When shopping for a mortgage, most people are thinking mainly about the size of their monthly payment. While that’s all well and good, there are many other factors to consider, as well. Below are six additional questions to ask your lender before you sign on the dotted line. Read them over to make sure you leave feeling informed about the entire process.
1. What interest rate can you offer me?
Sure, you were going to ask this one. It’s the one mortgage question we all know. However, what you may not know is that even though available mortgage interest rates are standard throughout the industry, the rate that you’re given can fluctuate.
The rate you’re given also depends on your personal finance history. In this instance, your credit score is king. According to MyFICO.com, the best interest rates are still available for those with scores between 760 and 850. At today’s rates, those scores would get an interest rate of 4.2% versus an interest rate of 5.1% for someone with a middling score between 620-639.
If you need to improve your score a little before you apply, you can do so by remembering to make your credit card payments on time, every month. Always pay more than the minimum balance, so that your score will rise as you pay down your debts.
2. Does the rate come with points?
Also known as a buying down rate, points are fees that you can pay to the lender at closing in order to secure a lower interest rate and, by extension, lower your monthly payment. As a rule, one point will cost you 1% of your total mortgage value. However, the rate by which your interest decreases is not standard, so it can vary by lender.
If you’re considering buying points, it’s important to look at how long it will take you to recoup their cost. To find your break-even period, simply divide the cost of the points versus how much you’ll save on your monthly payment. The resulting number is the number of months it will take for you to get back your initial investment.
If you plan on staying in the home for longer than that amount of time, points may be a worthwhile expense. However, if you plan on moving sooner, consider putting that money towards your downpayment instead.
3. Is it a fixed-rate or adjustable?
These days, most would-be homeowners are going for fixed-rate mortgages, or ones where the interest rates stay the same over the length of the loan. However, since adjustable-rate mortgages (ARM) typically start out with rates that are much lower than either the 30-year or 15-year fixed rate, ARM’s may still be attractive to some—particularly those who are only planning on staying in their new home for a few years.
If you’re thinking of choosing an ARM, be sure to ask the following questions:
- How long will the initial, fixed-rate period last?
- How often does the rate adjust after that?
- How is the adjusted rate calculated?
- What is the rate cap, or the highest my rate can go?
From there, it’s up to you to weigh the benefits and risks to determine which rate structure works best for you. Consider how long you’re planning on staying in the home and the frequency at which your rate will climb if you end up overstaying the fixed-rate period.
4. When can you lock my rate?
A rate lock on a mortgage is a guarantee from the lender that your rate will stay the same for a specified period of time, no matter how they fluctuate industry-wide. Traditionally, lock periods have lasted between 30 and 60 days, but as interest rates continue to climb that window has been getting smaller. If at all possible, you’ll want to make sure your closing date falls within your lock period.
Additionally, you’ll want to ask about the specific terms of your lock period. Ask if there is there a fee for locking in at a certain interest rate. Additionally, see if the rate has a “float down clause,” meaning you’d be eligible for a lower rate if they happen to fall.
5. Will I have to get private mortgage insurance?
If you’re planning on putting less than 20% down on the home, the answer will probably be “yes.” Since a smaller downpayment means that you have less of a stake in the home, private mortgage insurance (PMI) is made a requirement to protect the lender’s investment in the event you would default on the loan.
You’ll want to ask your lender about your options. Most conventional loans only require PMI until you’ve paid down over 20% of the loan while FHA programs require that security for the entire length of the mortgage. VA programs, on the other hand, often waive this requirement for eligible applicants.
Ultimately, you’ll want to weigh how much PMI will affect your monthly payment versus the benefit of making a larger downpayment or switching loan programs.
6. What fees can I expect from you?
Origination fees, or fees charged by the lender to cover the costs of processing the loan, work a little differently than your other closing costs. Rather than getting collected from you at the time of settlement, this one-time fee is taken out of the amount that you borrow. Additionally, it’s expressed as a percentage of the loan value, rather than a flat rate. Typically, this fee will range between 1-5%.
For example, a $100,000 loan with a 4% origination fee, you’d actually receive $96,000, which accounts for the $100,000 loan minus the $4,000 origination fee. To that end, you’d want to ask your lender what their fee is, percentage-wise, and how much you should borrow based on that rate.
