What to Ask Mortgage Lenders
Although many borrowers look at interest rates first when shopping for a new home loan, this may not be the best tactic. In fact, there are several key components that determine the cost of a mortgage and how well it suits your lifestyle. Below are ten questions that will help you determine if a loan is the most appropriate available for you and your family.
Keep in mind that while a loan agent can answer any of these questions verbally, mortgage programs and rates change all the time. So, verbal answers aren't binding. However, most of this information is provided to you in writing, which makes shopping for a loan easier.
1. What is the interest rate on this loan? While the interest rate is important and the lower the better, it's the Annual Percentage Rate (APR) that allows you to compare loans with different rates and fees and determine which is the best deal. For example, is a 5% mortgage costing $5,000 a better deal than a 5.5% loan that costs $1000? The APR can tell you that. Lenders are required by law to express the loan's total cost as an interest rate, which is disclosed on a Truth-in-Lending (TIL) form. However, the law doesn't specify what costs are included in the calculation so you'll need to have the lender list those charges. Only then can you accurately compare loans between lenders. It's also important to remember that APR calculations only work for comparing the same kinds of loans. You can't use APR to compare a 30 year fixed mortgage and a 5/1 ARM.
2.Can this interest rate change over the life of the loan? This will let you know if you are getting a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM). ARMs have a "teaser" fixed-rate period of anywhere from 3 months to10 years and can adjust after this period expires. If are considering an ARM, understand when your loan can begin adjusting and how much your rate can increase. The lender should disclose the terms of an ARM on a form called an Adjustable Rate Rider.
3.Am I being charged an origination fee? Originating a loan is an expensive process and lenders frequently charge a fee to do so. The fee is usually expressed in "points," with one point being one percent of the loan amount. However, origination fees are almost always negotiable; if you don't want to pay one you may be able to substitute other terms, such as a prepayment penalty or a higher interest rate instead.
4.Is there a yield spread premium? A yield spread premium, also called a YSP or rebate, is a fee paid to brokers by wholesale lenders for bringing your loan to them. It is disclosed on the final settlement document called a HUD-1 but not always on forms available to you before closing. Brokers can be paid several ways -- by charging you lender fees, by getting a rebate from a wholesale lender, or a combination of both. How they get paid doesn't matter -- it's all reflected in the APR -- and you have the option of taking a higher interest rate if you prefer to pay less out of pocket. If the lender is getting a YSP you can always request a lower rate and agree to pay all of your own fees.
5.What other fees will I be charged? Lender fees have many names, like documentation preparation, underwriting, courier, administration, origination, and discount. The bottom line is that these fees are all charged by the lender and may be negotiable. Third party fees cover items like an appraisal, title insurance and escrow fees, and are paid to others whose services are required to complete the transaction. And finally, prepaid expenses, such as taxes, insurance, and homeowners' association dues aren't really fees at all -- they are costs of home ownership that have to be paid by you whether you have a mortgage or not.
6.Is there a prepayment penalty on this loan? If you pay your loan off early due to refinancing or moving, you may be subject to a prepayment penalty-- typically some percentage of the loan amount or six months of interest. Penalties may decrease with each year you hold your mortgage, or they may apply only to payoff by refinancing but not if the property is sold. Prepayment penalty terms are detailed on your Truth-in-Lending disclosure.
7.What's your protocol on locking-in the interest rate? A lender may allow you to "lock-in" your interest rate for a specific time period, often 30 or 60 days, to protect you from rate increases before your loan closes. Ask when the lock-in rate is effective, and if there are any costs associated with doing so. Also, ask if you will get a lower rate if rates drop after you lock yours in. this is referred to as a "float-down." In most cases you are not locked in unless you have a rate-lock in writing.
8.Does the quoted monthly payment include taxes and insurance? If your payment includes an impound account, your monthly mortgage payment includes property taxes and homeowners' insurance. If there is no impound account associated with your loan, you are responsible for making these payments independently of your monthly mortgage payment.
9.Are you going to be my main contact? Sometimes your mortgage professional works on a team where several people handle your loan transaction. Know if you only want to talk to one person or if you are comfortable talking to a number of people regarding your loan.
10.What might delay my loan? If you are upfront with your lender, you should have no delays. If you have changes in your marital status, employment, debts or credit, there may be delays in your loan approval or it may even be revoked.
These are all good questions to ask, but understand that verbal answers are not commitments to lend, that written disclosures are better tools for loan comparisons, and that nothing is binding until the loan is approved and locked.
About the Author
Meiling Hunter has worked in the mortgage industry for four years. She graduated from the University of California, Davis, with a double major in Economics and Philosophy.