Finding the best mortgage is one of life's great financial puzzles. You need to look at mortgage rates, but there is much more to consider. So how do you compare offers from different lenders? Here are 10 key questions to ask.
1. What Are Mortgage Rates Today?
Mortgage rates are a moving target. They move up and down each day and you want the lowest available rate given your credit standing and down payment. You will see various rate quotes online but those rates are not necessarily available to all borrowers. Lenders have many factors to consider and every loan application is unique. Your job is to land the best rate and terms so that you can get the lowest monthly payments as well as the lowest up-front costs.
One way to do this is to look at the "annual percentage rate" or APR for each loan offer. The APR is a measure which reflects both the interest rate and certain fees. Another approach is to ask each lender to make a loan at par, which makes comparing offers easier. When you look at mortgage rates with a quote at par, it means the lender is telling you the interest rate for the loan without any points. A "point" is a loan discount fee which you pay up front.
2. What's a Point?
One point is equal to one percent of the mortgage amount. If you pay points up front you should be able to get a lower interest rate; however do you really want to pay points? If you expect to own the property for a short term, say five to seven years, then maybe you are better off with a higher rate of interest. If you expect to own the property for 30 years than paying points might be the more attractive option. You have to look at how much the interest rate is being reduced in exchange for the up-front fee to make your decision. Another factor you should consider is whether you have enough available free cash so that you can comfortably pay fees up-front.
3. Fixed or Adjustable?
Mortgages are available with either fixed rates or adjustable rates. Fixed rates can be seen as a hedge against inflation because they allow borrowers to establish a single mortgage rate for the life of the loan. Adjustable rate mortgages, or ARMs, have interest rates which can vary over the loan term. This means the rate can go up or the rate can go down. However, while lower monthly costs are not a problem, the same may not be true if rates rise and monthly housing expenses increase.
Most ARMs today are two-step products; that is, they have an initial start rate which might last one, three, five, seven, or 10 years and then the mortgage rate adjusts annually. The amount of the adjustment is typically limited to two percent per year and not more than five or six percent over the life of the loan. Be sure to speak with lenders regarding details.
4. Is it Best to Make a Large or Small Down Payment?
The size of your down payment should be guided by two practical standards. First, how much do you have comfortably available (remember that in addition to a down payment you also have the costs of closing)?. Second, what is most comfortable for lenders?
Lenders are very happy when borrowers put up at least 20 percent down. If you put down less, you're usually required to obtain some type of third-party insurance -- FHA, VA, or private mortgage insurers. Some lenders do not require third-party insurance, instead they self-insure by charging the borrower a higher interest rate.
The bottom line is that purchasing with 20 percent down or more will eliminate the cost of mortgage insurance or its equivalent.
5. Should I Lock in My Interest Rate?
When you apply for mortgage, and during the application process, you will have the opportunity to lock in your mortgage rate. If you lock your rate, it means you will be able to close your loan at the mortgage rate which was quoted at the time of the lock. The lock period typically ranges between seven and 90 days but can be longer. In most cases, the longer your lock period, the higher the rate or fees. Some lenders offer what's called a "float-down," which means if rates are lower than your locked rate when it's time to close your mortgage, you'll get the lower rate. Ask your lender if it offers this option and how much it costs.
6. What Documents Do I Need for a Loan Application?
Lenders must verify your credit, your income and your ability to repay the debt. This means they want such documents like your two most recent tax returns, your two most recent payroll stubs, your two most recent W-2 statements, bank statements, and statements for such things as retirement accounts and Social Security. Your loan officer will give you an initial list of paperwork requirements and may ask for any additional information if it is required. The requests you get for paperwork may differ from other borrowers if you are self-employed and for other reasons.
7. Can I Get a Quickie Settlement?
At this writing the typical settlement takes about 40 days. It is possible to have faster closings but this assumes that all paperwork is in hand and ready to be reviewed by the lender and that it's possible to quickly set up an appraisal. If you need a fast settlement the best approach is to be pre-underwritten by the lender before you go home shopping.
8. How Do Recent Mortgage Reforms Affect My Application?
Under the Dodd-Frank legislation passed in 2010, generally known as Wall Street Reform, lenders are required to prove that borrowers have the ability to repay their loans. This is hardly an unusual requirement for lenders but one which was sometimes ignored during the run-up to the foreclosure crisis. The result of Dodd-Frank is that underwriting requirements for FHA, VA and conventional mortgages are virtually unchanged. What has changed is the ability to get mortgages with no-doc loan applications as well as option ARMs and interest-only mortgages. Such "non-traditional" mortgage products and procedures are now rare. The benefit is that the lending process is less risky than in the recent past, and because there is less risk interest rates are pressured downward.
9. Can I Prepay My Mortgage?
If you get inheritance, win the lottery or work for a technology company on the verge of an IPO you may well be able to quickly prepay your mortgage. Under Wall Street reform, home loans are generally divided into two groups: "qualified mortgages" and "non-qualified mortgages." Prepayment penalties are not allowed with non-qualified mortgages. Prepayment penalties are allowed with qualified mortgages, however qualified mortgages include FHA, VA, and conventional mortgages sold to Fannie Mae and Freddie Mac. Mortgages originated under these programs have no prepayment penalties.
This means the only place where you might find a prepayment penalty is with a portfolio loan which meets the standards to be a qualified mortgage. If a prepayment penalty is allowed, then the maximum charge is limited under Wall Street reform to two percent the first year, two percent the second year, one percent the third-year and nothing thereafter. Ask your lender if your mortgage can be prepaid, in whole or in part, without penalty and at any time.
10. How Much Will I Pay to Close My Mortgage?
Closing costs vary widely. Your lender will give you an estimate of closing costs, and it should largely conform to your final, actual costs. You will probably be issued more than one Good Faith Estimate -- you'll get one when you lock in your loan, and you'll get one if anything "material" changes, like the loan amount or loan or loan program. It's the last GFE you receive that is compared to the final settlement statement. If the actual costs exceed your estimate by amounts defined by law, the lender has to eat the difference -- not you.