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Mortgage FAQ's

These are answers to some of the frequently asked questions we run across in our everyday dealings with home buyers and mortgage clients.  Some of the answers will be specific to Pennsylvania law, some specific to the Philadelphia real estate market and Philadelphia mortgages, and others are general in nature.  We operate in the Philly real estate market and for that reason can not speak to real estate law or custom in other states.  The answers here do not constitute legal advice in any way.  We recommend that if you have specific needs or questions that you consult a real estate attorney.

What are closing costs?

Closing costs are made up of several fees and charges, some from your lender, some from the title company, and other from the city, state or township the property is located in.  Closing costs will vary from lender to lender as the fees they charge will vary slightly.  Here is a list of common closing costs for a Philadelphia mortgage:

Lender Fees

• Loan Origination
• Appraisal fee
• Credit report
• Processing fee

Title Charges

• Notary fees
• Title insurance (this is regulated in Pennsylvania and is set by the state)
• Endorsements

State Charges

• Recording Fee
• Transfer Tax (unique to Philadelphia it is 4% usually split between buyer and seller)

Escrows
(money withheld to pay your taxes and insurance for the year)

This is not a complete list, but it’s close.  As mentioned before the fees and charges will vary from lender to lender and some of these charges are specific to Philadelphia mortgages. 

What are escrows and can I avoid them?

Escrows are funds that are reserved by the lender to pay your real estate taxes and homeowners insurance for the following year.  The idea behind this is that the lender is attempting to avoid losing the home to a tax sale should you not pay your taxes or having the asset (your home) lost to fire or damage for lack of paying the homeowners policy.  In Philadelphia, taxes are very low and homeowners insurance is not that expensive either.  If you are buying a condo, the lender may also require a few months worth of escrow for the condo association fees.

You as the buyer have the right to decide to waive the escrows, in other words, tell the lender not to hold them and that you will pay for them yourself.  Sometimes though this will affect your rate as the lender will raise it to cover the additional risk.

How can I compare two different mortgage offers?

Most answers to this question state “get a Good Faith Estimate and Truth In Lending disclosure from each mortgage company and compare them side by side”  The problem with that is first, make sure they are both quoting the same thing.  The same amount down, the same escrows, and that all applicable fees are included, such as condo fees.  Second, not all loan officers know how to properly prepare a TIL.

My advice is to look at those two documents, but more importantly will the loan officer be present for your closing?  So that if anything goes wrong you have someone to turn to.  Pay attention to how your loan officer advised you, were they responsive, did they educate and advise you or were they simply a rate qouter?

It may serve you better to go with a local mortgage company when buying a home in Philadelphia.  A loan officer located near you could better serve you now and into the future.  As time goes by, people have different needs for financing.  Establishing a relationship now can help you down the road.

What is a fixed mortgage?

A fixed rate mortgage is just what the name implies.  It is a mortgage with a fixed interest rate that is amortized over a certain number of years.  15, 20, 30 and 40 years are the typical loan term.  The interest rate remains fixed over the life of the loan, so the interest rate is the same from the first payment to the last.  This is a very popular mortgage choice and seems to be the one that most folks are familiar with.  It is best for people who are W2 employees, and whose income does not fluctuate much.

What is an ARM loan?

An ARM loan is short for adjustable rate mortgage.  Adjustable rate mortgages are a more recent loan structure.  These loans generally have the same term as a fixed rate mortgage would.  So the loan may be a 15, 20, or 30 year loan.  But the mortgage interest rate is only fixed for the first 6 mos., 1, 3 or 5 years.  After that the interest rate will adjust up or down based on the index it is based on, as well as the margin set when the loan was originated.  So for instance a 3/1 ARM will be fixed for the first 3 years and then will adjust every 12 months after that for the life of the loan.  These loans are generally more appropriate for investors who are interested in increasing cash flow on their investment properties, or homeowners who move frequently as the interest rates on ARM loans are often below that of a fixed rate loan.

What does APR mean?

APR means annual percentage rate.  The APR for your mortgage is reflected on the TIL or “truth in lending” form that your lender or mortgage broker is required to provide to you prior to your loan closing.  The APR, when calculated correctly, is designed to give you an accurate picture of the cost of your mortgage including all fees, expressed as an annual percentage rate.  I say calculated correctly because often this document is not completed correctly and so it makes it difficult to use it as the basis of comparison between two loans.  The idea of the APR would be that if you added all the fees associated with the closing of the loan (excluding certain things like the appraisal fee) to the actual loan amount, then amortized that entire amount over the term of the loan, you get the APR for the amount borrowed.

What is the difference between a mortgage broker and a mortgage banker?

A mortgage broker is essentially a vendor of various mortgage lenders products.  A broker will often have a list of 20, 30, 40, or more lenders that they are registered with and able to send their mortgage clients business to.  A mortgage broker is a sort of third party sales force for mortgage lenders.  Most lenders have broker programs, called a wholesale channel.  Wells Fargo, Wachovia, Bank of America, Countrywide, etc. all accept loan applications from brokers.  Brokers do not actually lend the funds for your mortgage, but they shop for the best rates and terms for their clients and handle the process all the way to closing.  Mortgage bankers are actual lenders.  Their company will have large lines of credit with which to fund mortgage loans.  Mortgage bankers typically will either use their own funds for the mortgage, or if they find a better deal with another lender can also broker the loan out.

What is a point?

A point is simply 1% of the loan amount.  This term is usually used regarding fees that a lender charges for either the origination of the loan or as a discount to buy a lower interest rate from the client, called “buying down the rate”.

What is a sellers assist?

A sellers assist is money agreed to be given to the buyer at the time of closing.  Often this is used to help a buyer who does not have all the funds necessary to not only make a down payment on the home they are buying but to also pay all of the closing costs.  If a buyer agrees to pay $150,000 for a home, they may choose to add $4,500 to their offer for a total of $154,500 but ask for the seller to give back that $4,500 at the time of settlement to be used toward the money the buyer needs to close.  The seller isn’t losing anything, the buyer is actually financing that additional $4,500 along with the purchase price of the home.  The amount that a buyer can receive is capped however and a general guideline is 3% maximum seller contribution when the buyer is financing 90% or more of the purchase price of the home.  6% is the maximum when the buyer is financing 90% or less of the purchase price of the home.

What does buying down the rate mean?

If a lender is offering a loan at x% they may also offer the option to pay a percentage of the loan amount to receive a lower rate, known as discount points.  So if a loan is offered at 7% the lender may also offer the borrower the option to pay an additional 1% of the loan amount to receive a rate at 6.75%

What does LTV mean?

LTV stands for loan to value.  It expresses the ratio of what a property is worth to how much is owed on the mortgage.  A 90% LTV means that 90 percent of the value of a home is owed on the mortgage.  This term is used often in regard to how much a borrower is borrowing for the purchase of a property.  If a homebuyer is putting 10% of the loan amount as a down payment then their loan to value on that property would be 90%.

Dale Archdekin
Mortgage Consultant
Mega Mortgage
Cell: 215-370-1236
Office: 215-357-6342
Fax: 215-389-8973
www.megamortgagepa.com

Contact us today to buy sell or refinance a home!