1. What's your history?
The first item for the prospective home buyer is figuring out which lender to use. The mortgage field has many players: credit unions, banks, savings and loans, mortgage brokers, finance companies, and Internet-based enterprises.
Many companies these days are dangling low-rate mortgages in front of consumers, but you shouldn't bite on the mortgage rate alone. There is always a correlation between a borrower's interest rate and the fees they pay the lender or the credits they receive from the lender. It's important to work with a lender who explains this to you and helps you to find the best option for you, not one who merely tries to sell you on one feature—such as a low mortgage rate or a lender credit—of a loan.
Find out how long the lender has been in operation and what kind of reputation they have established through customer service and diligent, honest work. Are they local? Can you walk into an office to ask questions or get issues resolved? A local lender is much more accountable to you and your agent than one cities or even states away who can't be reached except through an eight-hundred number. In this market it's very important to work with a lender you can trust, have personal interaction with, and who wants to do a great job for you -- so that you'll want to write a good review or even refer your family or friends because of your good experience.
2. How much are the closing costs going to be?
When comparing lenders, remember that the mortgage rate is only part of the mortgage costs. You'll also pay closing costs, due at the closing, when the house is officially yours. A major portion of the closing costs is what's known as "points"—various one-time fees the lender charges. One point is equal to one percent of the mortgage amount. Find out how many points the lender charges.
Ask if you have the option of paying fewer or no points in return for a higher mortgage rate on your loan. This will increase your monthly payments, but require you to come up with less cash at closing. Points are just part of the closing costs, so ask the lender for an initial estimate of what all your closing costs will be (the law requires most lenders to give you a written estimate of closing costs within three days of accepting your mortgage application).
3. What other fees will I be expected to pay up front?
Be sure you get the full story on fees. Some lenders won't tell you about all the fees unless you ask for specifics. For instance, if the lender quotes an "application fee," ask what that entails. Is it just for the application? Are there separate fees for obtaining your credit report and appraising the house, or is that included in the application fee? Are there any extra "processing" or "document preparation" fees? You don't want surprises later.
4. How much of a down payment will I be paying?
Five percent down is a common minimum today, but some special programs are available that only require 3% down, and there are also zero-down loan programs available. You'll have to determine what you can afford. Ask your lender to show you how different down payment amounts will affect the size of your monthly house payments.
5. What's private mortgage insurance and what will it cost me?
With most mortgage loans, if you make a down payment of less than 20% of the home's cost, your lender will require private mortgage insurance (PMI). It's a protection for the lender in case you default on your loan. So ask how much PMI will cost and how you’ll be expected to pay it (usually added in with the monthly payment). Ask if you'll have to pay the full first year's premium at closing.
If you stay current on payments, the law makes it easier to drop PMI once your equity level reaches 22% of the value of your home (with some exceptions). You should also ask if there are any options to prepay the mortgage insurance, so you can consider that option as well.
6. How much can I afford to borrow?
Your mortgage lender can help you figure out how much your loan amount could be, and therefore what price range of homes to look at. This is known as prequalification — not the same as approval or preapproval — and it's wise to do it before you start house shopping. The prequalification gives you some idea of what size mortgage you'll be eligible for, based on information you give the lender about income, assets, and past debts. The lender will want to confirm that information after you've applied for the loan and will verify your job and credit history before granting loan approval.
7. What’s the difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM)?
With a fixed-rate loan your mortgage rate stays the same throughout the life of the mortgage. It's usually the best choice if you plan to stay in your house for a long time. Ask the lender to show you what the monthly payments and total interest would be for a fixed-rate mortgage for different loan periods, such as 15, 20, or 30 years.
If you expect to sell your house in a few years, an ARM may be right for you. With an ARM, the mortgage rate starts out lower than with a fixed-rate mortgage, making monthly payments smaller at first, and changes at set intervals depending on the current market conditions at the adjustment period. Ask the lender:
- How often can the ARM rate change?
- How much can it change at each adjustment and over the full term of the loan?
- What's the interest rate tied to (known as the index, such as the Treasury bill rate)?
- What is the margin (the amount the ARM rate may exceed the index rate)?
- How much will the payment become at the first adjustment?
- Can you convert the ARM to a fixed-rate mortgage later? When? Is there a conversion fee? Will you have to pay for another appraisal?
Locking in a rate means that a lender promises to hold a rate for you, even if rates climb before your application process is complete. Ask when the lock-in takes effect: upon application or approval? How long does the lock-in last?
9. When is the mortgage payment due each month?
When is a payment considered late? What is the penalty? Ask about payment methods. Many lenders will give you a slightly lower rate if you pay by automatic deduction from your account rather than by coupon.
10. Is there going to be a prepayment penalty?
You may decide to pay extra on your mortgage principal when you're able and even pay off your mortgage sooner than the full term of the loan. Find out if there's a penalty for doing so.