What is a mortgage?
How is the cost of my mortgage calculated?
What is PITI?
What is APR?
How do I find the right mortgage program for my needs?
When does an ARM payment adjust?
Can I protect against possible rising interest rates?
How is my interest rate determined?
What is risk-based pricing?
What factors can affect my loan pricing?
How and when is my price determined?
Is there a way to access the appreciation in my new home?
Is there a way to obtain a lower price?
A mortgage is a loan made to help you finance a home. Your lender advances you a certain amount of money, which you repay over a specified period.
The total cost of your mortgage is determined by a number of different factors, most notably the interest rate, discount points, and loan fees. The expenses that contribute to the cost of your loan can be expressed as the annual percentage rate (APR).
When considering loan pricing, keep in mind that rates, points and fees should be considered together. The interest rate alone only tells part of the story.
- Interest Rate - refers to the percentage of your outstanding loan balance that you pay the lender each month as part of the cost of borrowing money. Your interest rate is based on the current overall rate environment, your financial profile, and the specific features of your loan.
- Discount Points - let you “buy down” your interest rate at closing. One point equals 1% of your loan amount. The more points you pay, the lower your interest rate becomes, and the less you will have to pay each month. How much your rate decreases with each discount point you pay depends on the specific features of your loan.
- Loan Fees are up-front charges to cover the cost of originating, processing, and closing your loan. An origination point is a loan fee that equals 1% of your loan amount.
Mortgage payments are generally divided into four parts: principal, interest, taxes, and insurance. These are often referred to with the acronym PITI.
- Principal - refers to the amount of money you borrow to buy a home and to the outstanding loan balance at any point during the mortgage term.
- Interest - is the cost of borrowing money. The amount of interest you pay each month is determined by your interest rate.
- Taxes - are assessed by your local government and will likely be collected by your lender as part of your monthly payments, and then paid annually or semi-annually on your behalf, a process also known as an escrow.
- Insurance - like property taxes, are often collected by the lender in an escrow account. Insurance offers financial protection, and has two major components: property and liability.
The loan's annual percentage rate (APR) doesn't figure into the calculation of the monthly payment. The APR reflects the entire cost of your mortgage, including the quoted interest rate (used to calculate the principal and interest) and required loan fees such as loan points, fees and mortgage insurance.
Selecting the right mortgage is central to the homebuying process–that's why it's so important to understand your options. Two things to consider from the start are which loan type best fits your needs and which loan term offers the optimal repayment schedule.
Are you looking for the predictable monthly payments of a fixed-rate mortgage? Or do you need the lower up-front payments of an adjustable-rate loan? What about a combination of both? Whichever it is, we have a number of ways to help you manage your payments and help meet your financial goals.
Loan Types
Most home loans fall into one of two general categories:
- Fixed-rate mortgages have interest rates that stay the same for the entire life of the loan. They offer predictable monthly payments and can protect you from rising rates, ensuring that your principal and interest payments never increase.
- Adjustable-rate mortgages (ARMs) have interest rates that fluctuate periodically based on market conditions. The initial rate is fixed for an introductory period and is typically lower than for a fixed-rate mortgage. After that, the rate adjusts annually based on a market index, but can't exceed a predetermined adjustment cap. Because of the lower initial rate, some borrowers may be eligible for a larger loan amount with an ARM than with a fixed-rate mortgage.
Following the initial fixed-rate period, the remainder of the loan term is divided into year-long adjustment periods. At the end of each adjustment period, the interest rate may change based on the loan’s:
- Index: Published economic indices such as U.S. Treasury Securities or London Inter-Bank Offered Rate (LIBOR) that are used to direct the adjustment.
- Margin: A fixed percentage (usually 2-3%) that is added to the index at each adjustment period
- Rate Cap: The maximum amount your rate can increase or decrease per adjustment period (typically 2%) and over the life of the loan (typically 6%). This protects you in case of volatile market swings.
Yes, Winchester Home Loans offers “Extended Lock” programs specifically designed to protect our borrowers against rising interest rates.
A mortgage lock acts as an insurance policy for homebuyers in an uncertain rate environment. Most loan programs offer a lock option, which protects your loan pricing from the ups and downs of financial market fluctuations.
Because financial markets could cause rates to rise prior to closing, locks involve a certain amount of risk to the lender. Therefore, borrowers are usually required to pay some additional closing costs or fees in exchange for the security of locking.
The borrower also assumes the risk that if financial markets push rates lower, the pricing on the locked loan would still apply. Some loan programs alleviate this risk to the borrower by providing a one-time float-down option. If rates should drop during the lock period, the borrower would have an opportunity to "float down" to the lower level of rates.
While most loan programs allow borrowers to lock for up to 60 days, some borrowers need extended lock programs. Popular with borrowers who are building a new home, some programs allow locks for up to 360 days.
While locking insulates you from changing mortgage rates related to financial market conditions, it doesn’t determine the final interest rate that applies to your loan. That depends on the transaction characteristics of the loan and changes, if any, in your credit status.
- Builder Best®
Wells Fargo Home Mortgage's Builder Best® program protects homebuyers against rising interest rates while their new homes are under construction, by enabling them to lock their pricing for up to 360 days. And if the market improves during construction, homebuyers may seek a one-time float-down option at no additional cost to get the best rate. Or they may request a one-time switch to any eligible Wells Fargo Home Mortgage product and get the current rate, at no additional cost. *
* Product switch option may only be exercised within 60 days of closing
We use a system of risk-based pricing to determine the interest rate and points that we charge. This following FAQs explain the basics of risk-based pricing and provides you an understanding of our practices and procedures in determining the interest rate and costs for your mortgage loan.
Risk-based pricing is a system that evaluates the risk factors of your mortgage application and credit profile and adjusts the interest rate and discount points up or down based on this risk evaluation.
Various factors interact to adjust your loan pricing. Major factors include:
- Credit Profile
Your credit report shows how much debt you have outstanding and your history for making payments. It also contains a “credit score” that ranks your credit history. Credit scores look at five main kinds of credit information: payment history; amount owed; length of credit history; new credit; and types of credit in use. Generally, a history of nonpayment and/or late payments on any loans or debt may lower your credit score and increase your interest rate and costs. People with high credit scores consistently pay their debts on time, keep balances low on credit cards and apply for and open new credit accounts as needed.
- Property
The property you mortgage also impacts your loan pricing. Investment property, condominiums or multifamily housing tend to have a higher risk to lenders than single-family detached homes. The value of the property (usually determined by an appraisal) as compared to the amount you wish to borrow (the “loan-to-value ratio” or “LTV”) also impacts your loan price. The higher the LTV, the higher the interest rate and costs. LTV’s over 80% also usually require mortgage insurance. The price of mortgage insurance varies based on your credit profile.
- Income/Debt
The amount of your mortgage payments and total debt payments as compared to your income, (“debt-to-income ratios”) may also affect your loan cost. High debt-to-income ratios are higher risk and often result in a higher interest rate and fees.
- Other Factors
Other factors may also affect our risk, and your interest rate and fees. These factors include: previous bankruptcies, foreclosures or unpaid judgments; and the type of loan product applied for, such as adjustable rate versus fixed rate, or cash out refinance versus rate and term refinance.
Your price is determined by evaluating all of the risk factors related to your loan and determining where you fit into our risk/price range. After we perform an initial evaluation of your credit history and a review of your proposed property, we provide an estimate of your risk-based pricing.
Your risk-based pricing can change from this initial estimate if any of the risk factors discussed above change. For example, if there are changes in your credit profile or in the appraised value of the property could impact your final price.
If you choose to “lock” a rate prior to the final risk assessment, you will be locked for the interest rate range available at that time. Your actual price will be established based on where your final risk level fits into that particular interest rate range. Your final risk level is determined at time of closing, when there are no further changes to your credit profile or loan factors.
If you are not in the lowest price bracket available, you may be able to obtain a lower price if you are able to lower your risk. This in a variety of ways, such as: putting more money down to lower the LTV; finding a co-signer; clearing inaccurate items from your credit report; paying off other debt to lower your debt-to-income ratio; changing from a cash-out refinance to rate and term refinance; or changing the term on the loan.
Yes, with a Home Asset Management AccountSM. This program combines a first mortgage with a home equity line, allowing you to manage your personal finances like never before. Part or all of your down payment is used to establish an available line of credit that changes as you build equity in your home.
The Home Asset Management Account allows you to:
- Access funds with card or checks as needed after closing.Get an EquityLine ® Platinum card or use the ready-to-write convenience checks you automatically receive.
- Work with your growing asset without applying for additional loans. Equity increases are regularly reflected in your credit line based on mortgage principal payments and increases in your home value.
- Set guidelines that suit your needs and your comfort level. You can choose to decline - or limit the amount of - any increase to your line of credit.
- Plan for life events and make informed financial choices. Detailed quarterly reports track your current equity; annual reports define and illustrate any increase in your home asset position.
- Factor potential savings into your financial plan. Unlike credit cards or other installment loans, the interest you pay on your home equity line is usually tax-deductible.
- Convert all or part of your available equity to a fixed-rate loan. You pick the right time. You decide on the amount. And you pick a pay-off schedule that fits your monthly budget and is in line with your goals.
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