Are you planning to buy a home and you have several offers that you are looking into? How do you choose among the various offers? I suggest you interview the mortgage lender and ask him several questions.
The first question that you may ask is which kind of loan would be best for you.
This is important because a good mortgage broker or lender will always try to know more about you before making any offers. A good doctor will not suggest surgery unless he has had time to examine you and your medical test results. In the same way, choose a mortgage lender who tries to know enough about you before he makes an offer about a particular kind of loan.
Don’t forget to pick his brains about the advantages and disadvantages of each type of loan, such as interest-only loans, fixed rate loans, adjustable rate loans, and negative amortization loans.
The next question to ask your mortgage lender is the interest rate and the annual percentage rate (APR).
Homeowners usually ask the question about interest rate but do you know that the APR needs a more complex calculation and some lenders may not even do it properly? Some lenders fail to incorporate some of their fees into the APR that they would show you.
So don’t forget to ask for the items that have been included into the APR. The APR is a good way to compare the various offers because it is supposed to include other fees aside from the interest.
Take note also that APR is inaccurate for the adjustable rate loan. If you are offered an adjustable loan, ask about the cap, maximum annual adjustment, margin, index, and adjustment frequency.
The third question to ask your lender is whether you may be able to offer discount points as a way to reduce the rate.
One discount point means you are willing to pay one percent or one-hundredth of the principal. Each point reduces the interest rate so you may use this to obtain the most suitable arrangement for you.
Related to this, you may also inquire about origination points or fees, which actually have no impact on the interest rate by are sometimes charged for the work required to process your application. Take note that these points may be tax deductible even if it was the seller who paid for them.
Another question to inquire about is the documentation that the lender will ask for to approve the loan.
You can request for a checklist of the documents you would have to submit to prevent unnecessary delay in the processing of your mortgage as a result of the absence of a required document.
You may also ask about the impact of a down payment on the cost of the mortgage.
Some lenders would try to make the loan attractive by only asking for a minimal down payment, such as three percent, five percent, or even zero percent. But remember that you cannot get something for nothing.
What this often means is that your cost will be higher the lower the down payment. For some lenders, you would have to shoulder private mortgage insurance costs for down payments that are lower than one-fifth of the principal.
You can also inquire about the various fees that would be charged. These may include taxes, escrow, recording fees, pest inspection reports, lender’s title policy, credit report, and appraisal.
If he is reluctant to give you this information, tell him that he is mandated by federal law to provide you a Good Faith Estimate that includes the different fees.
The next question to ask is whether he may lock-in the points and interest rate that he has offered you while your application is being processed. Take note that the interest rate may change anytime and it is likely that he may adjust it in the final contract if it has gone up. The lock-in period is usually from 30 to 60 days and may required an additional fee. If he agrees to a lock-in, have it in writing.
Another important question to ask is if there is a prepayment penalty, which is charged if you want to complete the payment of the loan earlier than agreed.
This may also happen if you want to refinance the mortgage in the future. This penalty is no longer legal in some states so be sure to check this from other reliable sources. Some lenders may also ask you to pay a fee when you want to pay off more than one-fifth or 20 percent of the principal.
I hope this helps you understand the right questions to ask your mortgage lender and remember, if it doesn’t feel right, then it probably isn’t.