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FAQs

At Indigo Colorado we specialize in VA Home Loans, thus we have put together a helpful library of VA Home Loan FAQ's to assist you on your journey.

What exactly is a mortgage?

A mortgage is the loan for your home. It is a legal contract between a lender and the homebuyer or property buyer. The property itself is used as the collateral (or guarantee) to secure the loan; that means that if the buyer does not make the home loan payments to the lender that were agreed upon, the lender can take possession of the property which is called repossession.

What is a mortgage refinance?

A refinance, also known as a Re-Fi, is a type of mortgage loan in which the borrower uses the money from a loan to pay off an existing home loan. Borrowers often refinance to extend or to shorten the term of their current home loan, to obtain a lower interest rate and reduce their monthly payment, or to take money out of their home’s equity.

What is equity?

Equity is the ownership interest that the buyer accumulates in their home or property as their loan is paid down. Think of it as the difference between what your home is worth versus the amount remaining on your mortgage.

What is a home equity loan?

A home equity loan allows the homeowner to obtain a cash loan based on their property’s present value minus the mortgage loan amount that is still being paid off. Homeowners might apply for this type of loan so that they may pay for expenses like home renovations, consolidation of credit card or other debt, or things like college tuition or other long-term expenses.

What is a home equity line of credit (HELOC)?

A home equity line of credit, also known as HELOC, allows homeowners to access an open line of credit, where only the unpaid balance accumulates interest. HELOCs offer flexibility by granting borrowers access to money as needed such as for home renovations over a period of time.

What is a second mortgage?

A second mortgage is a type of refinancing that allows the homebuyer to obtain a second loan on their home that is subordinate to their first home loan. A second mortgage such as a home equity loan, is often offered at a higher interest rate.

What is a reverse mortgage?

A reverse mortgage allows older homeowners to use some of their home's equity as cash. Even if the homeowner may still be residing in the property, a reverse mortgages does not require the homeowner to pay off their home loan until they no longer live at that residence primarily.

What is a mortgage lender?

A mortgage lender is a financial institution that offers potential homeowners funds over a long-term so that they may pay off their mortgage. Borrowers must make monthly payments to their lender that include principle, interest, and any additional lender fees.

What is the difference between a mortgage broker and a mortgage banker?

A mortgage broker is an intermediary who assists in matching borrowers with appropriate lenders according to their needs and standards; they do not work for just one financial institution so a mortgage broker may be able to present various financing options to the prospective homeowner. Mortgage brokers organize approximately 80% of all transactions between buyers and lenders. Mortgage bankers actually finance and distribute the largest amount of home loans in comparison to other lenders but typically can offer only that company's options.

What is a mortgage principle?

The mortgage principle refers to the amount of money that the homeowner borrows from the lender, not including the cost of the interest.

What does APR mean?

APR refers to the annual percentage rate which is used to calculate the total cost of your cash advance loan by considering all fees charged by your lender as well as your loan principle and interest.

What is a fixed rate mortgage?

A fixed rate mortgage is a home loan with a fixed and consistent interest rate and monthly payments that remain the same through the duration of the loan.

What is an adjustable rate mortgage?

An adjustable rate mortgage, also known as an ARM, has monthly payments that fluctuate as the market’s interest rates fluctuate. These loans may offer a lower interest rate in the first year or so, but then the rate can adjust to increase to current market rates.

What is an interest-only mortgage?

An interest-only mortgage loan requires that the borrower pay only the interest on the principle in monthly payments for a set amount of time. By paying only the interest, little equity accumulates in the property.

What is an amortized mortgage?

An amortized mortgage is a loan that is paid in installments, which are made up of both principle and interest, and is paid off, or amortized, over a set period of time.

How is the loan-to-value (LTV) ratio calculated?

To calculate the loan-to-value (LTV) ratio of your home, the market value of your home is divided by the amount of your home loan.

What are lender fees?

Lender fees typically range from 2% to 5% of the loan and cover items such as the cost of the property appraisal, the document preparation, application costs, and other associated costs.

What is the Truth in Lending Act?

The Truth in Lending Act is a federal law to protect homebuyers and property buyers. It was enacted as part of the Consumer Protection Act and mandates that lenders reveal all information to the buyer and disclose in detail all costs associated with the purchase.

Is there a minimum down payment for a mortgage?

For conventional loans that are not backed by a government agency, down payments are usually around 5% to 20%. Eligible veterans may have the option of no-down payment for a VA mortgage loan. Don't assume that the 5% to 20% is mandatory though as there are many options in today's mortgage marketplace.

What is a rate lock?

Fluctuations in the financial market can affect the interest rate on a loan. A rate lock protects the homebuyer from these fluctuations, particularly if their home search is taking more time. The homebuyer has the option to lock the interest rate range or not, which sets the interest rate offered to you for a certain amount of time.

What is the difference between “locking” and “floating”?

Locking provides a specified time period for protection from financial market fluctuations that affect interest rates. It sets the range of pricing but does not guarantee that an exact rate will apply. Floating means the rate will fluctuate as the market fluctuates. However, if interest rates drop during the protection period, the homebuyer can lock in at a lower rates if they choose to do so.

What is PMI?

PMI stands for private mortgage insurance which is required when the buyer has less than 20% equity in their home or a less than 20% down payment for their new property. PMI offers the lender protection if the buyer is unable to make the loan payments or defaults on the loan.

What is the difference between preapproval and pre-qualified?

Being pre-qualified through a mortgage lender gives the buyer the approximate amount they can borrow in their loan. Generally, the person provides their income, current amount of debt, and the amount they are able to pay as a down payment to the lender. The lender can then calculate an approximate value of home that the buyer can afford. Being pre-approved through a financial institution, lets the buyer know their specific maximum loan amount that can be borrowed. The buyer who is pre-approved may have more negotiating power than a buyer who is only pre-qualified when it comes to the real estate market.

What is the difference between a second home and an investment property?

If a home owner purchases a second home that is more than 55 miles away from their primary residence and is not using it to generate income, then it is considered a second home. If the second home is within 55 miles of the buyer’s primary residence, it is considered an investment property. If the second home is being used to generate income, then it is considered and investment property.