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MORTGAGE

1. What is the difference between a mortgage interest rate and an APR?

The difference between a mortgage interest rate and an annual percentage rate is that a mortgage interest rate is the cost you pay each year to borrow money for a mortgage. An annual percentage rate reflects the mortgage interest rate and other charges. There are many costs associated with taking out a mortgage. These include:

  • The interest rate

Points

  • Fees
  • Other charges

The interest rate is the cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan.

An annual percentage rate (APR) is a broader measure of the cost to you of borrowing money. The APR reflects not only the interest rate but also the points, mortgage broker fees, and other charges that you have to pay to get the loan. For that reason, your APR is usually higher than your interest rate.

2. What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important?

Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income.  This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.

To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.  For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6000, then your debt-to-income ratio is 33 percent. ($2000 is 33% of $6000.)

Evidence from studies of mortgage loans suggests that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments. The 43 percent debt-to-income ratio is important because, in most cases, that is the highest ratio a borrower can have and still get a Qualified Mortgage.

There are some exceptions. For instance, a small creditor must consider your debt-to-income ratio, but is allowed to offer a Qualified Mortgage with a debt-to-income ratio higher than 43 percent. In most cases your lender is a small creditor if it had under $2 billion in assets in the last year and it made no more than 500 mortgages in the previous year.

Larger lenders may still make a mortgage loan if your debt-to-income ratio is more than 43 percent, even if this prevents it from being a Qualified Mortgage. But they will have to make a reasonable, good-faith effort, following the CFPB’s rules, to determine that you have the ability to repay the loan.

3. How does foreclosure work?

Foreclosure processes differ by state. If you are worried about foreclosure, you should call the CFPB at 1-855-411-CFPB (2372) to be connected with a U.S. Department of Housing and Urban Development (HUD)-approved housing counselor.

Typically, once you fall four months behind on your mortgage payments, the foreclosure process may begin (although the process can begin earlier or later). The foreclosure process may proceed in one of three ways depending on your state: judicial sale, which requires that the process go through court; power of sale, which can be carried out entirely by the lender; or strict foreclosure, which is only available in a few states and requires the lender or a servicer acting on the lender’s behalf to file a lawsuit against the borrower.

All types of foreclosure generally involve public notice to be given and require all parties to be notified regarding the proceedings. States laws on giving notice and scheduling a foreclosure sale vary. Some states may also provide you with the right to mediation prior to foreclosure. Be sure to read your mail carefully and act promptly on notices you receive.

4. What is mortgage insurance and how does it work?

Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get.

Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. If you are required to pay mortgage insurance, it will be included in your total monthly payment that you make to your lender, your costs at closing, or both.

5. Are there different types of reverse mortgages?

Yes. Most reverse mortgages today are insured by the Federal Housing Administration (FHA), as part of its Home Equity Conversion Mortgage (HECM) program. If you apply for a HECM loan, you can choose from the following options:

  1. Payment of loan proceeds.You can receive loan money as a line of credit, monthly installment, a combination of these, or a lump sum.
  2. Interest rate.You can choose between a fixed interest rate and an adjustable interest rate. Fixed interest rates are only available with the lump-sum payment option. 

The HECM program also offers two special-purpose loan options for special circumstances:

  1. HECM for Purchase.HECM for Purchase allows you to purchase a home using money from a reverse mortgage loan.
  2. HECM Refinance.HECM Refinance allows one HECM loan to be converted into another HECM loan. The typical reason for refinancing is to get a lower interest rate, if one is available, or to borrow more cash, if the home value has gone up.

 

6. If I take out a reverse mortgage loan, does the bank own my home?

No. When you take out a reverse mortgage loan, the title to your home remains with you. Just like a traditional mortgage, you are borrowing money and using your home as security for the loan. You must continue to pay for repairs, property taxes, and homeowners insurance or the bank can foreclose on the home.

If you move out, sell the home, or the last surviving borrower dies, you or your estate will need to repay the loan. The loan balance will include the amount you have received in cash, plus the interest and fees that have been added to the loan balance each month. To repay the loan, you or your heirs will probably have to sell the house. If there is money left over from the sale after repaying the loan, you or your heirs can keep the difference.

7. What is the difference between a Home Equity Loan and a Home Equity Line of Credit?

With a home equity loan, you receive the money you are borrowing in a lump sum payment and you usually have a fixed interest rate. With a home equity line of credit (HELOC), you have the ability to borrow or draw money multiple times from an available maximum amount. Unlike a home equity loan, HELOCs usually have adjustable interest rates.

If you are having trouble paying your mortgage, before taking out a home equity loan or home equity line of credit, talk to a housing counselor to see if there may be other options that make better financial sense for you. Call the CFPB at 1-855-411-CFPB (2372) to be connected to a HUD-approved housing counselor today.