When it comes time to apply for a mortgage, most people are thinking mainly about the size of their monthly payment. But there are many other factors to consider as well. Here, Forbes suggests these additional questions to ask your lender before signing on the dotted line to make sure you leave feeling informed about the entire process.
1. What interest rate can you offer me?
This is the one mortgage question we all know. However, you might not know that even though available mortgage interest rates are standard throughout the industry, the rate that you’re given can fluctuate depending on your personal finance history. That’s why your credit score is very important.
According to MyFICO.com, the best interest rates usually are available for those with scores between 760 and 850. If you need to improve your score before you apply, remember to make your credit card payments on time every month and always pay more than the minimum balance so 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 to secure a lower interest rate and to reduce your monthly payment. As a rule, one point will cost you 1 percent 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, be sure to examine how long it will take you to recoup their cost.
To find your break-even period, 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 recoup 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 toward a down payment instead.
3. Is it a fixed-rate or adjustable?
These days, most would-be homeowners are choosing fixed-rate mortgages, or ones where the interest rates stay the same during the length of the loan. However, since adjustable-rate mortgages (ARMs) typically start out with rates that are much lower than either the 15- or 30-year fixed rate, ARMs may still be attractive to some—particularly those who are only planning to stay in their new home for a few years. If you’re considering an ARM, you’ll want 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 interest rate will stay the same for a specific time, no matter how rates fluctuate industrywide. Traditionally, lock periods have lasted between 30 and 60 days, but 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 and whether the rate has a “float-down clause,” which means 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 down less than 20 percent on the home, the answer will probably be “yes.” Since a smaller down payment 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.
Ask your lender about your options. Most conventional loans only require PMI until you’ve paid down more than 20 percent of the loan, while FHA programs require that security for the entire length of the mortgage and VA programs 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 down payment 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 other closing costs. Rather than being 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 to 5 percent. For example, for a $100,000 loan with a 4 percent origination fee, you’d actually receive $96,000, which accounts for the $100,000 loan minus the $4,000 origination fee. Toward 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.