FAQs

Is it expensive to refinance a mortgage?

Fees for refinancing may be more expensive than for the original loan. If you are replacing an existing loan, you may have to pay a prepayment penalty of as much as 1% of the old loan balance. In addition, arranging a new loan may require payment of closing expenses, including discount points, application fee, survey fees, and title insurance. Some of these costs may be waived if the loan is with the original lender. Currently, many lenders are reducing or waiving much of the closing costs for such loans.

What are discount points?

Discount points are charged by mortgage lenders as part of the cost of getting a loan. Each point is equal to 1% of the loan amount. In most cases, the charge is not for any particular service but is additional interest on the loan. Therefore, points add to the effective interest rate on the loan. Points on loans to buy a house may be deductible as mortgage interest from your taxable income, provided certain conditions are met. In refinancing, the deduction for points must be spread out over the life of the loan.

Does a mortgage affect my income tax?

All interest paid on a mortgage loan (used to purchase a home) is an itemized deduction for federal income taxes up to a limit of $1 million in loan principal. For a second mortgage, or a refinanced first mortgage, interest is deductible up to a limit of $100,000 over the amount of the loan used to purchase the home. These deductions apply to both first and second homes, and the property value must exceed the debts.

Why did I get turned down for a mortgage?

Before lenders grant mortgage loans, they assess the risk that the borrower will default on the payments. This is called "qualifying the borrower" and depends heavily on the income and credit history of the applicant. People are generally turned down if they don't have established credit, if they have had a loan foreclosed in the past, if their income is too low to support the payment burden, or if their existing debt is too high to allow for additional debt. Certain qualifying standards must be met for the loan to be approved for FHA insurance or VA guarantees. Even those granting conventional loans use relatively standard qualifying procedures in order to make those loans acceptable in the secondary market.

What is mortgage insurance?

Mortgage lenders consider a loan for 80% of the value of the home the maximum amount of risk exposure they may undertake. They will, however, make loans for higher amounts if the loan is insured against borrower default. The Federal Housing Administration (FHA) offers mortgage insurance on loans below a specified dollar amount. Larger loans may be insured by private companies specializing in this service. Also, the Veterans Administration (VA) guarantees loans for eligible military veterans. The guarantee is not the same as insurance, but it has the effect of allowing the borrower to get a loan with a very small down payment.

What's the difference between a first and a second mortgage?

A first mortgage gives the lender first claim to the home in the case of default on the loan. After the loan is foreclosed and the home is sold to satisfy the debt of the first mortgage, any sales proceeds left can be claimed by the holder of the second mortgage. Because of this priority, a first mortgage is less risky for the lender than a second mortgage. Consequently, interest rates and terms on first mortgage loans are more favorable to the borrower. In most cases, second mortgage loans are used to take equity out of the home when it is desirable to preserve the existing first mortgage loan.

How does a mortgage differ from other types of loans?

A mortgage is a secured loan. When you get the loan, you pledge a property (the house you're buying) to the lender to back up your promise to repay the debt. On the other hand, personal loans are generally backed up only by the borrower's signature and past credit history, and carry a higher interest rate. Since real estate tends to hold its value better than other forms of property (such as a car or a boat), a home is a valuable security for a lender. That's why the lender is willing to lend you a large amount of money at a relatively low interest rate.

Should I get the largest loan I can?

Yes, you should. The standard mortgage covers 80% of the cost of the home. However, you can get a mortgage for as much as 97.5% of cost. You may want a larger loan because you may not have enough cash. But even if you do have the cash, you don't want to tie it up in your house, since you won't be able to get it out if you need the money in a hurry. Also, if you're buying a home as an investment, a larger loan gives you more leverage. Your profits from appreciation will be a higher percentage of your equity. On the other hand, a larger loan will require higher monthly payments, and if your income declines, you may have difficulty meeting the payments.

I'm self-employed. What kind of documents do I need to apply for a mortgage?

Lenders often ask for the following types of documents from self-employed people:

Personal income tax returns for the past two years
Business income tax returns (if you are incorporated) for the past two years
A current balance sheet
A current profit and loss statement
A business credit report fee
A personal credit report fee

The decision on your loan will be made on how both you and your company are doing.

What is a home equity loan?

Basically, a home equity loan is a second mortgage that allows a homeowner to access the accumulated equity in the home. The loan may be set up as a traditional second mortgage or as a line of credit. The traditional loan provides a lump sum when the loan is closed, whereas the line of credit gives the borrower the right to draw cash over time as needed.