9 Questions to Ask Before You Take Out a Mortgage
Congratulations! You’re about to achieve the American dream of owning a home. Before you jump in face first though, we do have some words to the wise when it comes to choosing a lender and asking the right questions. Check out our top must-ask questions below and make sure you’re really ready to cross the threshold of home ownership.
What is my interest rate?
A mortgage is something you’ll most likely be paying off for the next 15 to 30 years. That’s why it’s so important to make sure you know the interest rate before you sign on the dotted line. Since August 2015, interest rates have hovered between 3.24% and 4.06%. However, the market is constantly shifting so you need to find out exactly what you’ll be paying in interest and shop around until you find the best price.
What is my loan estimate?
Interest rate isn’t the only price you’ll be paying in addition to the cost of your home. There are also points, fees and other charges. By asking for a loan estimate, you’ll get an APR (annual percentage rate) from your lender that will include all costs and help you determine your monthly payment.
How many points does my loan estimate include?
As mentioned above, points, or mortgage fees, are an additional cost. There are two types of points, discount and origination points, and both account for 1% of your loan amount. For example, if your home costs $300,000, one point would be $3,000.
Now, not all mortgages include points and this is where some strategy comes into play. If you want to pay discount points (essentially prepaid interest) to lower your interest rate and monthly payment, you can pay as many as you want out of pocket. If you don’t want to, you’ll just have higher interest and a higher monthly payment for your mortgage term. Any point you pay (as long as they go toward the cost of the home and not closing costs) is tax-deductible and can be utilized depending on your preference and cash flow.
Is my interest rate locked in?
Good question. This depends on whether you have a fixed rate or adjustable rate mortgage. With a fixed rate, you will lock in the price of interest no matter what happens in the market. If it gets pricier, you win. If interest rates drop, you’ll lose out. Fixed rate mortgages are generally more expensive since lenders have to account for the potentially shifting market. These types of mortgages also don’t allow you to change mortgage rates unless you refinance and pay closing costs all over again. Nonetheless, you will always have the peace of mind knowing your monthly payment won’t ever change.
Adjustable rate mortgages allow buyers to purchase more expensive homes because of cheaper interest rates. These plans also don’t lock you into a situation where you can’t refinance. Despite the pros, there is a lot of uncertainty involved too. If you sign your mortgage agreement at 4.49%, the market drops to 3% a year later, but then five years down the road it surges to 10% or higher, you’ll have a big change in your monthly payment. If you do opt for an adjustable mortgage rate so you can afford a more expensive house, then this fluctuation could have serious implications on your finances.
What are the closing costs?
Typically, closing costs are 2-5% of the cost of the home. While negotiations can be made to have the seller pay for the closing costs, sometimes you as the buyer have to absorb the expense. Closing costs are fees created by your lender, so you’ll have to talk to them about exactly how much you owe and if you can work it into your mortgage or if you have to pay out-of-pocket.
Is there a prepayment penalty?
Mortgage lenders make their money from interest. If you pay your mortgage earlier than the original terms, they lose out on hundreds to thousands of dollars in interest. That’s why most mortgage companies charge fees for paying off your mortgage early.
There are two types of prepayment penalties: soft and hard. And it’s very important to know which one you have. The soft penalties allow you to sell your house without having to pay a fee for paying off the mortgage. The hard payment penalties charge you if you sell or refinance your home at any time during your mortgage. This can be up to 80% of six months worth of interest! If you plan on staying in your home forever, it won’t matter as much, but if you think you might move then you need to know the difference in penalty terms so it doesn’t cost you.
How much do I have to put down?
Most mortgage lenders require you put 20% down these days. For a $250,000 home, that’s $50,000. While that seems like a lot, it will help lower your monthly payments and ensure that you can afford the home. Lenders will also evaluate you on a 43% debt-to-income ratio before approving you. In other words, they check to make sure you don’t have more than $43 in debt for every $100 you earn.
How long will it take to approve my loan and close?
Typically, mortgage approvals can take several weeks to months. This is because you need to go through document signings, an appraisal, and more document signing. While it’s tough for lenders to give you an exact timeframe, ask anyways to hold them accountable and manage your expectations.
Can I afford it?
This is a question you need to ask yourself. After down payments, fees, property tax, and market fluctuations (if you go for adjustable), is this something you can reasonably pay for throughout the next 30 years? If the answer is yes, then enjoy your new home! If not, don’t despair. Being house-poor is a stressful feeling and re-budgeting to find a house in your price range will benefit you greatly in the long run.
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