Walten Mortgage Loans | Mortgage Terms in Depth

Mortgage Terms in Depth

What is a “good faith estimate”?
What is cash out option?
What is a housing to income ratio?
What is an appraisal and who completes it?
What is an impound/escrow account?
What is an income to debt ratio?
What is an owner’s estimate value?
What is PITI?
What is PMI?
What are prequalification vs pre-approval?
What is roll in refinancing?
What is the difference between an Equity Line of Credit and another type of second mortgage?
What are closing costs?
What are income, debt and mortgage payments?
What are prepaid interest and Impound Escrow funds?
What are rates, terms and APR?
What is “locking in a rate”?
What is a mortgage?
What is amortization?
What is equity?

What is a "good faith" estimate?

It is an estimate of the fees that you will pay to close your loan.

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What is a cash-out option?

If your equity in your property qualifies, you can refinance with a loan amount greater than your current mortgage - and keep the difference! Use it for home improvement, debt consolidation, or whatever you desire.

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What is a housing-to-income ratio?

Your income, debt, and mortgage payments are the primary factors that affect whether you qualify for a loan. If you do qualify for a loan, you can apply, and Walten Mortgage Services. will move to the next step of checking to see if you can be approved.

To determine your qualification, the first thing Walten Mortgage Services will do is divide the monthly payment of your proposed loan by your gross monthly income. This provides your housing-to-income ratio. If the resulting percentage falls within a certain range, the next step is to divide your total monthly debt by your gross monthly income. This provides your debt-to-income ratio. Again, if the ratio falls within prescribed limits, you are qualified for the loan.

The limits within which your housing and debt ratios must fall are determined primarily by the size of the loan, the value of the property, and the ratio between the two (known as the loan-to-value ratio, or LTV). This loan-to-value ratio is one of the most important factors in determining a home loan.

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What is an appraisal and who completes it?

The appraisal determines the value of the property in question, which becomes a prime factor in determining the loan-to-value - or LTV - ratio (the amount of your loan divided by the value of your property). Your LTV is important because it determines your equity in the property. With the exception of leveraged equity and some second mortgages, Walten Mortgage Services. will arrange an appraisal of your property to verify its value. An appraiser is an authorized professional who estimates the value of the property and sends the information to Walten Mortgage Services. and to you.

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What is an impound/escrow account?

An impound account or an escrow account (the terms are interchangeable; each is used in different states) is the name of the account in which a lender collects payments you make toward your property taxes and hazard/fire insurance. If you have an impound/escrow account, each of your monthly payments will contain a fraction of your annual property tax and insurance costs. Your lender keeps these funds in the impound/escrow account and then pays your taxes and insurance directly when they become due.

An impound/escrow account can be a convenient and trouble-free manner of ensuring that your insurance and tax payments are made on time. Additionally, choosing the convenience of an impound/escrow account allows Walten Mortgage Services. to offer you a better rate or lower fee. Please note that impound/escrow accounts are mandatory for purchase or refinance Loans where the loan amount is 80.01 percent or more of the property value (loan-to-value ratios of 80.01 percent or more), unless otherwise restricted by laws in your property's state (in California, impound accounts are required for refinance loans, purchase loans with LTV of 90 percent or greater, and for second mortgages with LTVs of 80.01 percent or greater).

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What is an income-to-debt ratio?

Your income, debt, and mortgage payments make up your income-to-debt ratio. These are the primary factors that affect whether or not you qualify for a loan. If you do qualify for a loan, you can apply, and Walten Mortgage Services. will move to the next step of checking to see if you can be approved. To determine your qualification, the first thing Walten Mortgage Services will do is divide the monthly payment of your proposed loan by your gross monthly income. This provides your housing-to-income ratio.

If the resulting percentage falls within a certain range, the next step is to divide your total monthly debt by your gross monthly income. This provides your debt-to-income ratio. Again, if the ratio falls within prescribed limits, you are qualified for the loan.

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What is an owner's estimate of value?

For the 125% Freedom loan product, Walten Mortgage Services relies on your estimate of the value of your property. You can estimate the value by reviewing neighborhood comparable properties (comps). A good way to do this is to simply call a local real estate agent. You can also visit open house events in your neighborhood. This may give you an indication of what prices are being asked for various properties.

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What is PITI?

PITI is the acronym for Principal, Interest, Taxes and Insurance. That is, each month your payment to your lender will consist of:

Funds to be applied to the principal - to repay the actual money you borrowed
Funds to be applied to the interest - to repay the interest you're being charged on the loan, over the life of the loan
Funds being collected in an impound/escrow account to pay your property taxes when they come due
Funds being collected in an impound/escrow account to pay your hazard/fire Insurance when it comes due

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What is PMI?

Private Mortgage Insurance (PMI) is usually mandatory for loans when the ratio of the loan amount to the value of the subject property is greater than 80 percent; that is, 80.01 percent or more of the property is being paid for by the loan. This is known as the loan-to-value ratio, or LTV. Basically, the lower your loan-to-value ratio, the higher your equity in the property will be. You can think of equity as the part of your property you actually own. If you sold your property (for its appraised value), equity is the amount of cash you'd have left after you repay your loan balance in full.

Common wisdom holds that the more equity a borrower has in a property, the lower the risk of defaulting on the loan. Thus, Private Mortgage Insurance (PMI) must be paid for lower equity (high LTV) loans to safeguard the lender from possible loan defaults.

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What is prequalification vs. preapproval?

Walten Mortgage Services simultaneously gives prequalification and preapproval based upon the information you provide in the online application. Because this preapproval is based on information provided to Walten Mortgage Services. verbally and as set forth on the application, it is considered conditional loan approval.

The conditional approval is subject to the verification and/or receipt of additional information. Once all closing conditions and lender requirements are satisfied, the loan will receive final approval.

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What is roll in refinancing?

Rolling in your loan costs is especially attractive when refinancing. By rolling in your costs, you incur no expenses, thus you have no "payback period." The payback period is the time required to recoup the cost of your new loan through the monthly savings you get from the difference between your new lower payments and your old ones. For example, if your new loan's payments are $100 a month less than your old one, but you had to pay $1,200 to refinance, you'd have a payback period of 12 months before you'd actually start saving. By rolling in the cost of your refinance, your actual savings begin immediately. Rolling in your costs is particularly appropriate if you're planning to sell or refinance again in a few years because, in this case, it doesn't really matter that your loan amount is higher as long as you enjoy savings right now.

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What is the difference between an Equity Line of Credit and another type of second mortgage?

An Equity Line of Credit is money in an account that can be used as you need it. You can use any portion of it at any time and pay it back at any time. The interest rate is usually variable and is tied to the prime rate. Other types of second mortgages, such as the Home Equity Loan and 125 percent Freedom Loans are simple interest products. You borrow a lump sum and pay it back over a period of years with interest. The interest rate for these products is fixed.

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What are closing costs?

Closing costs are sometimes also called settlement costs. These are the costs a lender charges for funding and completing your loan and are generally charged at the time of closing (or settlement). They often include discount points, which are fees paid to lower your interest rate. Settlement costs/closing costs vary greatly depending on your state, county, and/or metropolitan area. They also vary from one lender to another, so it pays to shop around.

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What are income, debt, and mortgage payments?

These are the primary factors that effect whether you qualify for a loan. In order to determine if you qualify for a loan, your lender will calculate two defining ratios: the housing-to-income ratio and the debt-to-income ratio. The first of the two ratios, the housing-to-income ratio, is calculated by dividing the monthly payment of your proposed loan by your gross monthly income. If the resulting percentage falls within a predetermined range, the lender will then go on to calculate your debt-to-income ratio. The debt-to-income ratio is calculated by dividing your total monthly debt by your gross monthly income. Once again, if this ratio falls within prescribed limits, the lender will qualify you for the loan. The limits within which your housing and debt ratios must fall are determined primarily by the size of the loan, the value of the property, and the ratio between the two (known as the loan-to-value ratio, or LTV). This loan-to-value ratio is one of the most important factors in determining a home loan.

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What are prepaid interest and impound/escrow funds?

Prepaid interest and impound/escrow funds are costs generally associated with a mortgage. At the time of closing your loan, a lender will often require you to provide the funds to establish your impound/escrow accounts (so your taxes and insurance can be paid on time) and to pay the interest for the time period between the loan closing date and the end of the closing month.

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What are rates, terms, and APR?

All mortgages have an interest rate, a term, and an annual percentage rate (APR). For example, a mortgage might be defined as a 30-year fixed-rate loan at 7.625 percent, with an APR of 7.800 percent. In this example, the mortgage term is 30 years. As the borrower, you will pay back the loan in installments over the course of 30 years.

The interest rate in this example is 7.625 percent. This means you must pay interest on the money you've borrowed at a rate of 7.625 percent per year. That is, in addition to paying back the loan, you will pay your lender an additional 7.625 percent of the current loan balance every year. This interest is basically the fee your lender charges you in return for lending you the money.

The annual percentage rate (APR) is a measure of the cost of credit, expressed as a yearly rate. Because APR includes points and other costs such as origination fees, it's usually higher than the advertised rate. The APR allows you to compare different mortgages based on actual annual costs.

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What is "locking in a rate"?

You can secure your rate by completing a written agreement in which Walten Mortgage Services. guarantees a specified interest rate for a specified period of time. Locking in a mortgage rate protects you against interest rate changes from the date of the rate lock until the date of the closing as long as your rate lock has not expired. Should interest rates rise during that period, Walten Mortgage Services is obligated to honor the committed rate. Should interest rates fall during that period, you must honor the lock.

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What is a mortgage?

A mortgage is a loan you acquire in order to purchase property, but you can also get cash for other purposes using the property as equity. In return for the loan, you pledge real property (land and/or a building) as security in case you fail to live up to your obligation.

When you borrow money against property, you commit to two financial documents:
• The NOTE that is a personal obligation to repay the loan on a timely basis
• The MORTGAGE DEED OF TRUST that is the pledge of the property as security; the mortgage deed of trust defines your obligations to your lender, as well as your rights and those of the lender.

You are pledged to repay the mortgage loan, along with an additional charge for the lender's service of lending you the money.

The cost of borrowing the money is the interest rate specified in your note. The amount of time you have to pay back the loan is the note's term.

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What is amortization?

Amortization means paying down your principal. You repay your loan in monthly installments. If you have a fixed mortgage (that is, an interest rate that remains fixed for the entire term of the loan), your payments will always be the same amount. Part of the payment goes toward the payment of the interest, and part toward the repayment of the money you've borrowed (the principal).

The balance of the principal (what you still owe at any given time) is reduced with each payment. As a result, your monthly payment will pay the principal in increasing amounts over time. With a fixed-interest rate, the amount of interest you owe will decrease as your principal balance decreases.

You can create an amortization schedule for fixed loans when they are originated. This schedule will show how much of each payment will go toward interest and how much will go toward principal over the life of the loan.

As your principal decreases, your equity in the mortgaged property increases. Equity is a very important factor in mortgage financing.

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What is equity?

Equity is a crucial aspect of home loans. Equity is simply the value of a homeowner's unencumbered interest on real estate. Equity is computed by subtracting the total of the unpaid mortgage balance and any outstanding liens or other debts against the property from the property's fair market value. A homeowner's equity increases as he or she pays off his or her mortgage or as the property appreciates in value. When a mortgage and all other debts against the property are paid in full, the homeowner has 100 percent equity in his or her property.

Equity exists in conjunction with your loan-to-value ratio (or LTV). Your LTV is a ratio expressing the value of your property to the amount of your loan. You determine your LTV by dividing your loan amount by your property's value or selling/purchase price, whichever is lower.

For example, you buy a $100,000 home with a $20,000 down payment of your own money, and cover the remaining $80,000 with a mortgage - 80,000 divided by 100,000 gives you a loan-to-value ratio of 80 percent and equity of 20 percent.

Equity and LTVs are important because lenders prefer a borrower to have as much equity as possible. Traditional wisdom holds that the higher the LTV on a loan, the higher the risk of default; alternatively, the higher the equity, the lower the risk - and therefore the lower the interest rate, cost, and fees associated with doing the loan. Equity also determines how much a lender will allow you to refinance your property for and how much they will lend you for a second mortgage.

Another way to think of equity is as the amount that you'll receive when you sell the property and pay back the remaining loan balance. Again, for a $100,000 house bought with an $80,000 loan and sold for $100,000, you would get $20,000 in cash back - or 20 percent of the home's value.