End Mortgage Confusion

Choosing a mortgage can be confusing. Find out the most important questions to ask before signing on the dotted line. Chances are your mortgage will be the biggest loan you will ever have. Make sure it’s also the best one for your needs by asking your lender the following 10 essential questions.

What Types of Mortgages Do You Offer?

Consider both your current and future financial requirements in order to help you choose the best mortgage for your needs. There are a variety of different loan types, but the two most common are fixed-rate and adjustable-rate mortgages (ARMs).

In a fixed-rate mortgage, the interest rate and payment amounts remain constant over the loan’s life span. Therefore, this may be a better option if you’re planning to stay in your home for a while, are buying when interest rates are low or are concerned about the possibility of a future rate increase.

In the case of an ARM, the interest rate changes periodically according to a formula based on a particular market index. If interest rates are high at the time you’re applying for a loan, or you plan to move before the first adjustment period, this may be a better option. Most ARMs adjust their rate after a specified period, usually between three months and five years.

Hybrid ARMs combine the features of both fixed-rate and adjustable-rate loans. These loans use a fraction to indicate the adjustment term; a 3/1 hybrid ARM means that the rate will stay stable for three years and readjust every year after that.

What Is the Interest and Annual Percentage Rate (APR)?

Once you’ve selected a loan type, the next important consideration is the interest rate. Your interest rate is used to calculate your monthly payments and how much you’ll pay over the loan’s term. Most ARMs are protected by caps that limit how much the interest rate can go up the first time, each successive time, or overall.

The annual percentage rate (APR) factors in other fees charged by the lender to better reflect the true cost of borrowing. However, it’s impossible to accurately compute the APR of an adjustable-rate loan. It’s therefore important to understand the adjustment frequency, the maximum annual adjustment and its interest-rate cap.

What are the Discount Points and Origination Fees?

Your lender may let you purchase discount points to secure a lower interest rate. One point is equivalent to 1 percent of the principal (e.g. three points on a $100,000 mortgage would cost $3,000). The longer you plan to stay in the home, the more it’s worth it to pay for discount points.

Origination points are administrative charges that cover the cost of the processing of your application. They don’t affect the interest rate.

What are the Closing Costs?

Be aware of the extra fees that will be included in your loan. They may include charges for appraisals and credit reports, and make sure you understand what each one is for. Ask for a “good faith estimate” of your loan’s closing costs — your lender is required by law to give you one within three days of receiving your application. Ask if they’ll guarantee it in writing and if there’s room to negotiate on the extra fees.

What are Rate Locks and When Can I Take Advantage of Them?

Rate locks or lock-ins constitute a commitment from your lender to guarantee a certain interest rate and number of points for a specific time period. Interest rates can change daily, so you may want to lock in your rate early in the negotiations if they appear to be going up.

Ask if your lender charges a fee to lock in the rate, how long it can be locked it in for and if you can get the locked-in rate in writing. Most lenders offer “lock and shop” agreements that fix the loan price for 30 to 45 days while you shop around for the right home. Sometimes, however, lenders may be willing to hold the rate for up to four months. Lock in your rate “on application” as opposed to “on approval;” otherwise, if the market rises between the date you submit your application and the date your loan is approved, you’ll have to pay the latter, presumably higher rate.

What is the Minimum Required Down Payment?

The amount of your down payment helps to determine the rate and term of your loan. Larger down payments reduce the overall cost of your loan by reducing the size of the principal and usually enabling you to obtain a lower interest rate.

If your down payment is less than 20 percent, you will probably be required to pay private mortgage insurance (PMI). You can ask your lender to cancel PMI once you’ve paid down 20 percent of the original price or once you have attained 20 percent equity in your home. Your lender and mortgage insurer are required to automatically cancel your PMI once you reach 22 percent equity if your payments are current and your mortgage was originated on or after July 29, 1999.

Is There a Prepayment Penalty?

Most lenders will charge you a penalty if you pay your mortgage off early, sometimes as much as 3 percent of the loan balance or the equivalent of six months’ interest. Paying the penalty may be worth it if you can secure a better interest rate. Ask if the penalty would still apply if you refinanced your mortgage through the same lender. Determine in advance how the penalty is calculated; some penalties decline yearly and may even disappear altogether.

How Long Will it Take to Close My Loan?

Your lender will have to assess your documentation and check your credit rating before granting you loan approval. Two weeks is typical, but the process may take significantly longer; six-to-eight-week waits are not uncommon. So be sure to apply for a mortgage far enough in advance to ensure the funds will be available at closing.

What Might Delay My Loan Application?

If your credit score is good, the pre-approval process should be relatively quick and painless. Your application may be delayed or rejected if you have bad credit, if there’s a problem with your appraisal or if information on your application is missing, incorrect or illegible.

What Documentation Will I Need?

Your lender will ask for proof of income, the name and contact information of your current employer, your social security number, information on any assets you have and an appraisal of your home’s value. Ask for a checklist to make sure you don’t miss anything. “No-documentation” loans are available, but these traditionally involve significant down payments and higher interest rates.