The largest undertaking in buying a home is making the commitment to a mortgage. It is vital to find the most affordable and desirable mortgage offer available to you. Before authorizing a mortgage lender to initiate a loan in your name, be sure to fully understand exactly what their loan requires and offers. If you aren’t enthused with the offers presented to you, continue shopping. Only you know what you can and will be able to afford. Listen to any advice offered and ask for assistance if you need help in understanding the mortgage terms before signing your contract.
Here are five questions you should consider asking your potential lenders:
- What Discount Points and Origination Fees can they offer you?
Mortgage points are fees you’ll pay at closing in order to reduce the interest rate on your mortgage. This enables a lower monthly payment. Each point is equivalent to one percent of the amount of your loan. (For example: 3 points on a $100,000 mortgage would cost $3,000.) Your points are also tax deductible, even if the seller assists in paying for the points.
Origination fees are charges from the lender for processing the loan application. They’re usually quoted between .5 and 1 percent on the total mortgage.
- Is there a prepayment penalty?
A prepayment penalty is a fee imposed by lenders if a homebuyer pays off all, or a large portion of the loan early. Paying additional principal on your monthly payments do not normally result in prepayment penalties. If a prepayment penalty is listed on your loan, ask your lender to verify the terms. It would be best to have them provide a similar loan quote without a prepayment penalty in place, to compare costs.
- Which type of loan best suits your situation?
Fixed rate mortgages: These types of loans offer a fixed interest and mortgage payment remaining the same throughout the duration of the loan. They’re usually slightly more expensive than an adjustable rate loan, however they offer the best payment stability. These loans are the best option if you intend to remain in the home at least ten years. The only real downfall to this type of loan is having to refinance in order to lower your interest rate.
Adjustable rate mortgages: These mortgages offer a fluctuating rate which adjusts at specific times throughout the life of the loan. Your monthly payment may fluctuate, depending on the current market trends. These loans work best if you intend to stay in your home a short amount of time, with the intention of selling before the ARM inflates. The risk to consider: as you continue to make payments and your balance decreases, your monthly payment may increase, if the market trends escalate.
Interest Only loan: These loans offer fixed or adjustable rates, with the option of paying interest only on the loan for a specific timeframe. Once the interest-only period comes to an end, monthly payments towards your loan will increase. Your loan balance does not decrease until your monthly payments start including principal, as well as interest. These loans are best for families expecting their annual salaries to dramatically increase in the future, such as young physicians or law professionals. The risks include lack of refinancing options and facing high monthly payments once the interest-only period concludes.
Balloon Mortgages: These types of loans are fixed, short-term mortgages commonly for 3, 5, or 7 years. However, at the cessation of the loan, a large balance remains, requiring a pay-off or refinancing. Some balloon mortgages allow conversion to a long-term fixed mortgage at the end of the balloon term. Monthly payments remain the same for the term of this loan, resulting in a decrease in balance. Keep in mind, if market conditions are high at the end of the balloon term, you could get stuck with a high monthly loan payment.
- What are the total costs of the loan?
Ask for the totals your lender expects for you to pay at closing. Your upfront costs usually consist of down payment, third-party fees (such as appraisals, credit report costs, and HOA and flood certifications), property taxes, recording fees, any prepaid costs, points or lender credits, lender fees, origination fees, and application fees.
- How long does funding take the lender to finalize?
Other than unexpected delays during underwriting, most loans can close and deliver funding within thirty days. Certain homebuying programs may take up to forty-five days, since they typically require approval from two separate underwriting entities. Be sure to ask your lender about what kind of obstacles that could cause delays in funding. Generally, buyers with loan preapprovals close much sooner than those with just pre-qualifications.
With these helpful tips, you should be able to make a better informed decision on which approach you should take to getting the mortgage you will need to finance your dream home.