Whether you're buying a house or refinancing, there is more to a mortgage than the rate. Here are some questions to ask while mortgage shopping. Some of these are for you to answer, while others can only be answered by mortgage professionals and insurers.

1. What is APR – Annual Percentage Rate?
2. What is a mortgage broker?
3. What is an origination fee?
4. What does LTV (Loan-to-Value) mean?
5. What is DTI?
6. What documents will I need to apply for a mortgage?
7. What is the difference between “locking in an interest rate” and floating an interest rate”?
8. What is closing cost?
9. How can I avoid Private Mortgage Insurance?

top of page

1. What is APR – Annual Percentage Rate?
   APR is an interest rate that reflects the total cost of financing a loan. It is a combination of the simple interest rate (the rate you are actually paying back), any discount points, and the fees paid to a lender when getting a mortgage. Other factors that affect APR are the loan size and the term of the loan. A mortgage with a 15 year term will have a higher APR than a 30 year mortgage, even if the rate and fees are the same. Also, a $100,000 mortgage will have a higher APR than a $200,000 mortgage, with the same rate and fees.

   top of page

2. What is a mortgage broker?
   A mortgage broker is a licensed independent contractor that offers a large selection of loan programs from various lenders. A bank usually has a limited selection of their own programs, which may or may not fit your needs.

   top of page

3. What is an origination fee?
   An origination fee is the fee charged to cover processing of the application of a mortgage provided by the mortgage broker.

   top of page

4. What does LTV (Loan-to-Value) mean?
   Loan to Value is a ratio determined by the loan amount divided by the property value. For example, if a home has a property value of $100,000 and the loan amount is $90,000 the LTV is 90%.

   LTV is used to define the maximum loan percentage available for each particular loan program.

   top of page

5. What is DTI?
   Debt-To-Income ratio shows what percentage of your income is available for a mortgage payment after all other continuing obligations are met. The ratio is one of the factors a lender considers before approving your loan.

   top of page

6. What documents will I need to apply for a mortgage?
   At a minimum you will need your last two years W2s and your last two pay stubs. This is the minimum to get a pre-approval. Often two months’ bank statements are needed for verification of funds.

   If you are self-employed you will need the last two years 1099s or the last two years’ tax returns.

   The lender may ask for other documents during underwriting.

   top of page

7. What is the difference between “locking in an interest rate” and floating an interest rate”?
   When applying for a mortgage you may be quoted a simple interest rate that is available at that moment. In order to ensure the rate you are quoted is available at your closing time, you should have your lender “lock” in your rate. Typically lock periods are 30 days. The longer the lock period is the higher the interest rate locks will cost. Alternatively, if you think interest rates are trending lower you may choose to float the rate and accept whatever the prevailing interest is once you are closer to your closing date.

   top of page

8. What is closing cost?
   Each lender may have different costs which apply to their programs. Closing Cost is the fees applied to make the loan and may consist of some or all of the following fees:
   1. Settlement and or attorney fees.
   2. Underwriting fee
   3. Pre-Paids – this includes escrowing for property taxes, mortgage interest, home owners insurance and PMI (private mortgage insurance).
   4. Loan origination fee
   5. Appraisal fee
   6. Credit report fee
   7. Messenger/overnight fee
   8. Title fee
   9. Recording fee
   10. Survey (if needed)
   11. Documentation preparation fee

   top of page

9. How can I avoid Private Mortgage Insurance?
   PMI is typically required if the LTV is 80% or higher. Many lenders do not require PMI on 100% financing, but may have a slightly higher rate. Lenders also offer an 80/20 loan and this eliminates the need for PMI. If you are required to carry PMI you can stop paying PMI once your LTV reaches 80% or the value of your home has appreciated to place your loan under 80%. Check with each lender on their PMI guidelines to see when it can be cancelled.

The questions and answers presented on this website are for informational purposes only. You should consult your Attorney, Real Estate Agent or Lender for answers to questions you may have related to loan programs available for your situation in your local area.