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Getting a mortgage
Obtaining a mortgage can be extremely overwhelming if you don't know how to compare offers and don't know what the loan terms are. This article will help you decide what to ask about a mortgage when you're comparing offers and give you an easy way to understand and compare. This will allow you to decide on the best loan available to you.
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What types of mortgages are available?
There are a variety of mortgages available today and it's important to first understand what type of mortgages the lender offers. The most popular mortgage is the fixed-rate mortgage. You can get a 10, 15, 20, 30, 40, and even 50-year fixed-rate mortgage. FHA loans, insured through the government, are also very popular. Down payments required for FHA loans are low and the FICO requirements are also much lower than required for traditional mortgages. Interest-only loans are yet another option, allowing you the option of interest-only payments and usually requiring a balloon payment at the end of the loan period.
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What is the interest rate?
The interest rate is one of the most important questions to ask about a mortgage. The interest rate is what mostly determines what you'll pay over the period of the loan. In general, the higher your credit, the lower the interest rates you'll be offered. Ask for the annual percentage rate (APR) of the mortgage interest, which includes all lender's fees. This will give you the best way to compare loan offers and should be used with an itemized list of rates and fees.
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What is the required minimum down payment?
The down payment required is usually between 5 and 20%. Generally, the terms and interest rate of your loan will be based on your down payment, meaning that you can often get better terms if you put more money down. If your down payment is low you may be required to pay for private mortgage insurance (PMI).
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What are the qualifying guidelines?
The guidelines for your mortgage are things like income, credit history, any liabilities, and assets. Often times, first time homebuyers programs and other government-sponsored programs have easier qualifying guidelines to fulfill so this is important to ask about a mortgage.
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What documents will I need to provide?
Know ahead of time what documents you'll need to provide for the application process. You'll usually need to provide proof of income and any assets. If you have very good credit you may be able to get a no-documentation loan but expect to pay a higher interest rate and need a large down payment.
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Are any terms, fees, or closing costs negotiable?
Asking if any terms are negotiable is very important to ask about a mortgage. Knowing if any terms or closing costs can be negotiated can potentially save you thousands of dollars.
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What about discount and origination points?
Sometimes, lenders will charge pre-paid interest points to offer you a lower interest rate. Othertimes, points offered may have no benefit whatsoever. Getting the details of origination and discount points will give you a good way to compare offers.
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What are the closing costs?
Asking for the closing costs is another important thing to ask about a mortgage. Every mortgage will come with fees for services provided by the lender. It's important to know at the beginning what these closing costs will be as you will be responsible for them after you accept the loan. Expect the closing costs to be around a few thousand dollars.
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When can I lock in the interest rate?
It's important to realize that the interest rate quoted to you may change between the time you apply and the time of closing. Ask about locking in the interest rate for a certain amount of time and find out if any fees apply to this.
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Will I need to buy private mortgage insurance?
Private mortgage insurance (PMI) is usually required if your loan is more than 80% of your home value, or if your down payment is less than 20%. This will be an extra cost to you that you need to prepare for so be sure to know this when you ask about a mortgage.
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Is there a prepayment penalty?
According to Bankrate.com, some penalties for prepayment of your loan are 1% of the entire loan amount, some are equal to six months of interest, and some only apply when you refinance or reduce the principle amount of the loan by more than 20%. Others are only charged when you eventually sell your home. Finding out the prepayment penalty terms is a very valuable piece of information and something you should ask about a mortgage. You'll probably find that you can get a lower interest rate if you agree to a prepayment penalty. It's up to you to decide if this is worth it to you.
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How long will the loan application process take?
This information is something you should ask about a mortgage to find out, primarily, how long you'll need to lock in your interest rate and terms. If a lender says that the process will take about three weeks, assume at least 6 and try to lock in your rates for that long.
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How can I speed up the application process?
Usually a lender will tell you that you can speed up the application process by giving completely accurate information and being upfront about credit problems. Make sure all information is up to date, such as your current job and salary and if you decrease or increase your debt.
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Why to ask these questions
Getting a mortgage and buying a home is one of the most nerve-wracking and exciting times of your life. Asking these questions and being prepared will not only ensure you understand what you're undertaking and help the process goes smoothly, it will help you get the best rate you can. These questions will help you decide which loan terms to accept and help you decide what's most important to you.
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Weintraub, Elizabeth. "Mortgage Loan Types." About.com. 19 March 2009. http://homebuying.about.com/od/financingadvice/qt/0507loantypes.htm
Glick, M. "Field Guide to Getting a Mortgage." Realtor.org. May 2008. http://www.realtor.org/library/library/fg323
"10 Questions to ask when applying for a mortgage." Bankrate.com. 15 March 2004. http://www.bankrate.com/brm/news/real-estate/buyerguide2004/10-questions.asp