Nine Questions to Ask Your Mortgage Lender

When you step into the office of a mortgage lender, make sure you know exactly what you are being offered. If you don't understand all of the rates, fees, schedules and fine print that come with your loan, you could be setting yourself up for some serious financial trouble down the road.

Here are nine questions you should ask your lender, or prospective lenders, before you make your application:

1. What type of loan are you offering?

There are a number of loan instruments available to consumers, and it is important to understand which one you are being offered. Discuss the pros and cons of each type with your lender, and be wary of those who claim one size fits all. Loan types include:

• Fixed rate: The interest rate is fixed over the life of the loan, as is the size of your monthly payment.

• Adjustable rate: The interest rate changes according to a predetermined schedule, and your monthly payments adjust accordingly (usually upward).

• Interest only: Each monthly payment goes toward the interest you have incurred, with none decreasing your principal. This means your loan never gets any smaller.

• Negative amortization: Each monthly payment is less than the interest you owe. This means that your loan is actually getting larger as the unpaid interest gets added to the original loan's principal.

2. What are the loan's interest rate and APR?

Loan offers always come with an interest rate expressed as a percentage. This is the rate used to calculate how much interest you will pay over the life of the loan. The annual percentage rate, meanwhile, represents the overall cost of the loan--including the interest rate as well as the closing costs and any other fees. The bigger the difference between the interest rate and the APR, the more fees and potentially hidden costs of the loan.

3. What are the rate schedules and caps?

If you have an adjustable rate mortgage, make sure you know exactly when the first rate adjustment will occur; most are scheduled to reset at one, three or five years into the loan.

Understand how frequently your rate resets (generally each year) and how high it can go. By law, most ARMs have a lifetime cap that limits how high the interest rate can climb. But you should also ask whether your loan has periodic caps, which limit the size of the increase at each of the scheduled resets.

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