There are some important questions that every borrower should ask his lender before deciding on a home mortgage. Finding the best home mortgage can be a tough process. Any change in interest, even if for a few points, can affect the payments by thousands of dollars. Here we take a look at seven specific items you can add to your list - “Questions to Ask Mortgage Lender.” For a first time home buyer, the answers to these questions could mean the difference between finally owning a home, or not.
Questions to Ask Mortgage Lender for the First Time Home Buyer
1. What is the interest rate?
An interest rate is the amount that lenders charge a borrower for borrowing their money and is usually expressed as a percentage. It is always good to get a low interest rate, but make sure that the lender is not quoting high closing costs to offset the low interest rate. Also, ask whether it is a fixed rate or a variable rate. In a Fixed Rate Mortgage the interest rates remain constant through out the term of the loan, where as in an Adjustable Rate Mortgage rates fluctuate over time.
2. What is the Annual Percentage Rate?
An Annual Percentage Rate (APR) takes into account the closing costs charged by the lender and spreads it over the term of the loan. It is a better tool for comparing home mortgages than taking into account the interest rate alone, especially in the case of a Fixed Rate Mortgage (FRM).
3. What will be the total closing costs?
Closing costs are the miscellaneous charges that a lender charges a borrower for processing his loan application. Lenders are required by law to give a Good Faith Estimate of the closing costs within three days of the submission of the loan application. Not all closing costs are included while calculating the Annual Percentage Rate, so always ask a lender about the items that are included in the calculation of APR.
4. Is there a prepayment penalty for paying off the loan early?
Always ask about the prepayment penalty clause before applying for the loan. Chances are, interest rates can go down in the future and the borrower will want to refinance to take advantage of the low interest rates. It is not unusual to find tough prepayment penalty clauses for sub-prime borrowers but regular borrowers can ask lenders to remove the prepayment penalty clause, if there is any.
5. What about Private Mortgage Insurance?
Private Mortgage Insurance may be necessary for borrowers who are planning to contribute less than twenty percent of the loan amount as down payment. If there is a PMI, ask the lender if the policy will automatically get canceled when equity reaches twenty-two percent of the appraised value of the home.
6. Is there a fee for locking rates?
Sometimes lenders allow borrowers to lock-in the interest rates, typically for a period of thirty to sixty days. Since the interest rates fluctuate daily, interest rates at the time of a loan application may be different from the rates prevailing at the time the loan is processed. Some lenders allow free lock-ins, others may charge for it at the time of application, during the processing or after the loan is approved. One important thing to keep in mind is that the lock-in agreement should always be in writing.
7. How much time will it take to process the loan?
Home sellers do not appreciate long waiting periods. A longer waiting period spells higher risk for them. There is always the chance that the loan application may get rejected or the house may depreciate in value during the waiting period. A promise that the loan will be processed quickly may give more bargaining power to the buyer. For the same reason, it is always a good idea to get pre-approved from lenders.
Borrowers should always shop around to get the best terms. Many of the costs related to borrowing are negotiable and they are more likely to get a better deal at the beginning of the loan application process than toward closing. Do not be afraid to pose these points from the list of “Questions to Ask Mortgage Lender.” For first time home buyers, clarifications and specific details are imperative. The loan application and approval process is a long and tedious one, and borrowers need assurance before making the investment.
1. State of California, Dept. of Corporations- https://www.corp.ca.gov/Education_Outreach/pdf/resources/mort20quest.pdf
2. U.S Dept. of Housing & Urban Development- https://www.hud.gov/offices/hsg/sfh/buying/buyhm.cfm