Most of us will only buy a few homes during the course of our life. Combine this fact, with the fact that home mortgages are often the largest single debt that most people carry, and you can see why choosing a mortgage lender can be nerve wracking. In what is often the biggest business transaction of your life, there are certain questions that you can ask that will better help you understand your loan and negotiate the best deal.
What type of loan do you advise?
There are many different types of loans, and the competent lender should help you understand each one, and explain the benefits and drawbacks of each. Adjustable rate mortgages are often touted for low interest rates, but they are not the best choice for everyone. The rate typically remains low for a year or two, but when it adjusts up, the amount of the monthly payment can increase enough that the home owner has trouble meeting their monthly obligations. Fixed rate loans have a fixed interest rate over the life of the loan. The fixed rate is often a little higher than the adjustable rate mortgage rate, but you have the advantage of knowing each month exactly how much your payment is. If rates drop substantially, you can always refinance your loan. Interest only loans are not as common. In interest only loans, the monthly payment is only the amount of interest on the mortgage. These types of loans are best suited for people who have high and steady incomes, and plan on living in a home long enough for it to substantially increase in value. At the end of the loan term, the home owner will either refinance the loan, or pay the balance of the loan in full. If the home has not appreciated during the loan term, it can be difficult to refinance.
What are interest rates and annual percentage rates?
A qualified mortgage lender should be more than willing to disclose what their interest rates are for different types of loans, as well as the annual percentage rate. They should also be willing to run the numbers for you so that you can see exactly how the different percentage rates affect the amount of your monthly payment.
How much will the loan cost?
The qualified mortgage lender should provide you with a good faith estimate. This is an estimate on the amount of money that it will cost to close your loan. This good faith estimate is not an exact amount, but should be very close, and include appraisal fees, title insurance and any other fees that the lender requires to close the loan. If the lender is unwilling to give you a good faith estimate, it is likely that there will be some surprises on closing days. Some disreputable lenders pad the closing costs with administrative fees that are unnecessary and add up quickly. Before you commit to one lender, you should see a copy of the good faith estimate that lists every fee you will be expected to pay to close on the loan.
Is there any prepayment penalty?
Although not as common as it once was, some lenders charge a fee if you pay off your mortgage early. While you may think that this does not apply to you, if the lender has a prepayment penalty it can be enacted even if you refinance your loan. It is important to confirm with your prospective lender that there are no penalties for prepayment of the mortgage.
How long will it take and what if interest rates change?
Closing can take a week or a month, or even longer. It is important to ask your mortgage lender how long they anticipate it will take from the start of the process to closing. You should also ask what happens if interest rates change during the closing process. Ideally, you will lock in your rate at the qualification phase, and if mortgage rates increase, you keep this rate, but if they drop, your lender will “float” your rate down with them.
How much of a down payment is required?
Down payments can vary greatly, depending on your credit history, the appraised value of the home and even market conditions. Never assume that you know, ask the lender what percentage of the loan amount you should have on hand for a down payment. This is often negotiable, but you need to know early in the process if you will have enough money to cover the cost.
How to qualify?
Ask the mortgage lender early in the process what the qualifications are to qualify for a loan. In addition to a solid job history, you will probably be required to have several years’ worth of income tax statements, as well as bank statements and information on any stocks, savings bonds or other investments. Even if you do not plan on cashing these to buy your home, they do count as assets and make it easier to qualify for a loan.