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Frequently Asked Questions
for Residential Mortgages and Home Equity Loans
How do you know if you can afford a mortgage?
Should you borrow as much as you qualify for?
Should you refinance an existing mortgage loan?
Home improvements - should you get a new mortgage or increase your home equity line of credit?
How much down payment is required on a mortgage loan?
Should you get a 15-year or 30-year mortgage?
What is the difference between a fixed-rate mortgage and adjustable-rate mortgage (ARM)?
What type of mortgage is best for you?
What is a conventional loan?
What mortgage loan programs are available?
Where do you go to complete an application?
How does the application process work? What should you expect?
When should you apply?
How long does it take to process and close a mortgage loan?
What is the difference between pre-qualifying and pre-approval?
What is a FICO score?
What are closing costs and how much will it cost to close a mortgage loan?
How can you compare fees between lenders to get an accurate comparison?
Why do interest rates change and what interest rate should you expect to pay?
What is a rate lock? When can you lock an interest rate?
When does a loan commitment expire?
What is an APR?
What are discount points?
Should you pay points?
What is private mortgage insurance (PMI)? Can you get rid of PMI on your loan?
What does a monthly mortgage payment include?
What advantage do you gain from making extra payments?
What are pre-payment penalties?
Can a loan be sold? What happens if a lender goes out of business?
What are the most common mistakes in buying or refinancing a property?
How do you know if you can afford a mortgage?
Besides having enough cash for down payment, closing costs and prepaid expenses due at closing, a prospective homeowner must have enough income to cover the monthly mortgage payment. Mortgage lenders study borrowers' monthly income and financial obligations carefully and counsel borrowers on the affordability of mortgages. RDM Lending's Loan Affordability Calculator a tool that will assist a prospective borrower in estimating an affordable monthly payment and mortgage debt based on the borrower's income and financial obligations.
Should you borrow as much as you qualify for?
A mortgage is generally such a significant component of a borrower's personal financial condition and planning that numerous factors should be considered when deciding on how much to borrow. Consumption patterns, tax bracket, health, family and educational obligations, commitments related to employment (or self-employment), predictability of income, savings objectives, etc. are some of the factors affecting the decision on how much to borrow. In addition to the quantitative issues relating to debt, a borrower's personal preferences relating to debt and risk aversion must be taken into consideration, i.e., the borrower must be comfortable with the amount of debt undertaken.
Should you refinance an existing loan?
Borrowers commonly refinance mortgage loans to save money or to convert a variable-rate loan to a fixed-rate loan. Other loans are often refinanced to consolidate debt and replace high-rate loans with a low-rate mortgage loan. Mortgage loans arising from refinancing of other loans may also result in tax savings because a mortgage loan may generate tax-deductible interest where such deductions do not exist under the loan(s) it replaces. RDM Lending's Mortgage Refinance Calculator as a tool that can assist a prospective borrower in analyzing certain aspects of refinancing an existing loan. A simple mathematical calculator, however, cannot address the complex issues pertaining to refinance questions. If you wish to discuss your needs and options with a RDM Lending loan officer, please direct your inquiries to a mortgage loan officer via rdmlendinginc@sbcglobal.net or contact us directly.
Home improvements - should you get a new mortgage or increase your home equity line of credit?
A new mortgage generally requires more time to process, and the closing costs are greater than a home equity line of credit. The interest rate on a new mortgage, however, may be lower. On the other hand, a home equity line provides greater flexibility because the borrower can draw advances on the line or pay down the balance in varying amounts based on personal cash flows.
How much down payment is required on a mortgage loan?
RDM Lending offers mortgage loan programs that generally require a down payment of 5% to 20%; however, down payments of less than 5%, 100% financing is available under specific programs for qualified borrowers.
Should you get a 15-year or 30-year mortgage?
The mortgage term chosen by a borrower is extremely personal and involves a number of factors. Commitments and timeframes for children's education, time to retirement, tax bracket, investment opportunities and numerous other personal financial planning issues could affect the mortgage term most desirable for a borrower. Due to the very personal nature of these factors, RDM Lending suggests that borrowers consult their personal financial planner; however, the investor is very flexible in allowing accelerated payments on a 30-year mortgages or prepaying the entire mortgage without penalty such that a 30-year mortgage, in effect, can become a 15-year mortgage.
What is the difference between a fixed-rate mortgage and adjustable-rate mortgage (ARM)?
A fixed-rate mortgage carries an interest rate that is constant for the entire term of the loan; accordingly, the monthly payment of principal and interest remains constant throughout the term of the loan. The total monthly payment may vary, however, because of changes in escrow payments arising from annual changes in tax assessments and property insurance; nevertheless, the principal and interest portion of the monthly payment for a fixed-rate mortgage loan remains constant over the term of the loan. The interest rate on ARM loans is adjusted periodically - under RDM Lending's residential mortgage programs, the initial rate can be set to adjust annually, fixed for five years then adjusted annually or fixed for seven years and then adjusted annually. The initial rate of interest on an ARM loan is generally less than a fixed-rate loan with comparable terms. The rate adjustment on an ARM depends on the index specified in the loan documents. The most common index used for ARM loans is based on the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity of one year. The index rate plus a margin determines the ARM adjustment rate, and the adjustment may increase or decrease the interest rate. The annual and cumulative adjustments are generally limited (capped) to prevent extreme adjustments to the initial rate established at the outset of the loan.
What type of mortgage is best for you - a fixed-rate mortgage or an adjustable- rate mortgage (ARM)?
An ARM will generally result in a lower interest rate when the loan commences, and a lower rate will generally qualify a borrower for a larger loan. But remember, there will be an adjustment to the interest rate in one year, five years or seven years, and the monthly payment could increase or decrease, depending on market conditions. The monthly payment on a fixed-rate loan will remain constant over the life of the loan regardless of increases or decreases in general market rates of interest. Fixed-rate loans are generally more suitable for borrowers who plan to stay in a home for a long time because they generally expect their incomes to increase over time while their mortgage payment remains constant. Borrowers who plan to stay in a home for a short period generally benefit from an ARM because of the ARM's lower rate of interest and monthly payment in the early years of the loan.
A conventional loan is one that the lender makes on its own authority and underwriting standards - no approvals of the borrower or lender are required from federal agencies. Down payments on conventional loans are generally larger than government-insured loans.
What mortgage loan programs are available at RDM Lending?
RDM Lending offers conventional, Fannie Mae and Freddie Mac loans, at fixed or adjustable rates.
Where do you go to complete an application?
You may request a loan application package by clicking here or you may contact us directly to obtain an application package. On our "Loan Process Page" there is a summary of items normally required from a prospective borrower.
How does the application process work? What should you expect?
How does the application process work? What should you expect? First, you must complete a mortgage loan application and provide certain supporting documentation identified in the application. If you have Adobe Acrobat Reader 4.0 or above, click here to display a Uniform Residential Loan Application (Freddie Mac Form 65, Fannie Mae Form 1003) or right-click to download the application form. A review of the form should assist you in gathering information required for a mortgage loan application. After you have decided to apply for a mortgage loan, an application will be prepared for your signature at our firm. After the loan application is submitted, a mortgage consultant or loan processor will advise you as to which supporting documents must be obtained, which documents must be signed, etc. After a completed application is approved and certain documents verified, a written commitment letter will be issued and a closing date established. If you wish to discuss your needs and options with a RDM Lending loan officer, please direct your inquiries to rdmlendinginc@sbcglobal.net or contact us directly.
When should you apply?
Many borrowers wait until they have identified a property they want to purchase to apply for a loan; however, RDM Lending has a pre-approval process for prospective homeowners who are truly committed to making a purchase. If you wish to discuss RDM Lending's pre-approval process with a mortgage loan officer, please direct your inquiries to a mortgage loan officer via rdmlendinginc@sbcglobal.net or contact us directly.
How long does it take to process and close a mortgage loan?
RDM Lending can generally process and make a decision on a mortgage loan application in twenty-four (24) to fourty-eight (48) hours providing all requested documentation by RDM Loan Officer or Processor is received. Personal factors, however, can affect processing and underwriting significantly. If you wish to have a more definitive estimate of processing and closing, please direct your inquiries to a mortgage loan officer via rdmlendinginc@sbcglobal.net or contact us directly.
What is the difference between pre-qualifying and pre-approval?
Pre-qualification is not a commitment to lend money - it is only a determination by a lending officer that the borrower is qualified to purchase a property at a certain amount. Pre-approval is a step above pre-qualification, and allows a borrower to close a purchase much more quickly than applying for a loan after an offer has been made on a property. With pre-approval, a prospective homeowner can often negotiate a better purchase price.
What is a FICO score?
A FICO score is a credit scoring method developed in the 1950's by Fair Isaac & Co. (FICO), and has become a widely accepted by lenders as a reliable instrument of evaluating a borrower's credit. A FICO score is developed from numerous factors including payment histories, the amount of time credit has been established, the amount of credit used compared to the amount of credit available, number of credit inquiries and negative credit information such as bankruptcies, charge-offs, collections, etc. Most lenders use credit scores from three credit bureaus, Experian, Equifax and Trans Union - some lenders use scores from all three, and some use scores from only one. The Federal Trade Commission has determined that the use of credit scores is an acceptable business practice.
What are closing costs and how much will it cost to close a mortgage loan?
Closing costs generally include:
- Down payment (usually determined as a percentage of the purchase price or appraised value, whichever is less)
- Loan origination fees (amount depends on type of loan)
- Discount points (generally negotiable, can be paid to lower the interest rate)
- Appraisal fee (Required)
- Credit report fee (Required)
- Title insurance premium (Required)
- Recording fees (deed, mortgage, etc.)
- Survey fee (new construction, land & commercial)
- Pest inspection fee and other home inspection fees (Required on new home purchase)
- Construction inspection fees
- Underwriting fee (Required by Wholesale Lender)
- Document preparation fee
- Per diem interest (may be required if escrow is extended beyond expected close date)
- Tax service fee (Required by County)
- Flood certificate fee (Required if subject property is determined to be in a flood zone)
- Private mortgage insurance premium, if applicable
- Property insurance premium (Required by Wholesale Lender)
- Flood insurance premium, if applicable
- Reserves for property taxes and insurance (required for some programs & impound accounts)
- Other fees based on local requirements
Not all the costs noted above are necessarily required for refinancing.
How can you compare fees between lenders to get an accurate comparison?
Most lenders will provide a Good Faith Estimate of closing costs. Obtaining a Good Faith Estimate does not require a loan application from a prospective borrower. When a borrower actually applies for a loan, the lender must also provide a Truth in Lending disclosure, a statement that shows the annualized cost of the loan, as noted in "What is an APR?"
Why do interest rates change and what interest rate should you expect to pay?
Changes in interest rates are based on one of the simplest concepts in economics - supply and demand. When the demand for loans increases, so do interest rates. Demand for loans comes from many sources - governments, corporations and individuals - and is fueled by many factors - the general state of the economy and business environment, inflation, demand for money from securities markets, monetary policy of the Federal Reserve, fiscal policies of federal, state and local governments, etc. Interest rates on mortgage loans at RDM Lending are published frequently and are available upon request. If you would like to discuss rates with a mortgage loan officer at RDM Lending, please direct your inquiries to a mortgage loan officer via rdmlendinginc@sbcglobal.net or contact the us directly.
What is a rate lock? When can you lock an interest rate?
A rate lock guarantees a specific interest rate to a prospective borrower for a specified period of time. The rate lock depends on the type of loan, the interest rate, discount points and the period for which the lock remains in effect. Generally, the longer the lock period, the higher the interest rate or discount points because the lender is assuming a higher risk, and, therefore, seeks a higher return in the form of interest or points. Given the rather complicated nature of rate lock programs, your inquiries should be directed to a mortgage loan officer via rdmlendinginc@sbcglobal.net or contact a mortgage loan officer directly.
When does a loan commitment expire?
At RDM Lending a rate lock is issued to a prospective borrower when their application is accepted. After the application is processed and approved, a commitment letter is issued by RDM Lending. A mortgage loan must be closed within 15, 30 to 45 days after the issuance of the wholesale lender's commitment letter and within forty-five days after the application is accepted to preserve rate lock. Under special lending programs, the forty-five day closing period may be extended to sixty days or more with a cost to the borrower. Questions regarding commitment letters and rate locks should be directed to a mortgage loan officer via rdmlendinginc@sbcglobal.net or contact a mortgage loan officer directly.
What is an APR?
APR stands for Annual Percentage Rate. Although the interest rate stated in a mortgage loan is used in calculating APR, the stated rate and the APR are hardly ever the same. APR is the annual cost of a loan taking into account he interest rate and certain loan charges as specified by the Truth in Lending Act. An APR disclosure is required when a borrower applies for a loan. APR is designed to measure the full cost of a loan - it is different from the note rate in the mortgage loan agreement, it does not affect the monthly payment of principal and interest and it does not change the amount of tax deductible interest. If interest were the only finance charge, then the interest rate would equal the APR on a loan. Trying to compare APRs between 15-year and 30-year mortgages is not advisable. Calculating APRs on variable-rate and balloon loans is even more complex because future rates are unknown.
Fees that are typically incorporated in APR calculations include:
- Interest
- Points - discount points and origination points
- Pre-paid interest (per diem interest)
- Loan processing fees
- Underwriting fees
- Private Mortgage Insurance (PMI)
- Fees charged by closing agents
Fees that are typically not incorporated in APR calculations include:
- Title or abstract fees
- Notary fees
- Credit report fees
- Appraisal fees
- Home inspection fees
- Recording fees
- Taxes paid to public officials
- Voluntary credit life insurance premiums
What are discount points?
Discount points are monies paid at the outset of a loan to lower the interest rate on the loan. Discount points generally represent a percentage of the loan - one point is one percent (1%) of the original amount of the mortgage loan. Lowering the interest rate via payment of discount points may lower the monthly payment on a loan or qualify the borrower for a larger loan.
Should you pay points?
A breakeven analysis is the best way to determine whether or not points are beneficial. First, calculate the total cost of the points (i.e., one points on a $100,000 loan is $1,000). Next, calculate the monthly payment of principal and interest on a loan without points, calculate the monthly payment of principal and interest on a loan with points, and determine the difference (e.g., the monthly payment on a 30-year, 8% fixed-rate loan of $100,000 is $733.76, and the monthly payment on a 30-year, 7½% fixed-rate loan of $100,000 is $699.21, a difference of $34.55 per month. Next, divide the total cost of the points ($1,000) by the monthly savings ($34.55) to arrive at the number of months it takes to recover the cost of the discount points (29 months in this example). The longer a borrower plans to stay at a mortgaged property, the more advantageous discount points become over the term of the loan. These breakeven calculations, however, do not consider the income tax implications of discount points. Discount points on purchase money mortgages are generally deductible when paid, but discount points on refinancings must be amortized over the term of the mortgage. Prospective borrowers should note that income tax considerations can become very complex depending on individual circumstances, and tax advisors should be consulted.
What is private mortgage insurance (PMI)? Can you get rid of PMI on a loan?
PMI protects a lender against the costs of default and is normally required on loans when the borrower makes less than a 20% down payment on a property. The cost of PMI generally increases as the amount of down payment decreases. The PMI premium is normally added to the monthly mortgage payment. Most lenders will allow a borrower to cancel PMI once the mortgage loan is paid down to 80% of the mortgaged property's original value; however, the decision to cancel PMI does not depend solely on the borrower's equity in the property. The final word on canceling PMI rests with the lender and any investor who has acquired an interest in the mortgage loan. Some lenders or investors may require borrowers to pay PMI for at least two years, regardless of the equity you establish in a mortgaged property. PMI can be avoided by using a sub prime lender for your loan.
What does a monthly mortgage payment include, and how can you compute the monthly payment on a loan?
Monthly mortgage payments always include a component for amortization of principal and interest. Most monthly payments also include a monthly deposit to an escrow account for the payment of property taxes and insurance. As noted above, some borrowers may also be required to pay a monthly premium for private mortgage insurance (PMI). RDM Lending's Loan Payment and Amortization Calculator is a tool for estimating monthly loan payments.
What advantage do you gain from making extra payments?
The primary advantages of extra payments include creating greater equity, reducing the overall amount of interest paid over the term of the loan, and reducing the repayment period. Most mortgage loan payments are reviewed and adjusted annually for changes in property taxes and insurance. The primary disadvantage of extra payments is that there may be investment opportunities that will generate higher rates of return than the after-tax savings of reduced interest expense.
What are pre-payment penalties?
Some mortgage loan agreements require payment of additional fees if the mortgage is paid before the end of its term. Pre-payment penalties are generally expressed as a percentage of the remaining balance at the time of prepayment, and the percentage penalty generally decreases with the age of the mortgage. Mortgage loans at RDM Lending for "A" paper borrowers generally do not contain pre-payment penalties; therefore, borrowers have a great deal of flexibility in making extra payments or pre-payments on mortgage loans. As a standard, all 100% financing (no money down) loans & sub-prime loans will have a pre-payment of 2-3 years. You may have the opportunity to buy out the pre-payment penalty, but this may cost you several points by the investor and may not be cost effective for your loan.
Can a loan be sold? What happens if a lender goes out of business?
Loans can be sold, and lenders frequently buy and sell pools of mortgages in the secondary market. The marketability of mortgage loans is a benefit to consumers because a secondary market generally results in more competitive rates for borrowers. Lenders purchasing mortgage loans assume all the terms and conditions of the original mortgage. The only change evident to the borrower is that the monthly payment is mailed to a different lender (if mortgage servicing is also sold - sometimes the loan is sold and servicing is retained, in which case payment to the original lender would probably continue). A borrower is obligated to make payments on a loan regardless of who owns the loan. If the loan servicing is sold, the borrower must be notified. If a lender goes out of business, their loans are typically sold to another lender and the borrower must be notified. In most cases the borrower will be notified in accordance with their mortgage loan agreement that their loan has been sold, and will be instructed as to when and where the payments should be sent. Absent notification, borrowers should send their payments to the lender who originated their loan until they have received proper notification and instructions to send payments to a new lender.
What are the most common mistakes in buying or refinancing a property?
- Buying a home without being pre-qualified or pre-approved.
- Making verbal agreements - agreements involving real estate must be in writing - verbal agreements are generally not enforceable.
- Choosing a lender just because they have the lowest rate.
- Not getting a Good Faith Estimate of closing costs.
- Using a dual agent - i.e., an agent who represents the buyer and the seller in the same transaction.
- Buying a property without professional inspections (itemize - pest, home, radon, etc.)
- Waiting too long to shop for property insurance.
- Not allowing for delays in the transaction.
- Purchasing a new vehicle right before applying or closing of you home loan.
- Applying for credit cards & other lines of credit right before applying or closing of you home loan.
- Using a tax assessor's value as an estimate of the market value or a property.
- Signing loan documents without a thorough review and understanding.
- Drawing cash on a home equity line of credit before refinancing a first mortgage.
- Getting a second mortgage before refinancing a first mortgage.
- Not knowing your loan has pre-payment penalty before refinancing or getting a home equity loan or home equity line of credit.
- Getting a home equity loan or home equity line of credit when refinancing a first mortgage is planned for the near future.
- Getting a home equity loan or home equity line of credit to clear credit card debt when spending habits are out of control.
- Lying to your RDM Lending Loan Officer about your credit, debt or any other financial or personal obligation(s) including non disclosure of home improvements that are not permitted and/or pre-payment penalties on current loan(s), Notice of Default ect.
- Going on a vacation right before the signing of you loan documents.
- Signing up for a debt management program including CCCS, Consumer Credit Counseling Services. (If you are a current homeowner all accounts under this program will be required to be paid off through escrow if refinancing)
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