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Frequently Asked Questions about Mortgages?

What does the term:
Mean?
What is a lock in?

What options are available for setting the mortgage terms?

What's included in closing costs?

What documents will I need to give the lender before closing a mortgage loan?

What is the difference between "assumption of mortgage" and "purchasing subject to a mortgage"?

What's the difference between a loan and a line of credit?

What can I use a home equity loan or line of credit for?

Is the interest on my home equity loan tax deductible?
 
 

What is a lock in?

 A lock-in, also called a rate lock or rate commitment, is a lender's promise to hold a certain  interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. (Points are additional charges imposed by the lender that are  usually prepaid by the consumer at settlement but can sometimes be financed by adding them to the mortgage amount. One point equals one percent of the loan amount.) Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file  your application, during processing of the loan,  when the loan is approved, or later.

 A  lock-in  for a loan  may be useful because it's likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application. During that time, the cost of mortgages may change. But if your interest rate and points are locked in, you should be protected against increases while your application is processed. This  protection could affect whether you can afford the  mortgage. However, a locked-in rate could also prevent you from taking advantage of price decreases, unless your lender is willing to lock in a  lower rate that becomes available during this period. The decision to lock in should consider how much risk you want take.

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What options are available for setting the mortgage terms?

Lenders may offer different options in establishing the interest rate and points that you will be charged, such as:

Locked in interest rate and locked in points:  Under this option, the lender lets you lock in both the interest rate and points quoted to you. This option may be considered to be a  true lock-in because your mortgage terms should not increase above the interest rate and points that you've agreed upon even if market conditions change.

Locked in interest rate and floating points: Under this option, the lender lets you lock in  the interest rate, while permitting or requiring the points to rise and fall (float) with changes in market conditions. If market  interest rates drop during the lock-in period, the points may also fall. If they rise, the points may increase. Even if you float your points, your lender may allow you to lock-in the points at some time before settlement at whatever level is then current. (For instance, say you've locked in a 10 1/2 percent interest rate, but not the 3 points that went  with that rate. A month later, the market  interest rate remains the same, but the points the lender charges for that rate have  dropped to 2 1/2. With your lender's  agreement, you could then lock in the lower 2 1/2 points.) If you float your points and market interest rates increase by the time of settlement, the lender may charge a greater number of points for a loan at the rate you've locked in. In this case, the benefit you might  have had by locking in your rate may be lost because you'll have to pay more in upfront costs.

Floating interest rate and floating points: Under this option, the lender lets you lock in  the interest rate and the points at some time after application but before settlement If you think that rates will remain level or even go down, you may want to wait on locking in a particular rate and points. If rates go up, you should expect to be charged the higher rate.Because practices vary, you may want to ask your lender whether there are other options available to you.
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What's included in closing costs?

Closing costs can be classified into three categories:

 Lender fees :: points, appraisal, credit report, underwriting, settlement and tax service fee.
Prepaid expenses :: interim interest, real estate taxes and escrow, insurance premiums and escrow.
Settlement costs::title insurance, settlement/attorney fees, city/county/state taxes, recordation and messenger fees.

What documents will I need to give the lender before closing a mortgage loan?

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What is the difference between "assumption of mortgage" and "purchasing subject to a mortgage"?

Assumption of mortgage and purchasing subject to a mortgage are methods by which buyer taking over existing mortgage on property during purchase of the property. Taking over a mortgage can  usually save the buyer money since this is an existing mortgage debt.

Assumption of mortgage is an obligation undertaken by the purchaser of property to be personally liable for payment of an existing mortgage. In an assumption, the purchaser is substituted for the original mortgagor in the mortgage instrument and the original mortgagor is to be released from  further liability in the assumption, the mortgagee's consent is usually required. The original mortgagor should always obtain a written release from further liability if he desires to be fully released under the assumption. Failure to obtain such a release renders  the original mortgagor liable if the person assuming the mortgage fails to make the monthly payments.

But when one purchases subject to a mortgage, the purchaser agrees to make the monthly mortgage payments on an existing mortgage, but the original mortgagor remains personally liable if the purchaser fails to make the monthly payments. Since the original mortgagor remains liable in the event of default, the mortgagee's consent is not required to a sale subject to a mortgage.

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What's the difference between a loan and a line of credit?
A loan generally is for a fixed period of time with an initial balance and fixed monthly payments. A line of credit is a revolving credit account. A line of credit is similar to a credit card in that it only requires payments when there is an outstanding balance. Contrary to a loan, there is no initial balance on a line of credit. You are required to make a  minimum payment each month based on a percentage of the balance. If the line of credit is a home equity line of credit, it might be tax deductible
 
What can I use a home equity loan or line of credit for?
 For anything you want.

Is the interest on my home equity loan tax deductible?

In most cases it is tax deductible. The interest on home equity loans or lines of credit can be tax deductible.That's why many people choose to get a home equity loan or line of credit to finance cars, boats or other high price items.

 Interest on your credit cards or auto loans is not tax deductible. And because you're borrowing against an asset (your house), the interest rate is generally lower than other loan types. In general, the interest is deductible on a home equity loan or line of credit up to $100,000. If you are married and filing separately, interest is tax deductible on a loan or line of credit up to $50,000. Again, it's important to consult a professional tax planner for the specific tax laws that apply to you.

            
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