Should I refinance? Is now a good time to buy a house? What is an ARM?
Take the Home Buyer's Quiz and learn about terms and concepts you will encounter as you search for the mortgage that is right for you.
According to most mortgage lenders, you can qualify for a mortgage amount of about four times your gross annual salary. TRUE or FALSE?
This is false. Most lenders agree that you can afford a home that is 2 to 2 1/2 times your gross salary.
What is the maximum mortgage amount homeowners may deduct from their federal income tax for mortgage interest paid for first and second homes, and any improvements made to those homes?
The answer is 1 million dollars. (By the way, if you are currently in this situation, please give us a call for some special Jumbo rates. We'd love to hear from you!)
A 15-year fixed-rate mortgage saves you nearly 60 percent of the total interest costs over the life of a loan when compared to a 30-year mortgage. TRUE or FALSE?
True. You may also shorten the life of a 30-year loan (and thus save interest costs) by making additional principal payments on your loan along with your normal payments. These are known as curtailments.
Why do mortgage lenders refer to a homeowner's monthly payment as "PITI"?
- Homeowner's should be "pitied" because of their monthly payments. It includes principal, interest, taxes and insurance.
- "Piti" is the French word for "mortgage payments".
- PITI is short for "Pay It on Time In full.
The answer is a: It includes Principal, Interest, Taxes and Insurance.
What is a "jumbo" loan?
- A mortgage that is really too big for you to afford.
- A loan that you pay monthly for a time and then pay one "jumbo" payment on the remaining principal.
- A mortgage that is larger (more than $322,700) than the limits set by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).
- A loan to buy a house with more than four bedrooms.
The answer is c: A jumbo loan is any mortgage larger than the limit set by FNMA and FHLMC, commonly known as "Fannie Mae" and "Freddie Mac", respectively. This amount changes nearly every year due to inflation and current economic trends.
What does a "buy-down" refer to?
- A discount on the home price so you can afford it.
- A discount on the loan's interest rate during the first years of the loan to make financing easier to qualify for.
- Money you pay the lender to give you a lower interest rate.
- Buying a cheaper house than you live in now; also called a "trade-down".
The answer is b: A "buy-down" is a temporary reduction in the rate of a mortgage, usually for the first two or three years. One common example is a 3/2/1 buy-down. On a 9% fixed-rate loan this would make the first year's interest 6%, the second 7%, the third 8% and the fourth through the last 9%. However, you would qualify at the 6% rate. This is a very attractive option for buyers with some extra cash who would like to qualify for a more expensive home.
Typical closing costs can range from:
- 10 to 15 percent of the loan amount.
- 3 to 8 percent of the loan amount.
- 8 to 10 percent of the loan amount.
- 1 to 3 percent of the loan amount.
The answer is b: You can count on your closing costs being anywhere from 3 to 8 percent of the total loan amount. Where you fall in this range depends on the type of loan (FHA, VA or Conventional), whether or not you've financed some of the closing costs (like first-year insurance), etc. A good rule of thumb is to stick with 8% as an estimate and you'll be safe.
Making an extra mortgage payment each year shortens the life of a 30-year loan by:
- Approximately 7-8 years.
- About 5 years.
- About 15 years.
- It doesn't shorten the life of the loan, it just decreases interest costs.
The answer is a: Amazing, but true.
A "convertible" mortgage is one which:
- Allows you to buy a car with the house.
- Allows the homeowner to decrease the loan's interest rate without refinancing the mortgage.
- Can be used like a giant credit card.
- Allows you to make an adjustable rate mortgage (ARM) into a fixed-rate mortgage when interest rates are low.
The answer is b and d: The "convertible" means that you can convert an ARM into a fixed-rate mortgage (usually during certain periods) for a nominal fee, without refinancing the loan or changing the terms. This is especially attractive if the new fixed rate is lower than your previous ARM rates (i.e. interest rates are falling).
Lenders normally recommend refinancing a mortgage if:
- The market rate is one or more percentage points below the rate on the loan.
- The homeowner has no equity in the property.
- The homeowner doesn't want to pay any taxes.
- The homeowner has a "convertible" mortgage.
The answer is a: It does not usually pay to refinance your home if the spread between your current rate and the rates you can get on a new loan are less than one percent apart.
Mortgages backed by the Federal Housing Administration (FHA) require what size down payment?
- About 3 to 4 percent of the loan amount.
- About 10 to 20 percent of the loan amount.
- Nothing down.
- More than 20 percent of the loan amount.
The answer is a: FHA loans are often very popular because of the low down payment they require.
When discussing "points", your lender means:
- The things you really like about your new house.
- Prepaid interest. Each point equals 1 percent of the loan amount.
- A rating system used by lenders to qualify applicants.
- The number of traffic violations that show up on your credit report.
The answer is b: By paying points up front (at the time of closing), you may lower your overall interest rate. For example, on a $100,000 loan, you may have an interest rate of 10%. By paying one point ($1,000) extra at closing, you may be able to lower your interest rate to 9.75%. Make sure your lender explains the points and interest rates available to you for the loan you choose.
What is a deed of trust?
- Money you have received before you have actually qualified for the loan.
- A special document waiving your right of rescission.
- A document used in place of a mortgage in some states.
- A special mortgage you can get if the lender knows you.
The answer is c: Every state has their own rules, regulations and terms concerning the borrowing of money for a house.
A VA loan is:
- A long-term, low or no-down payment loan guaranteed by the Veterans Administration, which is restricted to individuals qualified by military service or other entitlements.
- A loan on a home sold at a discount because it is "Vacant and Abandoned".
- A loan on which the home buyer pays a premium of up to 1 percent.
- A loan for an animal hospital funded by the Veterinarians of America.
The answer is a and c: VA loans are popular because they offer a very low or no-down payment, but are restricted to a certain group of people who qualify. Contact your lender to see if you are a qualified candidate for a VA loan.
A title search:
- Examines the homebuyer's background to see if he or she is descended from royalty.
- Examines local public land records to determine the legal ownership of a property.
- Looks for books in the public library that tell about home financing.
- Verifies the property's past owners.
The answer is b: The title company is responsible for making sure that you are the new free-and-clear owner of the property you are buying. In addition, their insurance fee will cover you in the case where they have made a mistake and someone else claims a lien or right to your property.
So, how did you do?
For more information on mortgages and what to do when buying a home, contact our office. We hope this quiz helped you in your search for a home and mortgage.