Frequently Asked Questions (FAQ)

1. What are points and why should I pay any?

A point is 1% of the loan amount. Unfortunately, some companies will call this an origination fee, application fee, or some other name and infer that it is a standard charge for doing the loan. The fact is, all loans can be done with the borrower paying NO points. Some companies do not allow their loan officers to do zero point loans. Whether or not a borrower pays any points should only depend on their personal goals with regard to their plans for the property.

If you pay a point, you should get not less than ¼ percent better on your interest rate. This ¼ percent will create a certain savings depending on the loan amount. A better way of thinking about a point or points is to think of it as money invested. Then your question can be “ what do we get for our investment?” If you divide the money saved per month due to the lower interest rate into the amount invested, you will find that it takes about 5 years to recoup your investment. Obviously, if you are not sure if you will own the property for at least 7 or 8 years, it is not worth your while to pay any points. On the other hand, if you are recouping your investment in 5 years, that is about a 20% return per year. After the 5th year, you will be receiving a 20% or so return on your investment with no risk. For those who plan to own their property for a long time paying 1 point or more will make good sense. For those who are unsure about their plans for the next at least 5 years, it makes absolutely no sense to pay any points.

2. How can I guarantee my interest rate?

You can guarantee your interest rate by “locking” your loan. When you lock your interest rate, you guard against rates rising during the time of your escrow period. The lender commits the money at that locked rate and takes the risk that rates could rise. Your only risk is that rates could go down during the escrow period and you might have received a lower rate. When rates are below 8% it is usually a good idea to lock as soon as possible. In our experience since 1979, many more people have benefited from locking their rate when rates are under 8% than those who have not. There is no occurrence that has caused rates to drop significantly during a normal escrow period. However, we have seen rates rise 1 to 2% in a relatively short period of time. We usually advise 1st time buyers to lock in their rate especially if their qualifications are close to guard against an increase in rates disqualifying them.

3. Why do I have to pay for title insurance?

The answer is, you don’t. There is no law that dictates you must pay for title insurance. There are two kinds of title insurance. The CLTA policy is the one that guarantees that you get clear title to the property in a purchase. Everyone wants this insurance against unknown encumbrances or liens. The ALTA policy is required by all lenders to protect their interest in the property. In California, it is customary for the seller to pay for the CLTA policy and the buyer to pay for the ALTA policy.

California is a “trust deed” state, meaning that the lenders interest is secured by a deed of trust. On purchase money transactions of 1 to 4 units the lenders only recourse in the event of default of the borrower is to repossess the property (with the exception of their proving fraud). Therefore, the lender requires that the title company search court records etc. to determine that there are no judgments or personal liens by the IRS or any others that could result in the taking of the property when it is recorded in the borrowers name.