Obtaining a new mortgage has become increasingly difficult in recent months. Whether you’re trying to purchase a new property or refinance your existing home, loan requirements have become stricter in the face of declining home values, falling buyer demand, and financial market concerns.
Keeping on top of the ever-changing mortgage market can be difficult. So educating yourself is critical. Most people shop around to find the best deal on a home loan. But for many the process is of limited use because they don’t know what to ask. Before embarking down the path to a new mortgage, take the time to identify the questions you’ll need to ask. These questions will help your determine whether the loan is right for your individual situation. Just as importantly, they can provide you with significant insight into the mortgage professional’s intentions and credibility.
1. What kind of mortgage is this?
One of the most fundamental but least often asked questions relates to the type of mortgage you are getting. There are essentially two kinds of mortgages: fixed rate and adjustable rate. Fixed rate mortgages require you to pay the same monthly payment over the entire life of the loan. Adjustable rate mortgage payments are normally frozen for between two and five years, but then adjust according to market forces. Thus, fixed rate loans can be slightly more expensive, but they offer more stability to your budget. And don’t just ask this question, but get documentation proving the response you receive. Sadly there have been a number of cases in the past two years of borrowers being told their mortgage was fixed when really it wasn’t.
2. How much money will I need spend to close this loan?
Whether you’re purchasing a new home or refinancing your existing one, try to find out how much money you will need to pay to close the loan. This is almost always a rough estimate, but it will give you an idea of what to expect. Sometimes your lender or broker can roll all the extra expenses into the loan itself, but even in this scenario there’s usually some out-of-pocket cost. To be safe, if the cost is zero set aside a few thousand dollars, or if the cost you are told is more than zero multiply it by 10 percent.
3. How much home can I realistically afford?
This is a critical question for buyers because there is a strong temptation to purchase the biggest, most luxurious home available. But look realistically at your lifestyle, and at where you’d be content to live. Ask your broker or lender how much of a loan they can approve you for, and then stay under that figure. Never try to persuade them to approve you for a bigger loan amount, and beware if they offer to do just that.
4. How long does it normally take for your loans to close?
This can be a good indication of how much time you can expect to wait before your new mortgage is set in stone, and how honest the broker or lender is. The answer to this question is normally 15 to 25 business days. Any response less than 10 business days should be treated with suspicion. And regardless of their response, be prepared for the process to take at least 25 business days. While a home loan can be closed in under two weeks, assuming that it will be can create unnecessary stress for you.
5. Is there a prepayment penalty associated with this mortgage?
In recent years lenders often slapped a prepayment penalty on a mortgage to discourage the borrower from refinancing away to a more attractive home loan several months down the road. While times are changing and prepayment penalties are becoming a less common, they are still used. And you need to know if you will have one tied to your mortgage.
6. What is the financial index and margin associated with the mortgage?
This question is specifically relevant to adjustable-rate mortgages, also known as ARMs. The index and margin combine to determine your mortgage interest rates once any introductory rates have expired, and therefore how much your new or adjusted monthly payments will be. For example, a 5% margin added to a 6 Month LIBOR rate of 5.3% will equate to an overall interest rate of 10.3%. Margins for people with good credit are usually around 2.5% to 3.5%. Anything more can be a sign you’re getting conned. If your broker or loan officer seems flustered by this question or tells you it is too complicated for you to understand, chances are they’re not confident enough to answer you, or they have something to hide.
These questions are a good starting point. But don’t be afraid to read up on mortgages, and learn as much as you can before you approach this daunting and nuanced topic. Shop around by all means, but don’t shop blind. Ask questions, build your knowledge, and have confidence in your analytical abilities.