FAQ

“Frequently Asked Questions”

PacificFirst Mortgage knows that if you are like most people, purchasing a home can be the greatest single investment that you may make as a family. Also, you are likely aware of the complexity involved in considering refinancing your existing home or planning a new home purchase. With all of the various factors to consider, it's important to be as prepared as possible when starting out.

The information contained below will allow you to begin to prepare yourself for what to expect. Since 25% – 40% of your monthly income can represent your housing expense, it's good to do some careful research before making a final decision.

Here you will find some of the most commonly asked questions when starting this process. With these in mind, the decision will be a more enjoyable experience on your way to building your successful financial future.

1. What mistakes are commonly made when refinancing or buying a home?
2. Should I refinance?
3. Why do interest rates change?
4. What is the difference between being pre-qualified & pre-approved?
5. Does a zero point loan with no fees really exist?
6. What is an Annual Percentage Rate (APR)?
7. What fees are included in the APR?

1. “What Mistakes Are Commonly Made When Refinancing
   or Buying a Home?”

Refinancing Your Present Home

1. Refinancing with your existing lender without shopping around.
   Your existing lender may not have the best rates and programs. There is a general misconception that it is easier to work with your current lender. In most cases, your current lender will require the same documentation as other companies. This is because most loans are sold on the secondary market and have to be approved independently. Even if you have made all of your mortgage payments on time, your existing lender will still have to verify your assets and liabilities.
2. Not providing documents to your mortgage company in a timely manner.
   When your mortgage company asks you for additional documents, you should provide them immediately. They are doing what's necessary to get your loan approved and closed. Delays in providing documents can be costly.
3. Using the county tax-assessor's value as the market value of your home.
   Mortgage companies do not use the county tax-assessor's value to determine whether they will make the loan. They use a market-value appraisal which may be very different from the assessed value.
4. Paying for an appraisal when you think your home value may be too low.
   Have the appraisal company provide a list of comparable sales, typically at no charge, to provide you with a range of possible values. Your mortgage company's appraiser or your Realtor may also do this for you. Do not waste your money on a full appraisal if you are doubtful about the value of your home.
5. Not receiving a Good Faith Estimate (GFE).
   Within three business days after the broker or lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you'll pay for your loan. Bring the GFE with you when you sign your loan documents. You should not be expected to pay fees which are substantially different from those contained in your GFE.
6. Not getting a rate lock in writing.
   When a mortgage company tells you they have locked your rate, get a written statement which includes the interest rate, the length of the lock and details about the program.

Buying a Home

1. Looking for a home before being pre-approved.
   

   As a potential buyer competing for a home, you'll have a better chance of getting your offer accepted by being as prepared as possible.

   Imagine that you're a seller in receipt of multiple Purchase Offers. A complete stranger (buyer) is asking you to take your property off the market for at least the next two to three weeks while they apply for a loan. As the seller, lets consider the type of buyer you'd prefer to deal with.

   • Neither pre-qualified or pre-approved
     This buyer provides no evidence that they can afford to purchase your property. You may wonder how serious they are since they're not at least pre-qualified.
   • Pre-qualified
     This buyer has met with a mortgage broker (or lender) and discussed their situation. The buyer has informed the broker regarding their income, expenses, assets and liabilities. The broker may also have seen their credit report. The buyer provided you with a letter from their mortgage broker stating an opinion of what the buyer can afford.
   • Pre-approved
     This buyer has completed a loan application, provided a broker or lender with written evidence of income, expenses, assets, liabilities and credit. All information has been verified by a lender. As a result, much of the paperwork for this buyer's loan has been completed. This buyer will probably be able to close quickly. They provide you with a letter (pre-approval certificate) from the lender. You can be as certain as possible that this buyer can close. As a potential buyer, you can see that being pre-approved will give you the best chance of getting your offer accepted. This is critical in a competitive situation.

2. Choosing a lender because they have the lowest rate.
   While the rate is important, consider the total cost of your loan including the APR, loan fees, discount and origination points. When receiving a quote from a lender or broker, insist that the discount points (charged by the lender to reduce the interest rate), be distinguished from origination points (charged for services rendered in originating the loan). A below market or low interest rate quote may indicate some hidden loan requirements, such as a prepayment penalty, requirement for escrow impounds, a short 15 day rate lock or requiring a larger down payment. Make sure the rate quoted is for your specific loan request.

   The cost of the mortgage should not be your only criteria. Select a reputable company which will deliver the loan as promised. Insist on a written pre-approval from the lender. If in the final hours of the transaction you find that the lender has suddenly increased their profit margin at your expense, you won't have time to start again with a different lender.

3. Signing documents without reading them.
   Whenever possible, review the documents you'll be signing in advance. Eventhough some specifics of your transaction may not be known early in the transaction, the documents you'll sign are standard forms and are available for review. It's unlikely that you'll have sufficient time to read all the documents during the closing appointment.
4. Not allowing for delays in the transaction.
   Ideally, all real estate transactions would close on time. In reality, transactions are often delayed a week or more. Suppose you asked your landlord to terminate your lease the day your purchase transaction was scheduled to close. A day or two before your scheduled closing date, you learn that your transaction is delayed a week. Very likely your landlord is inconvenienced and angry.
5. Using a Dual Agent: an Agent who represents both buyer & seller.
   Buyers and sellers have opposing interests. Sellers want to receive the highest price; buyers want to pay the lowest price. In the standard real estate transaction, the seller pays the real estate commission. When an agent represents both buyer and seller, the agent can tend to negotiate more vigorously on behalf of the seller. As a buyer, you're better off having an agent representing you exclusively. The time you should consider a dual agent is when you get a price break in doing so.
6. Buying a home without professional inspections.
   Unless you're buying a new home with warranties on most equipment, consider obtaining property, roof, structural, pest control and other relevant inspections. This way you'll know exactly what you are buying. Inspection reports are great negotiating tools when asking the seller to make needed repairs. When a professional inspector recommends that certain repairs be done, the seller is more likely to agree to do them. If the seller agrees to make repairs, have your inspector verify that they are done prior to close of escrow. Do not assume that everything was done as promised.

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2. “Should I Refinance?”

The most common reason for refinancing is to Save Money!
Saving money through refinancing can be achieved in two ways:

1. By obtaining a lower interest rate, that causes your monthly mortgage payment to be reduced. One reason why homeowners refinance is to consolidate debts and replace high-rate loans with a low-rate mortgage. The loans being consolidated may include second mortgages, credit lines, student loans, credit cards, etc. In many cases, debt consolidation results in tax savings, since consumer loans are not tax deductible, while a mortgage loan is usually tax deductible.
2. By reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total interest paid during the life of the loan can be reduced significantly. People also refinance to convert their adjustable loan to a fixed loan or vice versa. The main reason for doing this to obtain the stability and the security of a fixed rate. Fixed rates are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in a lower rate. When rates are high, homeowners prefer adjustable loans to obtain lower payments.

   Since every situation is different and no two homeowners are in the exact same situation, the conventional wisdom of refinancing only when you can save 2 percent on your rate is problematic. If you are refinancing to lower your monthly payments, the following calculation is more appropriate compared to the 2 percent rule:

   1. Calculate the total cost of the refinance. Example: $2,000
   2. Calculate the monthly savings? Example: $100/month
   3. Divide the result of 1 by the result of 2. In this case $2000/10 = 20 months. This shows the break-even time period. If you plan to live in the home for longer than this period of time, it makes sense to refinance.

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3. “Why Do Interest Rates Change?”

Interest rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, (i.e. higher rates). If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, (i.e. lower rates). When the economy is expanding there is a higher demand for credit, and rates move higher, whereas when the economy is stable so are interest rates.

A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply & demand equation for mortgage rates may be different from the supply & demand equation for interest rates. This might sometimes result in mortgage rates moving differently from prime lending rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up.

• 11th District Cost of Funds:
  Rate determined by averaging a composite of other rates.
• Fannie Mae-Backed Security Rates:
  Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.
• Ginnie Mae-Backed Security Rates:
  Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities The rates on these securities influence mortgage rates on FHA and VA loans.

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4. “What is the Difference Between Being Pre-qualified
   and Pre-approved?”

Pre-qualification is normally determined by a loan officer. After interviewing you, the loan officer determines the potential loan amount for which you may be approved. The loan officer does not issue loan approval; therefore pre-qualification is not a commitment to lend. After the loan officer determines that you pre-qualify, he/she then issues a pre-qualification letter. The pre-qualification letter is used when you make an offer on a property. The pre-qualification letter informs the seller that your financial situation has been reviewed by a professional and you will likely be approved for a loan to purchase the home.

Pre-approval is a step above pre-qualification Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is submitted to a lender's underwriter and a decision is made regarding your loan application. When your loan is pre-approved you receive a pre-approval certificate. Getting your loan pre-approved allows you to close very quickly when you do find a home. Pre-approval can also help you negotiate a better price with the seller.

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5. “Does a Zero Point Loan with No Fees Really Exist?”

The best way to decide whether you should pay points or not is to perform a break-even analysis. This is done as follows:

1. Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000.
2. Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month
3. Divide the cost of the points by the monthly savings to come up with the number of months to break even. In the above example, this number is 40 months. If you plan to keep the home for longer than the break-even number of months, then it makes sense to pay points, otherwise it does not.
4. The above calculation does not take into account the tax advantages of Points. When you are buying a home the points you pay are tax-deductible, so you realize some savings immediately. On the other hand, when you get a lower payment your tax deduction reduces! This makes it a little difficult to calculate the break-even time taking taxes into account. In the case of a purchase, taxes definitely reduce the break-even time. However, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all, so there is little or no effect on the time to break even.

Whatever happened to the conventional wisdom of waiting for the rates to drop before refinancing? This works due to rebate pricing, also known as yield-spread pricing or service-release premium pricing. You pay a higher rate in exchange for no cash up front, which is then used to pay the closing costs. You are financing the closing costs by paying a higher rate. A zero point loan, with the borrower paying the closing costs would be 0.25% to 0.5% lower than the no cost loan.

On a $200,000 loan the loan officer can offer you a rate with a cost of 1% (rebate), which is a $2,000 credit toward your closing costs. A mortgage broker can use rebate pricing to pay for your closing costs and keep the balance of the rebate as profit. A no cost loan would need to have enough rebate points to cover all your closing costs, plus his profit margin.

What are the Benefits of a Zero-Point Loan? The main benefit is that you may have no out-of-pocket costs. As a result, if the rates drop in the future, you could refinance again even for a lower rate. So if you refinanced on the zero-point/zero-fee loan to get a lower rate and then the rates drop another 1/2 percent, you can refinance again. The zero-point/zero-fee loan eliminates the need to do a break-even analysis, since there is no up-front expense that needs to be recovered. It also is a great way to take advantage of falling rates.

What are the Disadvantages of a Zero-Point Loan? The main disadvantage is that you pay a higher rate than you would, had you paid points and closing costs. If you keep the loan long enough, you'll pay significantly more due to the higher rate. In a scenario where you plan to stay in the home for more than five years, and if rates never drop (no opportunity to refinance), you could end up paying more money. If on the other hand you plan to stay in the home less than five years, there is likely no disadvantage with a zero-point loan.

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6. “What is an Annual Percentage Rate (APR)?”

The Annual Percentage Rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending Law (Reg Z) requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate.

The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.

The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the true cost of a loan. It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.

The reason why APRs are confusing is because the rules to compute APR are not clearly defined.

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7. “What fees are included in the APR?”

The following fees are GENERALLY INCLUDED in the APR:

Points - both discount points and origination points
Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
Loan-processing fee	Private mortgage-insurance
Underwriting fee	Document-preparation fee

The following fees are SOMETIMES INCLUDED in the APR:

Loan-application fee

Credit life insurance

The following fees are normally NOT INCLUDED in the APR:

Escrow fee	Home Inspection fee
Recording fee	Transfer taxes
Attorney fee	Credit report
Notary fee	Appraisal fee
Document Preparation	Title or abstract fee

Calculating APR on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APRs.

Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time.

Finally, many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs.

Conclusion:

Use the APR as a starting point to compare loans. The APR is a result of a complex calculation and not clearly defined. There is no substitute to getting a good-faith estimate from each lender to compare costs. Remember to exclude those costs that are independent of the loan.

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