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What is Prepaid Interest? |
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Prepaid interest is typically paid at loan closing. It is the interest paid on a new loan from the day of closing through the end of the month. All future interest on a mortgage loan is then paid in arrears. For example, if your new loan closes on February 17th, prepaid interest would be paid at closing from February 17th through the end of the month of February. Interest would then be paid monthly with your first payment beginning April 1st which would pay March interest. Your payment on May 1st would pay April interest, etc.
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Why is the Published APR Higher Than Mine? |
| All lenders are required by the Truth-In-Lending Act to show the rate which will be charged on the note signed at closing, including the total finance charges to obtain the loan. This includes, but is not limited to, the total interest paid over the life of the loan, assuming the full term is carried out at the note rate, plus certain closing costs. Closing costs could include prepaid interest, Private Mortgage Insurance/FHA Mortgage Insurance Premium/or VA funding fee, whichever may be applicable, and various miscellaneous costs such as an underwriting fee, tax service fee, etc., as may be charged by the lender. All of these "Finance Charges" are taken into consideration when calculating the APR to give a more accurate picture of the total cost of the loan.
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What is the difference between "locking" or "floating" my interest rate? |
| When the borrower chooses to "lock-in" the interest rate, the lender takes the risk of interest rates increasing during the period of time from lock-in to loan closing. The down side is if interest rates fall, the borrower is locked in at the higher interest rate. The benefit is the security of knowing the interest rate is locked in if interest rates should increase. When floating the interest rate for any amount of time, the borrower takes the risk of interest rates increasing during the period from application to the time of lock-in. The downside to this of course, is if interest rates increase during this time, the borrower is subject to the then current higher interest rates. The benefit would then be if interest rates went down, the borrower would have the option of a lower interest rate than if locked in previously. The decision of whether or not to lock-in is a personal choice. The borrower needs to decide just how much risk to take.
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What is an escrow account? |
| When the borrowers make their monthly mortgage payments, they generally also pay one-twelfth of the anticipated annual amount needed to pay taxes and insurance premiums. These additional funds are deposited into an escrow account (also known as an impound account), until the lender pays the taxes and insurance premiums as they come due. The borrower benefits for budgeting reasons because costs are spread through the year rather than as a lump sum. This method allows the lender greater control in avoiding tax delinquencies or lapses of hazard insurance coverage on the property. Mortgage documents often stipulate lenders establish an escrow account.
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Can I pay my own taxes and insurance? |
| When a loan is originated, the mortgage documents specify the escrow conditions. Lenders are required to establish escrow accounts for all FHA and VA Mortgages. On conventional mortgages, it is possible to pay your own taxes and insurance. This usually is on loans lower than 80% loan-to-value and costs at least a quarter of a discount point.
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What does it mean when a lender refers to a loan being "A" quality? |
| Similar to Wall Street investments, lenders rate loans based upon the credit record applicant, type of property being loaned upon, and general quality of the loan. These ratings delineate the level of risk associated with making a particular loan. For example, a mortgagor with perfect credit borrowing $100,000 to buy a new home that they intend to live in may be considered an "A" quality loan. However, if the borrower had been late several times on their mortgage payments for the previous mortgage, the loan may be considered a "B" quality loan. If that mortgagor also had a previous bankruptcy or foreclosure on their credit report, the loan may be further downgraded to a "C" or "D" quality loan. Due to the risk associated with making these types of loans, the interest rates quoted for each level of loan will increase with the level of risk associated with making the loan.
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What is Private Mortgage Insurance and when can it be canceled? |
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Private Mortgage Insurance protects the lender against the borrower's default usually on the top 20% of the loan. This is because default is most likely to occur in the early years of the loan, especially if the equity in the property is low. Usually private mortgage insurance starts when the first payment is due. It is a monthly percentage of the loan amount with the percentage depending on the loan-to-value and the type of mortgage. It's a misconception that private mortgage will be removed automatically from the loan at some predetermined time. The borrower must make the request to the lender, who will evaluate it on a case-by-case basis. The lender will usually require that the last twelve months payments be made on time, and usually requires that an appraisal on the property shows at least 20% equity. One way to avoid the need for private mortgage insurance would be to put 20% or more down. Or perhaps the seller would carry a second mortgage for part of the purchase price in order to reduce the loan-to-value ratio on the first mortgage.
Check with your tax specialist.
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