Michael Creed's Blog

Many of us incorrectly call our home loan a mortgage, but in fact, a mortgage is not what your lender gives you to buy a home. A mortgage is actually the formal document proving the legal claim or lien on a piece of property that you give to the lender who holds it as security for the money you borrowed. The lien is recorded in public records. On a mortgage, you pledge the property as security for the repayment of your loan, but you do not transfer title to the lender.

If you (the mortgagee) repay your loan in accordance with the terms of the mortgage, it is canceled or satisfied by the lender (the mortgagor). However, if you do not repay your debt, the lender has the right to sell the secured property to recover funds through a court proceeding called foreclosure.

In some states, a deed of trust is used in place of a mortgage. While a mortgage involves two people (the borrower and the lender) a deed of trust involves three people - the borrower (or trustor), the lender (the beneficiary) and a trustee, a neutral third party, such as an attorney or a title agent. The deed of trust is also recorded in public records.

In a deed of trust transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the loan to the lender. The deed of trust is cancelled when the debt is paid. However, if you default on your payment of the loan, the trustee may sell the property at the request of the lender without a court proceeding.

What is the difference between the interest rate and the APR?

You'll see an interest rate and an Annual Percentage Rate (APR) for each mortgage loan you see advertised. The easy answer to "why" is that federal law requires the lender to tell you both.

The APR is a tool for comparing different loans, which will include different interest rates but also different points and other terms. The APR is designed to represent the "true cost of a loan" to the borrower, expressed in the form of a yearly rate. This way, lenders can't "hide" fees and upfront costs behind low advertised rates.

While it's designed to make it easier to compare loans, it's sometimes confusing because the APR includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. And since the federal law that requires lenders to disclose the APR does not clearly define what goes into the calculation, APRs can vary from lender to lender and loan to loan.

The APR on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. But ARMs were invented because the market index changes and makes fixed rate loans cheaper or more expensive to make -- that's why they're variable rate in the first placed!

So, APRs are at best inexact. The lesson is that APR can be a guide, but you need a mortgage professional to help you find the truly best loan for you.

Note when you're browsing for loan terms that the APR will not tell you about balloon payments or prepayment penalties, or how long your rate is locked. Also, you'll see that APRs on 15-year loans will carry a higher relative rate due to the fact that points are amortized over a shorter period of time.

Are you pre-qualified or pre-approved for a loan?

Before you begin to shop for a new home, you should set up a time to meet with me so we can figure out how much you can afford. This will put you in a better position as a buyer.

That's when it is important to understand the distinction between being pre-qualified for a loan and pre-approved for a loan. The difference between the two terms will be crucial when you decide to make an offer on a house.

To get pre-qualified for a loan, I will collect information about your debt, income, and assets. We'll then assess your goals for a down payment and get an idea of different loan programs that would work for you. I will then tell you if I was able to pre-qualify you to borrow for a home. 

It is important to understand that a pre-qualification is just an estimate of what you are eligible to borrow, not a commitment to lend. Pretty simple, right? This is why most Realtors and/or sellers don't really care if you are pre-qualified; they want you to be pre-approved. Read on…

Getting pre-approved for a loan gives you competitive advantage when the time comes to bid on a home because you have been pre-approved for a loan for a specified amount.

To get pre-approved, we will complete a mortgage application together and you will hten need to provide me with various information verifying your employment, assets and financial status such as W-2 forms, bank records and permission to obtain a credit report. I will then review your mortgage options and submit your application to our automated underwriting system to see which of our loan programs best meets your stated goals and needs. Once the application process is complete, you will receive a pre-approval letter indicating the amount we are willing to lend you for a home.

A pre-approval letter is not binding on the lender; it is subject to an appraisal of the home you wish to purchase and certain other conditions. If your financial situation changes (e.g. you lose your job), interest rates rise or a specified expiration date passes, your lender must review your situation and recalculate your mortgage amount accordingly.

Please contact me to get a free pre-approval today!