Iowa Mortgage

Frequently Asked Questions About Iowa Mortgages

I'd like to own my own home. What's the first step?

Before you begin searching for a home, it's important to take a close look at your current finincal situation. You'll want to consider:

How do I know how much I can afford?

The amount of money you can borrow will be determined by the size of the monthly payment you can afford. Most lenders do not allow the monthly payment to exceed 25% to 33% of gross monthly income, however some lenders have a more flexible debt-to-income ratios that they use.

You will first want to start by taking a look at your current assets which would include your income, savings, investments, IRAs, life insurance, pensions and corporate thrift plans, and equity in other real estate, etc. and liabilities (including outstanding loans, credit card balances, etc.). You will also want to think about how your income or your household income, if there are two people bring in an income in the family, and how might change over the next several years.

What does the application consist of?

The typical application is a simple outline of who you are, the property you want to buy or refinance, and your financial assets and liabilities. Click here for our "Online Mortgage Application" to see an example.

What happens after I apply?

The lender initiates a credit check and arranges for an appraisal of the property you plan to buy or the current property you want to refinance. The appraisal assures you and the lender that the property has fair market value. In the unlikely event of default on your loan, the property must be worth enough to settle the debt.

Once your credit check, appraisals and verifications are complete, this "credit package" is reviewed by an underwriter who makes the loan decision. If your loan is approved, your lender will issue you a loan commitment which is a binding agreement to lend you the money. The commitment spells out all the details of the loan including all charges and fees, closing requirements, and any important conditions that might include:

The loan commitment may also have certain conditions that you must meet before the loan is granted such as bills you must pay off, or special requirements of the homeowners association, are just a few.

What is the APR?

The concept of the annual percentage rate (APR) was developed to more accurately reflect a more presice cost factor. The APR represents not only the rate of interest charged on the loan but certain other finance charges. An APR is expressed in terms of percentages and may include the following costs: origination fees, loan discount points, private mortgage insurance premiums, and the estimated interest pro-rated from the closing date to the end of the month.

Please not that what may appear as a low interest rate may have a lot of optional loan discount points added to increase the effective rate to the lender. Reviewing the APR will help you to determine if this type of situation exists. When shopping for mortgage rates, get the APR from your lender to make sure you have an accurate comparison to other available mortgage rates.

Is my interest rate guaranteed?

It is important to ask the lender how long they guarantee the quoted interest rate. Some lenders guarantee the rate for 20 to 90 days. Other lenders may only agree to set a rate when the loan is approved. however, lenders will not set a rate for the loan until just before closing. A longer guarantee period allows you to protect the rate for a longer length of time, which could be beneficial to you in a volatile interest rate market. Also check to make sure long guarantee periods are available and what additional costs may be involved.

What is the difference between 'locking in' an interest rate and 'floating'?

Mortgage rates can change from day to day or even more often. If you are concerned that interest rates may rise during the time your loan is being processed, you can 'lock in' the current rate (and loan fees) for a short time, usually 60 days. The benefit is the security of knowing the interest rate is locked if interest rates should increase. If you are locked in and rates decrease, you may not necessarily get the benefit of the decrease in interest rates.

If you choose not to 'lock in' your interest rate during the processing of your loan, you may 'float' your intrest rate until you are comfortable with it. The borrower takes the risk of interest rates increasing during the time from application to the time the rate is locked in. The downside is that the borrower is subject to the higher interest rates. The benefit to floating a rate is if interest rates were to decrease, you would have the option of locking into the lower rate.

What is Prepaid Interest?

This is interim interest that accrues on the mortgage loan from the date of the settlement to the beginning of the period covered by the first monthly payment. Since interest is paid in arrears, a mortgage payment made in June actually pays for interest accrued in the month of May. Because of this, if your closing date is scheduled for June 15, the first mortgage payment is due August 1. The lender will calculate an interest amount per day that is collected at the time of closing. This amount covers the interest accrued from June 15 to July 1.

Are there different types of mortgages?

Yes. The two basic types of Iowa mortgages are fixed rate and adjustable rate.

Fixed Rate Mortgages

If you're looking for an Iowa mortgage with payments that will remain essentially unchanged over its term, or if you plan to stay in your new home for a long period of time, a fixed rate mortgage is probably right for you.

With a fixed rate mortgage the interest rate you close with won't change-and your payments of principal and interest remain the same each month-until the mortgage is paid off.

The fixed rate mortgage is an extremely stable choice. You are protected from rising interest rates and it makes budgeting for the future very easy.

But in certain types of economies, the interest rate for a fixed rate mortgage is considerably higher than the initial interest rate of other mortgage options. That is the one disadvantage of a fixed rate mortgage. Once your rate is set, it does not change and falling interest rates will not affect what you pay.

Fixed rate mortgages are available with terms of 15 to 30 years with the 15-year term becoming more and more popular. The advantage of a 15-year over a 30-year mortgage is that while your payments are higher, your principal will be paid off sooner, saving you money in interest payments. Also, the rates may be lower with a 15-year loan.

Adjustable Rate Mortgages (ARMs)

An adjustable rate mortgage is considerably different from a fixed rate mortgage. ARMs were created to provide affordable mortgage financing in a changing economic environment.

An ARM is a mortgage where the interest rate changes at preset intervals, according to rising and falling interest rates and the economy in general. In most cases, the initial interest rate of an ARM is lower than a fixed rate mortgage. However, the interest rate on an ARM is based on a specific index (such as U.S. Treasury Securities). This index reflects the level of interest rates and allows the lender to match the income from your ARM payment against their costs. It is often selected because it is a reliable, familiar financial indicator. Monthly payments are adjusted up or down in relation to the index.

Most ARMs have caps-limits the lender puts on the amount that the interest rate or mortgage payment may change at each adjustment, as well as during the life of the mortgage. With an ARM, you typically have the benefit of lower initial rates for the first year of the loan. Plus, if interest rates drop and you want to take advantage of a lower rate, you may not have to refinance as you would with a fixed rate mortgage. An ARM may be especially advantageous if you plan to move after a short period of time.

ARM are often misunderstood. Ask your mortgage lender to explain the details to you so you can determine if this type of mortgage fits your specific financial situation.

When do I need Private Mortgage Insurance (PMI)?

If the down payment on your home is less than 20%, your lender will more then likely require that you get private mortgage insurance. This insurance insures the lender against possible default on the loan. It is not to be confused with mortgage life insurance or homeowners insurance.

Normally, PMI may be removed if you have reduced the principal amount of your loan to 80% or lower than the original purchase price. It also may be removed if you have obtained an independent appraisal stating that the outstanding principal amount of the loan is 80% or lower than the appraised value.

Some lenders do not require PMI. Instead, they may increase the interest rate on the loan.

What are closing costs?

Mortgage closing costs, are fees charged for services that must be performed to process and close your loan application. Examples of mortgage closing cost include title fees, recording fees, appraisal fee, credit report fee, pest inspection, attorney's fees, taxes, and surveying fees. The closing cost of a loan will vary depending on your geographic location.

Lenders are required by law to disclose in writing, known as a Good Faith Estimate, your estimated mortgage closing costs and fees as a buyer.

What is an Escrow Account?

An account held by the lender to which the borrower pays monthly installments, collected as part of the monthly mortgage payment, for annual expenses such as taxes and insurance. The lender disburses escrow account funds on behalf of the borrower when they become due. Also known as Impound Account.

What is involved in the closing?

At the closing you, the seller, the lender and the attorneys for all involved validate, review and sign all documents relating to the purchase or refinance. The lender provides the check for the loan amount. You receive the title to your property and the keys to your new home or the cash from your refinance.

What is a Home Equity Loan?

The dollar difference between the market value of your home and your current mortgage balance determines your home equity. In other words, if you sold your home this would be the cash you would receive after the sale. A home equity loan allows you to access this cash without selling your home by using your home as collateral. As you pay down your mortgage, and/or your home's value increases, your available equity increases accordingly.

More Questions?

If we haven't answered your question here, feel free to contact Hall Lending Group for more help.