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Take the
Prime Home Mortgage, L.P. Home Buyer's Quiz and learn about terms and concepts you will
encounter as you search for the mortgage that is right for you.
Q: Most mortgage lenders can
qualify a potential borrower for a mortgage amount of about four times
his or her gross annual salary. TRUE or FALSE
This is false. Most lenders agree that a borrower
can afford a home that is 2 to 2-1/2 times his or her gross salary.
Q: 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!)
Q: 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.
Q: Mortgage lenders refer to a homeowner's monthly
payment as "PITI" because:
- 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: It includes Principal, Interest, Taxes
and Insurance.
Q: A "jumbo" loan is:
- 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 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: A jumbo loan is any mortgage larger
than the limit set by FNMA and FHLMC, commonly know as "Fannie Mae"
and "Freddie Mac", respectively. This amount changes nearly every
year due to inflation and current economic trends.
Q: A "buy-down" refers 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: 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 buydown. 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.
Q: 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: 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.
Q: 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: Approximately 7-8 years. Amazing, but
true.
Q: 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.
There are two answers: 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).
Q: 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: It is 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.
Q: 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: FHA loans are often very popular because
of the low down payment they require.
Q: 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: 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.
Q: 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: Every state has their own rules, regulations
and terms concerning the borrowing of money for a house.
Q: 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.
There are two answers: 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.
Q: 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: 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 one of the Prime Home Mortgage, L.P.
Offices nearest you and ask a loan representative.
We hope this quiz helped you in your search for a home and mortgage.
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