What Are Some Common-Sense Mortgage Questions to Ask?
Ask all the following questions. A reputable broker will answer them for you in plain English.
Question 1: Which type of loan is best for me?
Any reputable lender will want to find out more about your situation so he or she can suggest the correct loan (fixed rate, adjustable, etc.) to meet your needs. So, choose a lender who takes the time to gather vital information from you. Also, pick one who explains the advantages and disadvantages of each type of loan. Avoid any lender who tries to force a particular type of loan on you without finding out more about your situation.
Question 2: What is the interest rate and the annual percentage rate?
The annual percentage rate (APR) is calculated by a complex formula. This formula includes the interest rate and all the other related lender fees divided by the loan's term. However, keep in mind that some lenders do not compute APR correctly. Also, there is no accurate way to compute an APR for an adjustable loan. Finally, the APR does not account for early payoffs.
If your interest rate is adjustable, ask about its... adjustment frequency... maximum annual adjustment... highest rate (cap)... index... margin.
Question 3: What are the discount points and origination fees?
Generally speaking, a "point" is equal to one percent of the loan amount. So, for example, two points on a $100,000 loan results in a cost of $2,000. Points allow you to "buy down" the interest rate. This means that the more points you pay, the lower your interest rate will be. So, for an upfront payment, you save money over the life of the mortgage. Plus, points are tax deductible. Note: some lenders charge origination fees as well as points.
Question 4: Do you offer loan rate locks?
It is a fact that interest rates go up and down on a daily basis in the marketplace. If those rates are threatening to move up, you can save money by locking that rate in. Typically, lenders charge from zero to one point to lock in a rate and points. Be sure to ask what the charge is... how long it will be locked in... and if the lender will give the lock in writing.
Question 5: Is there a prepayment penalty?
It is wise to ask about this subject because, in some states, prepayment penalties are no longer allowed. If they are allowed, then, generally, prepayment penalties allow the lender to collect an additional six months of "unearned interest" if you pay the loan off early through a refinance of sale of the property. Ask the following questions about a prepayment penalty... How much is it?... What are the terms?... Will the prepayment penalty apply if I refinance through you later on?
There are more questions you can ask, of course, but the five listed in this message will give you a good start on finding a reputable lender to work with.
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