what the modalities are.

 

Top Five Market Factors That Influence Mortgage Rates

Timing the market for the best possible opportunity to lock a mortgage rate on a new loan is certainly a challenge, even for the professionals.

While there are several generic interest rate trend indicators online, the difference between what’s advertised and actually attainable can be influenced at any given moment by at least 50 different variables in the market, and with each individual loan approval scenario.

Outside of the borrower’s control, the mortgage rate marketplace is a dynamic, volatile, living and breathing animal.

Lenders set their rates every day based on the market activities of Mortgage Bonds, also known as Mortgage Backed Securities (MBS).

On volatile days, a lender might adjust their pricing anywhere from one to five times, depending on what’s taking place in the market.

Factors That Influence Mortgage Backed Securities:

1.  Inflation –

According to Wikipedia:

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, annual inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

As inflation increases, or as the expectation of future inflation increases, rates will push higher.

The contrary is also true; when inflation declines, rates decrease.

Famous economist Milton Friedman said “inflation is always and everywhere a monetary phenomenon.”

Public enemy #1 of all fixed income investments, inflation and the expectation of future inflation is a key indicator of how much investors will pay for mortgage bonds, and therefore how high or low current mortgage rates will be in the open market.

When an investor buys a bond, they receive a fixed percentage of the value of that bond as ‘coupon’ payments.

With MBS, an investor might buy a bond that pays 5%, which means for every $100 invested, they receive $5 in interest per year, usually divided up over 12 payments. For the buyer of a mortgage bond, that $5 coupon payment is worth more in the first year, because it can buy more today than it can in the future, due to inflation. When the markets read signals of increasing inflation, it tells bond investors that their future coupon payments will be less valuable by the time they receive them. So basically, this causes investors to demand higher rates for any new bonds they invest in.

2. The Federal Reserve

As part of its 2008-2010 stimulus effort, the NY Fed spent almost all of its $1.25 trillion budget buying mortgage bonds. Many believe this strategy kept mortgage rates lower over a 15 month period.

The lending environment significantly changed between 2008, when the Fed began its mortgage bond purchasing program, and early 2010 when the market was left to survive on its own.

When the MBS purchase program was announced in November 2008, mortgage bonds reacted immediately and dramatically.

But at that time, there weren’t any investors willing to take a risk in buying mortgage bonds. The meltdown in the mortgage market and world economies lead many investors to shy away from the risks associated with MBS, which is why the Fed had to step in and basically assume the role as the sole investor of mortgage bonds.

However, loan underwriting guidelines drastically tightened up by 2010, which may create a little more confidence in the mortgage bond market.

3. Unemployment –

Decreasing unemployment will suggest that mortgage rates will rise.

Typically, higher unemployment levels tend to result in lower inflation, which makes bonds safer and permits higher bond prices. For example, the unemployment rate in March 2010 was at 9.7%, just slightly below its highest mark in the current economic cycle.

Every month, the BLS releases the Nonfarm Payrolls (aka The Jobs Report) which tallies the number of jobs created or lost in the preceding month.

The previous report indicated a loss of 36,000 jobs. Not necessarily a number that will move the needle on the unemployment gauge, but some economists suggest we need about 125,000 new jobs each month just to keep pace with population growth. So that negative 36,000 is more like negative 161,000 jobs short of an improving unemployment picture.

One flaw to pay attention to with unemployment rates is that the method of surveying fails to capture part-time workers who desire full-time employment, discouraged job seekers who have taken time off from searching and other would-be workers who are not considered to be part of the labor force.

4. GDP –

GDP, or Gross Domestic Product, is a measure of the economic output of the country.

High levels of GDP growth may signal increasing mortgage rates.

The Federal Reserve slashes short-term rates when GDP slows to encourage people and businesses to borrow money. When GDP gets too hot, there might be too much money floating around, and inflation usually picks up. So high GDP ratings warn the market that interest rates will rise to keep inflation concerns in balance.

Spiking GDP with flat/increasing unemployment begs some questions.

There are two major indicators that help provide more context:

1. Increases to worker productivity – employers are getting more work out of their current employees to avoid hiring new ones

2. Surges in inventory cycles – when the economy first started contracting, manufacturing slowed down to cut costs, and sales were made by liquidating inventory.

This is like a roller coaster cresting a hill, where one part of the train is going up, the other down. Eventually, the other side catches up, inventories are rebuilt by manufacturing more than is being sold. Both surges can throw off periodic reports of GDP.

5. Geopolitics –

Unforeseen events related to global conflict, political events, and natural disasters will tend to lower mortgage rates.

Anything that the markets didn’t see coming causes uncertainty and panic. And when markets panic, money generally moves to stable investments (bonds), which brings rates lower. Mortgage bonds pick up some of that momentum.

Acts of terrorism, tsunamis, earthquakes, and recent sovereign debt crises (Dubai, Greece) are all examples.

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Putting It All Together:

Economic data is reported daily, and some items have a greater tendency to be of concern to the market for mortgage rates. If you are involved in a real estate financing transaction, it’s helpful to be aware of these influences, or to rely upon the advice of a mortgage professional who is already dialed in.

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What’s The Difference Between Interest Rate and Annual Percentage Rate (APR)?

The difference between APR and actual note rate is very confusing, especially for First-Time Home Buyers who haven’t been through the entire closing process before.

When shopping for a new mortgage loan, you may notice an Annual Percentage Rate (APR) advertised next to the note rate.  The inclusion of an APR is actually mandated by federal law in order to help give borrowers a standard rule of measurement for comparing the total cost of each loan.

The APR is designed to represent the “true cost of a loan” to the borrower, expressed in the form of a yearly rate to prevent lenders from “hiding” fees and up-front costs behind low advertised rates.

According to Wikipedia:

The terms annual percentage of rate (APR) and nominal APR describe the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage, credit card, etc. It is a finance charge expressed as an annual rate. 

  • The nominal APR is the simple-interest rate (for a year).
  • The effective APR is the fee+compound interest rate (calculated across a year)

The nominal APR is calculated as: the rate, for a payment period, multiplied by the number of payment periods in a year.

However, the exact legal definition of “effective APR” can vary greatly, depending on the type of fees included, such as participation fees, loan origination fees, monthly service charges, or late fees.

The effective APR has been called the “mathematically-true” interest rate for each year. The computation for the effective APR, as the fee+compound interest rate, can also vary depending on whether the up-front fees, such as origination or participation fees, are added to the entire amount, or treated as a short-term loan due in the first payment.

What Fees Are Typically Included In APR?

  • Origination Fee
  • Discount Points
  • Buydown funds from the buyer
  • Prepaid Mortgage Interest
  • Mortgage Insurance Premiums
  • Other lender fees (application, underwriting, tax service, etc.)

Since origination fees, discount points, mortgage insurance premiums, prepaid interest and other items may also be required to obtain a mortgage, they need to be included when calculating the APR. Fees such as title insurance, appraisal and credit are not included in calculating the APR.

The APR can vary between lenders and programs due to the fact that the federal law does not clearly define specifically what goes into the calculation.

What Does APR Not Disclose?

  • APR on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change.  But Adjustable Rate Mortgages always change over the course of 30 years.
  • Balloon Payments
  • Prepayment Penalties
  • Length of Rate Lock
  • Comparison between loan terms – EX:  A 15-year term will have a higher APR simply because the fees are amortized over a shorter period of time compared to a similar rate / cost scenario on a 30-year term.

APR Comparing Examples:

  • Bank (A) is offering a 30 year fixed mortgage at 8.00% APR
  • Bank (B) is offering a 30 year fixed mortgage at 7.00% Note Rate

Easy choice, right?

While Bank (B) is advertising the lowest Note Rate, they’re not factoring in the origination points, underwriting / processing fees and prepaid mortgage interest (first month’s mortgage payment), which could essentially make the APR much higher than the one Bank (A) is advertising. So Bank (A) may show a higher rate due to the APR, but they could actually be charging a lot less in total fees than Bank (B).

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Before lenders and mortgage brokers were required to state the APR, it was more difficult to find the truth about the total borrowing costs of one loan vs another. When comparing mortgage rates, it’s a good idea to ask your lender which fees are included in their APR quote.

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How Are Mortgage Rates Determined?

Many people believe that interest rates are simply set by lenders, but the reality is that mortgage rates are largely determined by what is known as the Secondary Market.

The secondary market is comprised of investors who buy the loans made by banks, brokers, lenders, etc. and then either hold them for their earnings, or bundle them and sell them to other investors. When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans.

That market price of those Mortgage Backed Securities (MBS) is what impacts mortgage rates.

Typically, investors are willing to accept a lower return on mortgage backed securities because of their relative safety compared to other investments.

This perception of safety is due to the implied government backing of Fannie Mae and Freddie Mac and the fact that the Mortgage Backed investments are based on real estate collateral. So, if the loan defaults there is real property pledged against potential losses.

In contrast, other investments are considered more risky, specifically stocks which are based on earnings and profit vs real property.  The movement between the two investment vehicles often dictates mortgage rates.

Why Do Mortgage Rates Change?

Mortgage rates fluctuate based on the market’s perception of the economy.

Stocks are considered riskier investments, and therefore have an expected higher rate of return to compensate for that risk. When the economy is thriving, it is presumed that companies will perform better, and therefore their stock prices will move higher. When stock prices move higher – MBS prices generally move lower.  Mortgage Backed Securities, however, thrive when the economy is perceived as not doing well. When investors forecast a faltering economy, they worry that the return on stocks will be lower, so they frequently engage in a ‘flight to safety’ and buy more secure investments such as Mortgage Backed Securities.  Mortgage rates are actually based on the yield of those Mortgage Backed Securities.

Bonds are sold at a particular price based on their value in relation to other available investments.  When a bond is sold it yields a certain return based on that original purchase price.  As the prices of the MBS increases because investors seek their safety, the yield decreases. Conversely, when investors seek the higher returns of stocks and the MBS are purchased in lesser quantities the price goes down.  The lower price results in a higher yield, and this yield is what determines mortgage rates.

How Would I Know if Rates are Expected to Go Up or Down?

UP:

When the economy is growing or is expected to grow, stocks will likely become the more favored investment.

When investors buy more stocks, they purchase fewer MBS, which drives the price down.

When the price of the MBS is lower, the yield increases.

Since mortgage rates are based on the yield of the 30 Year MBS, you would expect rates to increase in this environment.

DOWN:

When the economy appears to be slowing or is doing poorly, investors typically move their money out of the stock market and into the safety of the MBS.

This drives the price of these investments higher, which results in a lower yield.

Since mortgage rates are based on the yield of the 30 Year MBS, you would expect rates to decrease in this environment.

Since these market variables and expectations change multiple times as economic reports are released throughout the course of a week, it is not uncommon to see mortgage rates change several times a day.

Understanding how rates move is not necessarily as important as having a loan officer that is equipped with the technology and professional services to track and stay alerted at the precise moment rates make a move for the better or worse.

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What’s My Debt-to-Income (DTI) Ratio?

Debt-to-Income (DTI) is one of the many new mortgage related terms many First-Time Home Buyers will get used to hearing.

DTI is a component of the mortgage approval process that measures a borrower’s Gross Monthly Income compared to their credit payments and other monthly liabilities.

Debt-to-Income Ratios are designed to give guidance on acceptable levels of debt allowed by particular lenders or programs.

There are actually two different Debt-to-Income Ratios that underwriters will review in order to determine if a borrower’s monthly income is sufficient to cover the responsibility of a mortgage according to the particular lender / mortgage program guidelines.

Most loan programs allow for a Total DTI of 43% and a Housing DTI of 31%.

Two Types of DTI Ratios:

a) Front End or Housing Ratio:

  • Should be 28-31% of your gross income
  • Divide the estimated monthly mortgage payment by the gross monthly income

b)  Back End or Total Debt Ratio:

  • Should be less than 43% of your gross monthly income
  • Divide the estimated house payment plus all consumer debt by the gross monthly income

Remember, the DTI Ratios are based on gross income before taxes.  Lenders also prefer to use W2’s or tax returns to verify income and employment.

However, the adjusted gross income is used to calculate DTI for self-employed borrowers on most loan programs.  Since there is room for interpretation on these guidelines, it’s important to review your personal income / employment scenario in detail with your trusted mortgage professional to make sure everything fits within the guidelines.

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Calculating Loan-to-Value (LTV)

Understanding the definition of Loan-to-Value (LTV), and how it impacts a mortgage approval, will help you determine what type of loan amount and program you may qualify for.

Since the LTV Ratio is a major component of getting approved for a new mortgage, it’s a good idea to learn the simple math of calculating the amount of equity you may need, or down payment to budget for in order to qualify for a particular loan program.

The LTV Ratio is calculated as follows:

Mortgage Amount divided by Appraised Value of Property = Loan-to-Value Ratio

*On a purchase transaction for a residential property, the LTV is calculated using the lesser of either the purchase price or appraised value.

For Example:

Sally qualifies for a 96.5% Loan-to-Value FHA program, which means she’ll have to bring in 3.5% as a down payment.

If the purchase price is $100,000, then a 96.5% LTV would = $96,500 loan amount. And, the 3.5% down payment would be $3,500.

$96,500 (Mortgage Amount) / $100,000 (Purchase Price) = .965 or 96.5%

In addition to determining what mortgage programs are available, LTV also is a key factor in the amount of mortgage insurance required to protect the lender from default.

On a conventional loan, mortgage insurance is usually required if you have an LTV over 80% (one loan is more than 80% of the home’s appraised value). On that point, if you are currently paying mortgage insurance and think that your LTV is less than 80%, then it may be time to refinance, or call your lender to restructure the payment.

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Frequently Asked LTV Questions:

Q:  Why do the lenders care about Loan to Value?

Lenders care about the LTV because it helps determine the exposure and risk they have in lending on a certain property. Statistics show that borrowers with a lower LTV are less likely to default on their mortgage.  Also, with a lower LTV the lender will lose less money in case of a foreclosure.

Q:  Can I drop my mortgage insurance on an FHA loan?

The mortgage insurance on an FHA loan is structured differently than a conventional loan. On a 30 year fixed FHA loan, the monthly mortgage insurance can be removed after five years, as well as when the borrower’s loan is 78% LTV.

Q:  What does CLTV stand for?

CLTV stands for Combined Loan To Value. The CLTV calculation is as follows:
(1st Mortgage Amount + 2nd mortgage amount) / Appraised Value of Property = CLTV

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Top Mortgage Terms To Know

If you scan any mortgage website, you will find a detailed glossary that contains literally hundreds of lending and real estate-related terms. These are a few of the top terms that you will hear a number of times right through the approval & home buying process. Once you understand all the industry jargon that professionals in the field use and you have a good home buying team, you will be a little more confident while discussing various topics and that are crucial to your transaction.

Mortgage-Related Terms

  • Amortization Schedule: The payments schedule that show the amount that has been applied to the principal-amount & the interest through the payoff

  • Adjustable Rate Mortgage (ARM): The ARM is related to a certain financial index & might adjust post a fixed period of time

  • Annual Percentage Rate (APR): The rate of interest which is inclusive of loan-related fees. This helps in determining the entire cost of borrowing the loan.

  • Buy-down: The up-front fee that the borrower pays to reduce the mortgage rate & the monthly payment

  • Combined Loan-to-Value (CLTV): All the mortgage obligations on a specific property in comparison to the current fair market value

  • Delinquency: Late payments on the borrower’s monthly liability

  • Disclosure: The documents that the lender, buyer & seller sign during the real estate purchase/ mortgage transaction

  • Discount Point: The amount that is paid to reduce an interest rate

  • Fixed Rate Mortgage: The mortgage in which the interest rate does not change through the term of the note

  • Good Faith Estimate (GFE): The mortgage broker/lender has to provide a GFE to the customer. It is an itemized list of all the costs & fees related to the loan and has to be provided within 3 business days of the loan application date

  • Gross Income: The total taxable-income that is verified by the lender via tax returns & W2’s

  • Home Equity Line of Credit (HELOC): The line of credit that is secured by real estate

  • Joint Liability: When multiple people apply for & secure a mortgage

These are just some of the terms you will come across while your loan is being processed and closed. You will also hear real estate terms like Acceptance, Contingency, Due-Diligence, Deed of Trust, Earnest Money, Escrow, Equity and a lot more. Reading a little about all these terms will help you gain a firmer footing when you are applying for and waiting for your mortgage loan to get approved. For more information, contact ResMac Home Loans today.