Home Financing & Mortgage Guide for Monterey Peninsula Buyers

For many buyers, financing is one of the most important—and sometimes most confusing—parts of purchasing a home.

A mortgage affects much more than whether you can buy the property. The type of loan, interest rate, down payment, loan term, closing costs, mortgage insurance and lender requirements can substantially affect both your monthly payment and the long-term cost of ownership.

Financing can be particularly important on the Monterey Peninsula, where buyers frequently encounter jumbo loans, second-home purchases, condominiums, luxury properties, self-employed borrowers, complex investment income and properties with characteristics that do not always fit conventional underwriting easily.

This guide explains the major parts of a residential mortgage, how the loan process works and what Monterey Peninsula buyers should understand when comparing financing options.

What Is a Mortgage?

A mortgage is a loan secured by real property.

The borrower typically agrees to repay the amount borrowed, plus interest, over a specified period. The property serves as collateral for the loan.

A mortgage payment can include several components, and the total monthly housing expense may be substantially higher than principal and interest alone.

Principal & Interest

Principal is the amount borrowed.

Interest is the cost charged by the lender for lending that money.

With a typical amortizing mortgage, each monthly payment includes a combination of principal and interest. Early in the loan, a larger share of the payment generally goes toward interest. Over time, more of the payment typically goes toward reducing principal.

Your Mortgage Payment May Include More Than Principal & Interest

Depending on the loan and escrow arrangement, the monthly payment to the loan servicer may also include amounts for:

• Property taxes
• Homeowner insurance
• Mortgage insurance
• Other required escrowed items

HOA assessments are generally separate from the mortgage payment even though they are an important part of the buyer's total housing cost.

Fixed-Rate Mortgages

With a fixed-rate mortgage, the interest rate remains the same for the life of the loan.

That means the scheduled principal-and-interest payment generally remains stable throughout the loan term.

The total monthly amount can still change if items such as property taxes, insurance or mortgage insurance change.

Potential advantages of a fixed-rate mortgage include:

• Predictable principal-and-interest payments
• Protection from future interest-rate increases
• Simpler long-term budgeting

A fixed-rate loan may appeal to buyers who expect to hold the property for many years and value payment predictability.

Adjustable-Rate Mortgages

An adjustable-rate mortgage, commonly called an ARM, has an interest rate that can change according to the terms of the loan.

Many ARMs begin with an initial period during which the rate is fixed. After that period expires, the rate may adjust periodically based on an index plus the lender's specified margin, subject to applicable adjustment limits or caps.

An ARM can sometimes offer a lower initial rate than a comparable fixed-rate loan, but borrowers should understand how much the rate and payment could change later.

Questions to Ask About an Adjustable-Rate Mortgage

Before choosing an ARM, understand:

• How long is the initial fixed-rate period?
• When can the first adjustment occur?
• How frequently can the rate adjust afterward?
• What index is used?
• What margin is added to the index?
• What are the periodic adjustment caps?
• What is the lifetime rate cap?
• Could the rate decrease if market rates decline?
• What could the maximum monthly payment become?

An ARM may make sense for some buyers, but the initial rate should not be evaluated without understanding the future adjustment provisions.

Fixed or Adjustable: Which Is Better?

There is no universally better choice.

A fixed-rate mortgage may be attractive when payment stability is the primary objective.

An adjustable-rate mortgage may be worth considering when the buyer expects a shorter ownership period or when the initial economics are attractive enough to justify the future interest-rate risk.

The decision should reflect:

• How long you expect to own the home
• Your tolerance for payment changes
• The difference between fixed and adjustable rates
• Loan fees
• Potential future refinancing
• Your overall financial plan

Loan Term

The loan term is the period over which the mortgage is scheduled to be repaid.

A longer loan term generally produces a lower required monthly principal-and-interest payment than a shorter term using the same loan amount and interest rate.

However, extending repayment over more years can increase the total amount of interest paid over the life of the loan.

A shorter-term mortgage generally produces higher monthly payments but can reduce total interest expense if the borrower keeps the loan for its full term.

Interest Rate vs. APR

The interest rate is the rate used to calculate interest charged on the principal balance.

The annual percentage rate, or APR, is designed to reflect the interest rate plus certain additional loan costs in a standardized way.

APR can therefore be useful when comparing loans, but it should not be considered in isolation.

Compare:

• Interest rate
• APR
• Points
• Lender fees
• Monthly payment
• Cash required at closing
• Loan term
• Whether the rate is fixed or adjustable

What Are Mortgage Points?

A point generally equals one percent of the loan amount.

Buyers may encounter points paid in connection with obtaining a particular interest rate.

Paying additional points may reduce the interest rate, while choosing fewer or no points may result in a higher rate.

Whether paying points makes financial sense depends partly on how long you expect to keep the mortgage.

A buyer planning to sell or refinance relatively soon may evaluate that tradeoff differently from a buyer expecting to keep the same mortgage for many years.

Down Payment

The down payment is the portion of the purchase price that is not financed through the mortgage.

A larger down payment can potentially:

• Reduce the loan amount
• Reduce the monthly payment
• Improve loan qualification
• Reduce or eliminate certain mortgage-insurance costs depending on the loan

But buyers should also consider the importance of retaining liquidity after closing.

Putting every available dollar into the down payment may leave insufficient reserves for maintenance, repairs, remodeling and other financial priorities.

Mortgage Insurance

Mortgage insurance generally protects the lender—not the borrower—against certain losses if the borrower fails to repay the loan.

It can allow buyers to qualify for financing with smaller down payments, but it increases the cost of the mortgage.

The type and cost of mortgage insurance depend on the loan program.

Private Mortgage Insurance

Conventional borrowers making smaller down payments may be required to obtain private mortgage insurance, commonly called PMI.

PMI requirements, pricing and cancellation rules depend on the loan and applicable law.

Do not assume that every loan with a particular down payment percentage will have identical mortgage-insurance terms.

FHA Mortgage Insurance

Federal Housing Administration loans generally involve mortgage-insurance charges established under the FHA program.

The structure differs from conventional PMI and can include both upfront and ongoing mortgage-insurance costs depending on the loan.

VA Financing

VA loans for eligible borrowers generally do not use conventional monthly PMI, but they can include a VA funding fee unless an exemption applies.

VA financing also has property and appraisal requirements that differ in some respects from conventional financing.

Conventional Mortgages

A conventional mortgage is a home loan that is not insured or guaranteed by a federal government housing program such as FHA or VA.

Conventional loans can include both conforming and jumbo financing.

Conforming vs. Jumbo Loans

A conforming mortgage meets applicable size and underwriting parameters associated with the conventional secondary mortgage market.

A jumbo loan exceeds applicable conforming loan limits or otherwise falls outside standard conforming parameters.

Because Monterey Peninsula home values are relatively high, jumbo financing is common in Carmel, Pebble Beach, Pacific Grove, Monterey and Carmel Valley.

Jumbo Mortgage Underwriting

Jumbo-lending requirements vary substantially among financial institutions.

Depending on the lender and borrower, jumbo underwriting may require:

• Larger down payments
• More substantial reserves
• More extensive income documentation
• Higher credit standards
• Additional asset verification
• More detailed appraisal review

This variation is one reason higher-value buyers may benefit from comparing multiple lenders rather than assuming all jumbo programs are similar.

Second-Home Mortgages

Second-home purchases are common on the Monterey Peninsula.

A lender may apply different underwriting standards to a second residence than to a primary residence.

Potential considerations include:

• Down payment
• Existing housing obligations
• Cash reserves
• Occupancy requirements
• Number of financed properties
• Property type

Tell the lender accurately how you intend to use the property.

Investment Property Financing

Financing for a property purchased primarily as an investment can differ from owner-occupied and second-home financing.

Lenders may apply different:

• Down-payment requirements
• Interest rates
• Reserve requirements
• Income calculations
• Property requirements

Multi-family homes and properties involving expected rental income can also require specialized underwriting.

Mortgage Preapproval Comes Before the Property

Most financed buyers benefit from establishing financing before beginning a serious home search.

A meaningful preapproval can help determine:

• Likely loan amount
• Estimated purchasing range
• Required down payment
• Potential loan program
• Documentation issues
• Whether jumbo financing may be required

For a detailed explanation, see our Mortgage Preapproval Guide.

The Mortgage Application

Once you are ready to pursue a specific mortgage, the lender begins the formal application and underwriting process.

For most covered consumer mortgages, once a lender receives the six pieces of information that constitute an application for Loan Estimate purposes, the lender generally must provide a Loan Estimate within three business days.

Those application elements generally include:

• Your name
• Your income
• Your Social Security number to obtain a credit report
• The property address
• An estimate of the property's value
• The desired loan amount

The lender may then request additional documentation as the application moves forward.

The Loan Estimate

The Loan Estimate is a standardized federal disclosure used for most covered residential mortgages.

It provides important information about the loan the lender expects to offer, including items such as:

• Loan amount
• Interest rate
• Monthly principal and interest
• Estimated taxes and insurance
• Mortgage insurance if applicable
• Estimated closing costs
• Estimated cash to close
• Whether the rate is locked
• Whether the loan has an adjustable rate
• Whether certain potentially risky features are present

Receiving a Loan Estimate does not mean the mortgage has been finally approved.

Use Loan Estimates to Compare Lenders

Because covered lenders use the same standardized form, Loan Estimates provide a useful framework for comparing competing loan offers.

When comparing them, look carefully at:

• Loan type
• Loan term
• Interest rate
• APR
• Points
• Lender fees
• Mortgage insurance
• Monthly payment
• Estimated closing costs
• Cash to close
• Rate-lock status

Do not assume the loan with the lowest advertised interest rate is automatically the least expensive loan.

Shop More Than the Interest Rate

Lenders may differ in both pricing and execution.

For a Monterey Peninsula purchase, also consider:

• Experience with jumbo loans
• Experience with second homes
• Condominium lending
• Ability to handle complex income
• Appraisal turnaround
• Responsiveness during negotiations
• Ability to meet the contractual closing date

A slightly lower rate provides little benefit if the lender cannot perform within the requirements of the transaction.

Rate Locks

Mortgage interest rates can change while the loan is being processed.

A rate lock is an agreement under which the lender agrees to hold a specified interest rate for a stated period, subject to the terms of the lock.

Ask:

• Is my rate locked?
• When does the lock expire?
• What happens if closing is delayed?
• What does an extension cost?
• Can the rate change if the loan terms change?
• Is a float-down feature available if rates decline?

The Underwriting Process

Underwriting is the lender's process for determining whether the borrower and property satisfy the requirements of the proposed mortgage.

The underwriter may review:

• Credit
• Income
• Employment
• Assets
• Debts
• Down payment
• Cash reserves
• Source of funds
• Property appraisal
• Title information
• Insurance
• HOA information where applicable

Underwriting is not simply a one-time credit-score check. It is a comprehensive review of the borrower and the collateral securing the loan.

Conditional Loan Approval

A lender may issue an approval subject to additional conditions.

Conditions might include:

• Updated bank statements
• Updated income documentation
• Explanation of a deposit
• Proof of insurance
• Additional appraisal information
• HOA documents
• Verification of employment
• Documentation of funds needed to close

This is normal in mortgage underwriting.

Why the Lender Keeps Asking for Documents

Buyers sometimes become frustrated when a lender asks for updated information that appears similar to something already supplied.

The lender may need current documentation because:

• Statements have expired
• A large deposit appeared
• Income needs clarification
• Funds moved between accounts
• The closing date changed
• An underwriting condition requires additional evidence

Providing complete documentation promptly can help keep the transaction on schedule.

Source of Funds Matters

Lenders generally need to document funds being used for the down payment, reserves and closing.

Large unexplained deposits or transfers can therefore create additional questions.

During the loan process, avoid moving large sums unnecessarily without first discussing the documentation consequences with the lender.

Do Not Take on New Debt During Underwriting

A mortgage approval is based on the borrower's financial profile.

Taking on new obligations before closing can change that profile.

Before financing a vehicle, opening a new credit line, co-signing another loan or making another substantial credit purchase, talk with your mortgage lender.

Lenders may update credit or other financial information before funding.

Changing Jobs During the Mortgage Process

Employment and income are important underwriting factors.

A job change does not automatically prevent a mortgage from closing, but it can create additional documentation or underwriting questions.

If you are considering a change in employment or compensation structure while purchasing a home, discuss it with your lender before making the change.

The Appraisal

The lender may obtain an appraisal or other valuation to evaluate the property serving as collateral for the mortgage.

The appraisal provides an independent opinion of value based on the property and relevant market information.

It is not a substitute for a home inspection.

You Generally Have a Right to Receive the Appraisal

For applications secured by a first lien on a dwelling, federal rules generally require the creditor to provide the applicant with a copy of appraisals and other written valuations developed in connection with the application.

The borrower generally does not have to pay an additional fee merely to receive the copy, although the lender can charge appropriate costs associated with obtaining the appraisal itself.

What If the Appraisal Is Low?

If the appraised value is below the agreed purchase price, the lender may base financing on the lower supported value.

Possible transaction outcomes can include:

• Buyer increasing the cash contribution
• Seller reducing the price
• Parties negotiating another solution
• Buyer proceeding under the original terms
• Exercise of contractual rights where applicable

The seller is not automatically required to reduce the price because an appraisal is low.

The purchase contract and any appraisal contingency should be reviewed carefully.

Unique Monterey Peninsula Properties Can Be Challenging to Appraise

Appraisal can be more complicated when a home has few truly comparable sales.

Examples include:

• Oceanfront estates
• Major ocean-view properties
• Golf-course homes
• Historic residences
• Large acreage
• Extensively renovated older homes
• Properties with multiple structures

Value may depend heavily on location, views, lot characteristics and quality rather than square footage alone.

Condominium Financing

With a condominium purchase, the lender may need to evaluate both the borrower and the project.

Depending on the loan program, project review can involve:

• Master insurance
• HOA finances
• Reserve funding
• Special assessments
• Litigation
• Owner occupancy
• Building condition
• Commercial uses

A financially strong borrower can still encounter financing issues if the condominium project does not meet a lender's requirements.

Properties With ADUs or Guest Units

ADUs and secondary structures can raise additional appraisal and underwriting questions.

The lender may consider:

• Whether the unit is permitted
• Whether it is legally recognized
• How it contributes to property value
• Whether rental income can be considered
• Whether the property remains eligible for the loan program

If an ADU is central to your financial analysis, discuss it with the lender early.

Rural & Acreage Financing

Carmel Valley, Cachagua, Corral de Tierra and other rural Monterey County properties can present characteristics that some conventional lenders encounter less frequently.

Examples include:

• Large acreage
• Private wells
• Septic systems
• Private roads
• Multiple residences
• Barns and equestrian improvements
• Agricultural use

Work with a lender that understands the type of property you intend to purchase.

Insurance Is Part of Mortgage Approval

A lender generally requires evidence of acceptable property insurance before funding the loan.

This is another reason Monterey Peninsula buyers should investigate insurance early.

Wooded, rural, coastal and higher-fire-risk properties may require more time to insure than a conventional urban residence.

Escrow Accounts for Taxes & Insurance

Some mortgages require or allow the borrower to make monthly deposits into an escrow or impound account for property taxes and insurance.

The loan servicer then pays those expenses when they become due.

If taxes and insurance are not included in your monthly mortgage payment, budget separately for them.

Closing Costs

Mortgage costs extend beyond the down payment.

Depending on the loan and transaction, buyer costs can include:

• Loan origination charges
• Points
• Appraisal
• Credit-related charges
• Title services
• Escrow services
• Recording
• Prepaid interest
• Homeowner insurance
• Initial tax or insurance reserves

For a detailed breakdown, see our Buyer Closing Costs & Cash to Close Guide.

The Closing Disclosure

For most covered residential mortgages, buyers receive a standardized Closing Disclosure toward the end of the loan process.

The Closing Disclosure provides final information concerning matters such as:

• Loan terms
• Interest rate
• Projected payments
• Closing costs
• Cash needed to close
• Loan calculations

Federal rules generally require the borrower to receive it at least three business days before closing.

Compare the Closing Disclosure With the Loan Estimate

Use the review period to compare the final Closing Disclosure with the Loan Estimate received earlier.

Look for changes in:

• Loan amount
• Interest rate
• Points
• Monthly payment
• Mortgage insurance
• Fees
• Credits
• Cash to close

If something is different from what you expected, ask the lender and escrow professionals to explain it before closing.

Some Costs Can Change During the Process

Not every figure on the initial Loan Estimate is guaranteed to remain identical.

Some costs may change under applicable federal rules because of changed circumstances or other permitted reasons.

If the final terms or fees differ materially from what you expected, ask for a specific explanation.

Who Is the Loan Servicer?

The lender that originates your mortgage may not be the company that collects your payments for the entire life of the loan.

A loan servicer handles functions such as:

• Collecting monthly payments
• Maintaining escrow accounts where applicable
• Sending mortgage statements
• Managing certain borrower communications

Mortgage servicing rights can be transferred after closing.

Your Rights as a Mortgage Applicant

Federal consumer-protection laws provide mortgage applicants with important rights.

Among other protections, applicants for first-lien mortgages generally have rights concerning receipt of appraisals and other written valuations developed in connection with the application.

Federal law also prohibits unlawful discrimination in credit decisions.

If you believe a lender has violated applicable consumer-protection requirements, resources are available through the Consumer Financial Protection Bureau and other appropriate regulatory or legal channels.

Ask Questions Before You Commit to a Mortgage

Before selecting a loan, make sure you understand:

• Is the interest rate fixed or adjustable?
• What is the loan term?
• What is the APR?
• Are points being charged?
• What are the lender fees?
• Is mortgage insurance required?
• What is the estimated monthly payment?
• Are taxes and insurance included?
• What is the estimated cash to close?
• Is there a prepayment penalty?
• Is there a balloon payment?
• Is the interest rate locked?
• How long does the lock last?
• What conditions remain before final approval?

Do Not Choose a Mortgage Solely From an Online Rate Advertisement

An advertised mortgage rate may be based on assumptions that do not match your transaction.

The advertised rate may assume a particular:

• Credit profile
• Down payment
• Loan amount
• Property type
• Occupancy
• Number of points

The Loan Estimate for your actual proposed transaction provides more useful comparison information.

Monterey Peninsula Financing Requires Property-Specific Thinking

A lender that is excellent for one purchase may not be the best fit for another.

The financing strategy for a conventional Monterey residence can differ substantially from financing:

• A $5 million Pebble Beach second home
• A Carmel cottage with unusual square footage
• A condominium with complex HOA insurance
• A Carmel Valley acreage property
• A multi-family investment property
• A home with multiple guest structures

Choose financing based on the borrower and the actual property—not simply on a generic advertised loan product.

Work With Your Lender & Real Estate Agent Together

Good communication between the buyer, lender and buyer's agent can be important once a property is under contract.

The buyer's agent needs to understand whether financing can meet the proposed:

• Loan contingency period
• Appraisal timeline
• Closing date
• Offer structure

The lender needs timely information about the property and contract.

When everyone communicates early, potential financing issues are more likely to be identified before they become contractual problems.

What Happens After Final Loan Approval?

As closing approaches, the lender confirms that required borrower and property conditions have been satisfied.

The buyer reviews the Closing Disclosure, signs applicable loan documents and provides the remaining funds needed to close.

Escrow coordinates with the lender regarding funding and recording.

The transaction closes after the requirements of the purchase agreement, lender, escrow and title process have been satisfied and the deed is recorded.

Start With Financial Preparation & Preapproval

If you have not yet begun the financing process, start with our Preparing Financially to Buy a Home guide.

When you are ready to begin seriously shopping, continue with our Mortgage Preapproval for Monterey Peninsula Home Buyers guide.

For help developing a Monterey Peninsula home-buying strategy, call Mark Bruno at (831) 917-8190.

Mortgage & Home Financing FAQ

What is a mortgage?

A mortgage is a loan secured by real property. The borrower agrees to repay the amount borrowed plus interest according to the loan terms, and the property serves as collateral.

What is the difference between a fixed-rate and adjustable-rate mortgage?

A fixed-rate mortgage keeps the same interest rate for the life of the loan. An adjustable-rate mortgage generally has an initial rate period followed by future rate adjustments under the terms of the loan.

What is APR?

APR, or annual percentage rate, is a standardized measure that reflects the interest rate plus certain additional loan costs. It can help borrowers compare mortgage offers but should be considered along with the rate, fees, points and other terms.

What is a mortgage point?

One mortgage point generally equals one percent of the loan amount. Points can be associated with obtaining a particular interest rate and should be evaluated based on both upfront cost and expected time in the loan.

What is mortgage insurance?

Mortgage insurance protects the lender rather than the borrower against certain losses if the borrower fails to repay the loan. It is commonly associated with smaller down payments and certain government-backed loan programs.

Do I need mortgage insurance if I put less than 20% down?

Mortgage insurance is commonly required for conventional loans with smaller down payments, but requirements depend on the specific loan program and lender. FHA and some other programs have their own mortgage-insurance structures.

What is a jumbo mortgage?

A jumbo mortgage is generally a loan that exceeds applicable conforming loan limits or falls outside standard conforming parameters. Jumbo financing is common for higher-priced Monterey Peninsula properties.

What is underwriting?

Underwriting is the lender's review of the borrower and property to determine whether the proposed loan meets applicable requirements. The review can include income, assets, credit, debt, appraisal, insurance and property documentation.

What is a Loan Estimate?

A Loan Estimate is a standardized federal disclosure used for most covered mortgages. It provides estimated loan terms, monthly payment information, closing costs and cash-to-close figures and is generally provided within three business days after the lender receives the required application information.

Does receiving a Loan Estimate mean my loan is approved?

No. A Loan Estimate describes the loan terms the lender expects to offer based on the application information at that stage. Additional documentation and underwriting are still required.

What is a Closing Disclosure?

A Closing Disclosure is the standardized form showing the final terms and costs of most covered residential mortgages. Borrowers generally must receive it at least three business days before closing.

Should I compare more than one mortgage lender?

Yes. Interest rates, points, fees, loan programs, underwriting standards and execution can differ among lenders. Comparing multiple Loan Estimates can help buyers evaluate competing options.

Does a preapproval lock my interest rate?

Usually not. A mortgage rate is typically locked through a separate rate-lock process. Ask the lender whether the rate is locked, when the lock expires and what happens if closing is delayed.

Can my mortgage be denied after preapproval?

Yes. Preapproval is preliminary. Final approval can still depend on updated financial information, underwriting, appraisal, property insurance and other lender conditions.

Can taking out a car loan affect my mortgage?

Yes. New debt can affect credit and debt-to-income calculations. Buyers should speak with their mortgage lender before taking on significant new financial obligations prior to closing.

Is an appraisal the same as a home inspection?

No. An appraisal primarily evaluates property value for lending purposes. A home inspection evaluates physical property conditions and is part of the buyer's separate due diligence.