10
questions to ask your mortgage lender
So you’ve requested a mortgage and received three or four
home loan offers. Now what? Here are the most important
questions to ask each lender.
- What is the interest rate?
This is the most obvious question. The interest rate is used
to calculate your monthly payments, and it will determine
how much you’ll pay over the life of the loan. But
you’ll need to understand more than simply the quoted
rate. A good benchmark for comparing offers is their annual
percentage rate (APR). This figure combines the interest
costs and other fees charged by a lender over the life of
the loan, and expresses them as a yearly percentage. Make
sure to also ask for an itemized list of what’s included
in each APR calculation, so you know you’re making a fair
comparison, as some lenders don’t include all of their
fees in the calculation.
- Will the interest rate change over the life of the
loan?
In the case of a fixed rate mortgage, the interest rate will
remain the same for the entire term of the loan. Adjustable
rate mortgages, however, have interest rates that change
periodically. If you’re considering an adjustable rate
mortgage, make sure you understand what the adjustment
period is -- that is, how often the rate will change
(usually annually). Also, ask what the index and margin are
that will determine your rate, and find out what caps will
protect you from large rate increases. You can request a
chart showing the past performance of the index the rate is
based on, which will give you an idea of the rate swings
other borrowers have experienced in the past with the same
mortgage.
- Will I be charged points?
A lender may offer to lower your rate if you pay discount
points up front. One point is equal to one percent of the
principal -- two points on a $150,000 mortgage, for example,
will cost $3,000, and might lower your rate by 0.5 percent.
Lenders may also charge origination points, which are an
administrative fee for processing your application and do
not affect the interest rate. Make sure you understand which
type you are paying for.
- What are the closing costs and other fees?
Ask each lender for a good
faith estimate of their closing costs. (Lenders are
required by law to provide one within three days of your
application.) Take the time to go through each estimate
carefully to be sure you understand what each item means.
This is important when comparing offers as lenders sometimes
use different terminology for the same item.
- Will you lock-in the interest rate?
A lender may allow you to lock-in the interest rate and
points quoted in your offer for a specific period of time,
often 30 to 60 days. This will protect you if rates go up
during the time it takes to process your application. Ask
what date the lock-in becomes effective and whether there is
an additional fee involved -- and get the agreement in
writing.
- How will my down payment affect the cost of the
loan?
Some lenders require only a very small down payment of 3 or
5 percent, and some even offer zero-down-payment loans. But
these may carry significant costs to offset their inherent
risk. Typically, if your down payment is less than 20
percent, the lender will require you to pay for private
mortgage insurance (PMI). On the other hand, you may be able
to reduce the cost of your loan, or at least improve the
terms, by making a larger down payment.
- What documentation do you require?
Lenders will ask you to provide a bundle of personal
information, such as your income, employer, social security
number, information about your assets and an appraisal of
your home. Ask for a checklist so your application is not
delayed by missing paperwork.
- What are the payment terms?
Ask each lender what method of payment they require, such as
sending back a coupon with a check or arranging an automatic
withdrawal from your bank. Determine whether there is a
grace period (typically a week or two), and ask about late
payment fees.
- Can I pay the loan off early?
Chances are you may want to refinance your mortgage before
the term is complete. So check whether a lender will charge
you a prepayment penalty for doing so. Some may also charge
a fee for paying down a substantial portion (more than 20
percent) of the principal before it is due. In many cases,
prepayment penalties decline each year, and may eventually
disappear.
- How long will it take to close the loan?
Processing a mortgage application can be time-consuming. Ask
each lender how long they expect it will take to review your
documentation, check your credit rating and approve your
loan. A minimum of two weeks is typical, though it is not
unusual for it to take six to eight weeks to close a
mortgage.
- What might delay the process?
Ask each lender what information -- employment, marital
status, other outstanding debts -- they will be checking,
and make sure you advise them of any changes in these areas.
You can also head off problems by checking your own credit
file a couple of months before shopping for your mortgage.
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