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.
4. Do I need to pay discount points for this rate?
By paying for discount points, you can lower the interest rate on your loan. In general, each point costs 1% of the total loan amount, and can directly reduce the interest rate by 0.125 percentage point. Some offers require the consumer to pay a certain number of points in order to qualify for an advertised interest rate.
5. How big will my down payment be?
The down payment is money you pay up front when you sign your mortgage, and is a percentage of the total price of the home. Traditionally, lenders required 20% of the purchase price. But consumers are now able to finance 90% to 100% of the purchase price through their mortgage. However, a bigger down payment often means a better interest rate. And you may have to pay private mortgage insurance (about 0.5% of your loan) if your down payment is less than 20%.
6. What are the total closing costs?
Lenders are required to provide a good-faith estimate (in writing) of the closing costs. These costs are payable on the day you close on your mortgage, and they can include such things as an appraisal fee, a title search fee, title insurance fee, origination fees (charged by the lender for providing the loan) and a slew of other administrative fees. Closing costs typically come to 2% - 4% of your total loan.
7. Is there a penalty for prepayment?
Prepayments are made in addition to your regularly scheduled monthly payments, and go directly toward paying down the principal of your loan. Prepayment penalties may kick in if you refinance, make a prepayment before a certain time or lower your principal by more than a set amount, such as 20%. The penalties can be stiff, too -- sometimes as much as six months' worth of interest.
8. How much time is required before I can close on a home?
Once you have chosen your home, your lender must verify all of the information in your loan application and complete certain tasks, such as a title search and appraisal. The whole process can take as little as two weeks, but can stretch upward of 30 to 45 days if things get busy.
9. What else should I know?
This question won't necessarily protect you from less-ethical lenders, but it may remind honest lenders of items they forgot to explain.
Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.