So you've requested a mortgage and received three or four home loan offers. Now what? Here are the most important questions to ask each lender.
1. What is the interest rate?
This is the most obvious question. The interest rate is used to calculate your monthly payments, and it will determine how much you'll pay over the life of the loan. But you'll need to understand more than simply the quoted rate. A good benchmark for comparing offers is their annual percentage rate (APR). This figure combines the interest costs and other fees charged by a lender over the life of the loan, and expresses them as a yearly percentage. Make sure to also ask for an itemized list of what's included in each APR calculation, so you know you're making a fair comparison, as some lenders don't include all of their fees in the calculation.
2. Will the interest rate change over the life of the loan?
In the case of a fixed rate mortgage, the interest rate will remain the same for the entire term of the loan. Adjustable rate mortgages, however, have interest rates that change periodically. If you're considering an adjustable rate mortgage, make sure you understand what the adjustment period is -- that is, how often the rate will change (usually annually). Also, ask what the index and margin are that will determine your rate, and find out what caps will protect you from large rate increases. You can request a chart showing the past performance of the index the rate is based on, which will give you an idea of the rate swings other borrowers have experienced in the past with the same mortgage.
3. Will I be charged points?
A lender may offer to lower your rate if you pay discount points up front. One point is equal to 1 percent of the principal - two points on a $150,000 mortgage, for example, will cost $3,000, and might lower your rate by 0.5 percent. Lenders may also charge origination points, which are an administrative fee for processing your application and do not affect the interest rate. Make sure you understand which type you are paying for.
4. What are the closing costs and other fees?
Ask each lender for a good faith estimate of their closing costs. (Lenders are required by law to provide one within three days of your application.) Take the time to go through each estimate carefully to be sure you understand what each item means. This is important when comparing offers as lenders sometimes use different terminology for the same item.
5. Will you lock-in the interest rate?
A lender may allow you to lock-in the interest rate and points quoted in your offer for a specific period of time, often 30 to 60 days. This will protect you if rates go up during the time it takes to process your application. Ask what date the lock-in becomes effective and whether there is an additional fee involved -- and get the agreement in writing.
6. How will my down payment affect the cost of the loan?
Some lenders require only a very small down payment of 3 or 5 percent, and some even offer zero-down-payment loans. But these may carry significant costs to offset their inherent risk. Typically, if your down payment is less than 20 percent, the lender will require you to pay for private mortgage insurance (PMI). On the other hand, you may be able to reduce the cost of your loan, or at least improve the terms, by making a larger down payment.
7. What documentation do you require?
Lenders will ask you to provide a bundle of personal information, such as your income, employer, social security number, information about your assets and an appraisal of your home. Ask for a checklist so your application is not delayed by missing paperwork.
8. What are the payment terms?
Ask each lender what method of payment they require, such as sending back a coupon with a check or arranging an automatic withdrawal from your bank. Determine whether there is a grace period (typically a week or two), and ask about late payment fees.
9. Can I pay the loan off early?
Chances are you may want to refinance your mortgage before the term is complete. So check whether a lender will charge you a prepayment penalty for doing so. Some may also charge a fee for paying down a substantial portion (more than 20 percent) of the principal before it is due. In many cases, prepayment penalties decline each year, and may eventually disappear.
10. How long will it take to close the loan?
Processing a mortgage application can be time-consuming. Ask each lender how long they expect it will take to review your documentation, check your credit rating and approve your loan. A minimum of two weeks is typical, though it is not unusual for it to take six to eight weeks to close a mortgage.
11. What might delay the process?
Ask each lender what information -- employment, marital status, other outstanding debts -- they will be checking, and make sure you advise them of any changes in these areas. You can also head off problems by checking your own credit file a couple of months before shopping for your mortgage.
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