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FAQ's

 
  1. When should I refinance?
  2. What are closing costs
  3. What are no cost loans?
  4. What is an equity line of credit?
  5. Why work with a mortgage broker such as All California Mortgage, Inc.?
  6. Is it possible to buy a home with little or no down payment?
  7. What is an adjustable rate mortgage?
  8. What is an index?
  9. What are points?
  10. Should I pay points?
  11. What are "Option ARMs" (Neg-Am) loans?
  12. What is an Interest Only loan?
  13. How long does it take to close my loan?
  14. What is an annual percentage rate (APR)?
  15. What is the difference between the Loan Amount and the Amount Financed?
  16. What is a Credit Score (FICO Score)?
  17. What do I need to know about Property Taxes?
  18. I currently rent, but want to buy a house. Should I wait until rates come down?
1. When should I refinance?
Individuals who recognize that a mortgage makes up a considerable portion of their investment portfolio often use it as part of their financial strategy towards building wealth. They are able to do so through refinancing, which often enables them to save thousands of dollars over the life of their loan. The availability of "no cost" loans and numerous other loan products creates tremendous opportunities for many borrowers in a variety of situations. Here are a few wherein refinancing can be advantageous:
  • In a declining interest rate environment, it is always wise to contact a mortgage broker to ascertain what the current rate is for a no cost loan. As with the stock market, no one can predict where the bottom of the market will be; therefore, it is not advisable to try to "time" the market, hoping to get in when rates have reached their lowest point. Even if rates have only dipped slightly, it would be unfortunate to miss out on an opportunity to obtain a lower interest rate for no fees. If rates continue to drop, you can refinance again, as it cost you nothing the first time. In fact, a proficient mortgage broker will make any subsequent refinances quick and effortless. If interest rates do rise after your first refinance, it means that you were fortunate enough to get in at the bottom of the market and, most importantly, didn't miss out completely.
  • If you are seriously planning on moving in the near future, refinancing into a no cost adjustable loan with a low start rate can save you hundreds of dollars a month before you move. This is due to the fact that you will be retiring the new mortgage through the sale of your home prior to your interest rate adjusting upwards.
  • Refinancing can also make sense even with closing costs, including points, as long as you "break even" for those costs. (Your break even point is the point in time in which the dollar amount of money you have saved on your monthly mortgage payment equals the dollar amount you paid up front for closing costs.) If you retain the mortgage beyond your "break even" point you may realize substantial savings. Loans that carry closing costs typically offer lower interest rates than "no cost" loans. One of our experienced loan agents can help you decide if now is the right time to refinance and if a "no cost" or a loan with closing costs is best for your circumstances.
  • If your present mortgage no longer meets your current needs, a refinance will enable you to update and convert it to a loan product that does.
  • If your property has appreciated, refinancing to consolidate your first and second mortgage may provide you with immediate and significant payment relief.
  • Finally, refinancing can be a useful financial tool to accommodate home improvement costs, education expenses, consolidating debt and funding investments.

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2. What are closing costs
There are two types of closing costs, recurring and non-recurring. Non-recurring closing costs include loan points and origination fees, broker fees, lender fees, appraisal and credit report charges, and the costs of title insurance and escrow. Recurring costs include prepaid interest, insurance premiums, and property taxes. Your agent can provide you with a good faith estimate of closing costs for the loan you have chosen.

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3. What are no cost loans?
With a No Cost Loan, all non-recurring (one time) closing costs are paid for you. Typically, these costs include appraisal, credit reporting, escrow, title insurance and other incidental fees. No Cost Loans can be attractive:
  • If you will be refinancing or retiring the loan within a few years
  • When paying closing costs is not within your current budget - OR -
  • If you have determined that your money is best invested elsewhere
There is a trade-off, however. No Cost Loans with a fixed interest rate will always carry a higher rate than those with costs. On adjustable rates, although the teaser rate may sometimes remain identical to loans with costs, they will usually impose a higher margin and often a higher life cap; occasionally a pre-payment penalty will be imposed.

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4. What is an equity line of credit?
An equity line is a line of credit secured by your home. Equity line interest is usually tax deductible, unlike the interest on most consumer loans or credit cards. The payment on an equity line decreases proportionally whenever the outstanding balance decreases, and the unused portion can generally be tapped into again whenever the need arises. There are important differences between a fixed rate second mortgage and an equity line of credit: the fixed rate second mortgage payment does not change as the principal balance decreases, and once the fixed second mortgage has been paid down either partially or completely, a borrower cannot use that equity again, without either refinancing into a new first mortgage, a new fixed second mortgage, or an equity line of credit. Some lenders are now offering a blend of both an equity line of credit and a fixed rate loan. Contact one of our experienced loan agents today to learn more about this loan program.

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5. Why work with a mortgage broker such as All California Mortgage, Inc.?
We have long-standing relationships with hundreds of lending institutions through various wholesale divisions. These include local banks, national banks, savings and loans, portfolio lenders, credit unions, etc. Several of our lenders offer us improved pricing and have granted us exclusive partnerships based upon the quality of our agents and their ability to successfully package loans.

Additionally, we own and operate our own mortgage banking division, All American Mortgage. Our bank provides a wide array of premier mortgage products, competitive rates and excellent turn around times with the ability to quickly draw our own loan documents and close loans promptly. All American Mortgage serves only All California Mortgage, Inc., branches and their agents. Borrowers benefit from the speed and convenience of "in-house" underwriting and pricing.

We also have a private money lending division, ACM Investor Services, Inc., which accommodates difficult to place loans on all types of real estate.

Therefore, having all three companies at their disposal, our agents have the ability to provide you with a complete range of mortgage products, from standard fixed loans to every type of creative financing option available.

Due to the number of lenders competing for our business, our clients are offered the most competitive prices. We receive hundreds of daily rate sheets that are continuously updated as the financial market moves. This allows our agents to instantly shop and lock the best price and product on a particular day. This saves our clients thousands of dollars. Furthermore, this is all done with one application, at no cost to the client.

Our agents can also "troubleshoot" and perfect the manner in which your loan is packaged, before submitting it to a lender for approval. This offers you the greatest chance of approval on the highest quality product. Our agents can locate and arrange superior loans for all of their clients, including those with a less than perfect financial and credit history. This is possible because they possess the knowledge of the underwriting criteria of a vast number of lenders and have extremely well established business relationships that they can rely upon. Most importantly, because our brokers have access to so many lending institutions, even the most troublesome loans can be placed and closed at terms that are still affordable to our clients.

Finally, our agents are not biased to any one product as they are paid by the lender, regardless of which institution they choose. They work for you, not the lender. They are motivated to deliver the best product at the best price as their source of business is heavily dependent upon referrals and repeat customers. Most are fully commissioned; they are not paid if the transaction does not close and they do not receive referrals if a client less than satisfied. It is in their best interest, therefore, to provide you with the most competitive products and superior service.

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6. Is it possible to buy a home with little or no down payment?
The typical down payment for the purchase of a home is still 20%, but it is possible, depending on your particular situation, to buy a home with a much smaller down payment; 100% financing may be an option. Generally, when you are putting down less than 20% of the purchase price, the lender will require either mortgage insurance, which is not tax-deductible, or a higher interest rate. This may be avoided by getting a second mortgage for the difference between your down payment and 80% of the purchase price; these loans are generally referred to as an 80-10-10, an 80-15-5, or an 80-20. The first number represents the loan-to-value (LTV) of the first mortgage, the second number is the LTV of the second mortgage, and the third number is the down payment as a percentage of the purchase price.

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7. What is an adjustable rate mortgage?
An adjustable rate mortgage is one in which the interest rate can adjust during the life of the loan. Frequently, there is an initial fixed period, ranging from a few months to several years. During this time, the interest rate remains the same. Afterwards, however, it will adjust according to the index it is tied to and the size of the margin. The margin is added to the index to create the "fully indexed" rate that you owe. This happens on the adjustment date, which can range from monthly to annually.

There is also a life cap, which is the highest interest rate you could ever pay on that loan. For example, let's say you started out with a 6.5% rate, but after five years it becomes adjustable. If the index was at 3.44 and your margin is 2.75%, your new interest rate will be 6.19% until the next time it adjusts, at which time it may rise or fall depending on the index.

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8. What is an index?
There are many possible ARM indexes. Each one has a distinct pros and cons and fluctuates differently based on market conditions. The most common indexes are:
  • Constant Maturity Treasury (CMT)
  • Treasury Bill (T-Bill)
  • 12-Month Treasury Average (MTA)
  • Certificate of Deposit Index (CODI)
  • 11 District Cost of Funds Index (COFI)
  • Cost of Savings Index (COSI)
  • London Inter Bank Offered Rate (LIBOR)
  • Certificates of Deposit (CD) Indexes
  • Prime Rate
  • Fannie Mae's Required Net Yield (RNY)
  • CMT, COFI, and LIBOR indexes are the most frequently used. Approximately 80% of all ARMs today are based on one of these indexes.
If you're deciding which index is better you should understand that there is no such thing as a "good" index or a "bad" index. Each index has its advantages and drawbacks, and is used in different situations. Generally, a loan tied to a lagging index (COFI), for example, is better when rates are rising. More volatile indexes, like those tied to the One Year Treasury, are best during periods of declining rates.

The best way to judge an index is to study its past performance.

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9. What are points?
Points represent additional money paid to the lender at closing. They are expressed as a percentage of the loan amount. For example, 1 point is equal to 1.00% of the loan amount. If you choose to pay points, your interest rate will be lower. Typically on a fixed rate loan, for each point you pay, the interest rate on your note may be reduced by 1/8th (0.125) to ¼ (0.25) of a percentage point. Similarly, on a hybrid loan (an adjustable mortgage with an interest rate fixed for an introductory term of 3-10 yrs) a point paid will reduce the initial note rate by a comparable amount. On an adjustable rate mortgage, paying points will oftentimes reduce your start rate, margin and lifecap by ½ of a percentage point (0.50%) or more.

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10. Should I pay points?
Whether financing points from personal savings or adding the cost to your loan amount, it is not advisable to pay points if you plan on refinancing or retiring your loan within a few years. Your mortgage broker will help you to determine whether or not you should pay points by examining several scenarios based upon two factors:
  1. The expected time you plan on holding your loan
  2. Your individual financial goals
The scenarios will include comparing the total loan fees and monthly payments on the same loan product (i.e., a 30 year fixed) when points are paid versus a "no points" loan. The analysis will include calculating your "break even" point. Your break even point is the point in time in which the dollar amount of money you have saved on your monthly mortgage payment equals the dollar amount you paid up front for points. It is only after you reach this point that you begin to realize monthly savings. To perfect the break even point analysis, a calculation for the time value of money may be performed. It is also wise to consider where your funds are best invested. You may determine that the long term rate of return on your investments exceeds the rate paid on your mortgage, adjusted for taxes.

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11. What are "Option ARMs" (Neg-Am) loans?
Option ARMs are adjustable rate mortgages (or ARMs) with the added flexibility of making one of five possible payments on your mortgage every month, allowing you to better manage your monthly cash flow. The common term for these types of loans currently is "Option ARMs". As they have a potential for deferred interest, they are also termed negative amortization mortgages (Neg-Am). Typically the amount of the deferred interest is limited to 110% to 125% of the original loan balance.

With a standard loan, the mortgage payment you make each month includes a portion paid towards interest due and a portion that pays down the principal of the loan. Over the term of your loan (i.e., 15 - 40 yrs) the principal balance will steadily decrease until it reaches a zero balance, fully amortizing the loan. This process is reversed with an Option ARM and, if you so choose, the principal balance can increase slightly each month. The increase can occur because the lender gives you the option of making a payment that is less than the actual amount due according to your interest rate.

The components of an Option ARM include those typical to an adjustable rate mortgage such as an index, margin and life cap. However, they are differentiated by two additional components. The first is a very low introductory period that is effective for a set period of time (ranging from as little as 1 month to as much as 5 years). The second component is an annual payment cap (usually 7.5% per year), so called because it "caps" the amount that your payment can increase in any given year.

While the payment increase is capped, the interest rate on the loan is not. After the initial introductory period, the interest rate adjusts higher based upon the loan's margin plus the current index rate. The difference between the capped payment and the actual payment due is added to the principal balance, increasing the total loan amount owed to the lender. The borrower has more control and flexibility with this type of loan because the mortgage statement they receive each month gives them the choice of four different payments: the minimum payment due, the interest only payment (available as long as it is greater than the minimum payment due), a fully amortized payment based on a 30 yr loan or a fully amortized payment based on a 15 yr loan. Additionally (although not referenced on the monthly statement), a fifth option is available. Essentially, you can pay as little as the required minimum payment due and add any amount you desire. Thus, you have up to 5 options allowing you to tailor your mortgage payment according to your monthly income, as long as at least the minimum payment is made.

Borrowers who seek out this type of loan include those who have fluctuating income or those who might not have the necessary cash flow to make higher payments initially, but may choose to do so later. Additionally, some borrowers who anticipate their property will appreciate in value in an amount greater than their deferred interest may decide to continue making minimum payments in the hope that their increased loan balance will safely be covered through a sale or refinance.

Finally, Option ARMs are often used by sophisticated investors who prefer to determine on a monthly basis where their money is best directed. They may decide their funds are maximized if left invested in other financial instruments if their long term rate of return exceeds the rate paid on their current mortgage, adjusted for taxes.

Please note: Option ARMs have several attractive features; however, they should be thoroughly understood before they are obtained. Your All California Mortgage, Inc. loan agent will explain all aspects of this loan to you in great detail.

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12. What is an Interest Only loan?
With an Interest Only loan there is a set term during which the borrower has the option to pay only the interest due on the loan, causing the principal balance to remain unchanged. This feature is available on fixed rate, true adjustable rate mortgages (ARMs) and hybrid mortgages (ie, those that combine the features of both fixed and adjustable rate mortgages). Depending upon the particular loan product and lender chosen, the interest only period can range from three to fifteen years. Each month, borrowers have the choice of making the interest only payment, the full principal and interest payment or any amount in between. At the end of the interest only term, the loan balance is amortized for the remaining term and the borrower's payments will include both principal and interest.

Many people find these loans attractive for the following reasons:
  • They allow borrowers to qualify at the interest only payment, enabling them to qualify for a higher loan amount.
  • Borrowers who expect their income to increase over time appreciate being able to take advantage of the lower monthly payments due on the loan initially.
  • Some borrowers like the flexibility of either making the full principal and interest payment or taking the difference between the full payment and the interest only payment due and directing it to the investment of their choice.
  • With a majority of the Interest Only products offered, the borrower's monthly payment is determined by the current outstanding principal balance. Therefore, if a borrower makes a principal pay down during the interest only period, their monthly interest only payment (as well as the optional principal and interest payment) will be reduced accordingly. This feature appeals to borrowers, such as those that receive bonuses or those who have yet to sell their home, who anticipate receiving a considerable amount of funds in the near future and plan on making a principal pay down with those funds.

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13. How long does it take to close my loan?
Our loan agents will strive to meet any time frame that you need for your particular circumstance. There are several reasons why All California Mortgage, Inc. can help them accomplish this:
  • We have our own in-house mortgage bank giving us full control over the entire loan process, including the time frame.
  • We operate with the most current technology in the industry, enabling us to perform electronic or "paperless" submissions and, in some cases, instantaneous loan approvals.
  • Our highly knowledgeable agents and staff process loan packages in an extremely precise manner ensuring prompt approvals from all our lenders.
  • Finally, because we have earned an excellent reputation in the mortgage industry several of our lenders prioritize our files, allowing us to offer improved turn around times to our clients.
Discuss your circumstances with your loan agent so that they can coordinate your loan closing to meet your needs.

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14. What is an annual percentage rate (APR)?
The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise rates. The APR was designed to allow consumers the ability to easily compare loan programs. An APR factors into the interest rate the cost of borrowing. Unfortunately, lenders can legally calculate APRs differently. A loan with a lower APR may not necessarily be the most competitive.

APR's can be confusing because the rules for calculating them are not clearly defined. The following fees are most often included when calculating the APR:
  • Loan processing
  • Pre-paid interest (Interest paid from the date the loan closes through the end of the month)
  • Points
  • Private mortgage insurance
  • Underwriting
  • Escrow
  • Recording
Third party fees for the title insurance, attorney, document preparation, notary, credit report, and appraisal are generally NOT included in the APR calculation. The APR does NOT affect your monthly payment. Your monthly payment is based upon your note rate and the amortization period.

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15. What is the difference between the Loan Amount and the Amount Financed?
On face value, the term "Amount Financed" seems interchangeable with the term "Loan Amount", when in fact it is not. This discrepancy is often noticed on the federally mandated Estimated Settlement Statement. The Loan Amount is the amount you are borrowing, while the Amount Financed is the Loan Amount less the borrowing costs that are used to calculate the APR (annual percentage rate.) The "Amount Financed" often confuses potential borrowers as borrowing costs typically are added into the "Loan Amount" applied for. Always refer to the "Loan Amount" to determine the dollar amount you are truly applying for.

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16. What is a Credit Score (FICO Score)?
When credit scoring was developed by the Fair Isaac Corporation lenders and banks began using their "FICO" scoring system to make credit determinations. Credit scores are calculated using models that assign points for various types of information that have historically been predictors of future credit performance. These models were developed by studying the payment history of millions of borrowers. The model used for home mortgages was developed to predict the likelihood that a borrower will have a 90 day late payment in the next 24 months.

Credit scores analyze a borrower's credit history considering factors such as:
  • Late payments
  • The length of time credit has been established
  • The amount of credit used versus the amount of credit available
  • Negative credit information such as bankruptcies, charge-offs, collections, etc. Each of the three credit bureaus (Experian, Trans Union and Equifax) calculates their own credit score for every individual. In most cases, the middle score is used by lending institutions to aid in the process of making home loan decisions.

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17. What do I need to know about Property Taxes?
In California, the property tax year starts on July 1st and ends June 30th. Taxes for the 1st half of the tax year are due November 1st and delinquent December 10th. The second installment of taxes is due February 1st and delinquent April 10th. The lender will require that your property taxes are paid at closing if your loan closes on or after the tax due date.

When you are refinancing, be prepared for the possibility of paying your property taxes earlier than the final due date. For convenience, you may decide to add the taxes due to your proposed loan amount. Please consult with your individual loan agent to determine your options.

When purchasing property, you must reimburse the Seller for any property taxes that they have paid in advance to cover any time period in which you will be occupying the property. You are responsible for property taxes from the date you close escrow through the remainder of the tax year. The amount due at closing will be calculated at the seller's tax rate.

In most cases, the property will be re-assessed after you close escrow. The county will then send you a "Supplemental Tax Bill". This supplemental bill collects for taxes due to cover the difference between what you paid at the Seller's rate and your newly assessed tax rate. In the future, subsequent tax bills will incorporate all property taxes due at your current rate. Supplemental Taxes are due upon receipt.

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18. I currently rent, but want to buy a house. Should I wait until rates come down?
You may sometimes hesitate to buy real estate in an environment of escalating interest rates. However, you may not realize that the actual cost of a rate increase is not as great as it may appear on the surface. The appreciation in value of real property may compensate for higher loan costs, but the chief benefit to most purchasers is that interest paid on a mortgage is tax deductible, of course, with certain limitations. Contact your accountant or financial advisor to calculate your potential tax savings. In many cases, your after-tax monthly mortgage payment is less than or similar to your current rent. Your accountant can advise you how to increase your exemptions (if salaried) or decrease your quarterly payments (if self-employed) to accommodate a greater take-home pay in anticipation of the year-end tax savings of obtaining a mortgage.

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