Answers To Mortgage Questions You'll Have When Buying A Home

If there's one thing the majority of homebuyers that we meet with have in common, it's that they have numerous questions about mortgage loans which require professional responses.

Borrowing hundreds of thousands of dollars can often be scary, so we want to expose the common questions buyers have to help prepare our readers for when it's time to "sign on the dotted line."

Don't Market These Mortgage Mistakes!

We maintain relationships with several prominent mortgage lenders and reach out to them from time to time to curate the latest concerns into a message that can be delivered to our readership.

Today, we have shared the second installment of our interview with Caitlin Moore of Capital City Bank where she has graciously given her time to answer some of our mortgage related questions.

Caitlin, thanks for being here today. I'd like to remind our readers that they can see the first part of our conversation (here).

Some of our experienced buyers have concerns regarding a pre-payment penalty and whether they should be looking for one when they get quoted on a loan.

Can you tell us a little about pre-payment penalties on loans?

A pre-payment penalty is where the lending institution charges the consumer a fee for paying a loan off in full (or sometimes in part) earlier than the amortization scheduled payoff date. Most loans today do not have pre-payment penalties as part of their terms and conditions as there have been laws and regulations put in place to limit which type of loan can have a pre-payment penalty. These are usually only on promotional loans where the consumer is waiving a cost associated with the loan, or electing for a reduced interest rate in exchange for agreeing to a pre-payment penalty.

As of January of 2014, the CFPB rules prohibit prepayment penalties for residential mortgages, aside from limited circumstances, and even then there are limits on the amount they can charge and a limited term in which the charge can be imposed. They are practically unheard of in our market now.

OK, here is one we get all the time, and it relates to the appraisal that is ordered to secure the loan. Many homebuyers want to know if they can borrow more if the house appraises for more? For example, if they are buying a $300,000 and planning on putting 5% down ($15,0000), can they come up with a smaller down payment if the house appraises for $310,000?

Great question, on your typical purchase transaction the answer is no, your maximum loan amount is based on the lesser of the purchase price or the appraised value; However on a refinance scenario, or a construction loan on *property you already own* the answer is yes, the appraised value is what it used to determine your maximum loan amount.

When buyers are getting ready to purchase a home, we like to help them understand the totality of what they will be paying each month with their mortgage payment. After all, there is more to it than just principal and interest. One mysterious part of the monthly payment is "mortgage insurance," can you explain exactly what that is and who has to pay it?

Mortgage insurance for conventional loans (also known as “Private” Mortgage Insurance or “MI”) is insurance to protect lenders from a certain percentage of the debt should a mortgage go into foreclosure, with the major benefit to the consumer of allowing less than a 20% down payment to purchase a home. On a conventional loan, mortgage insurance is not required if you have 20% or more to put as a down payment on your home.

Fortunately, the mortgage insurance is not a forever expense. You can request to have the mortgage insurance removed as soon as you can evidence 20% equity in the home, either by paying down your principal balance to 80% or less of the original purchase price (or appraised value – whichever was less), or by a combination of payment and an appreciation of value as documented by an approved appraisal, typically requested by the lender holding the mortgage. If you do not request it to be removed prior to, it will automatically fall off once your amortization schedule hits a balance of 78% of the original purchase price.

Very good. It sounds to me like buyers who require mortgage insurance should speak with their Realtor every year to see if they've picked up enough equity through appreciation to have the insurance terminated.

Last year's appreciation rate was nearly double the normal rate seen in Tallahassee, and many neighborhoods exceeded 10%. If you purchased a home more than a year ago on the NW side of town, you might very well be passed the 20% equity level required to drop MI if you are paying it.

If you are paying MI and want an estimate of the current value of your home, simply give us a call at (850) 366-8917 or drop us a note and we'll let you know where you stand.