20 Questions for Your Lender

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Warning! Home finance has blossomed into an incredibly diverse and complicated industry. This is good and bad. There are at least a hundred ways to borrow the money for your next home now. There are also dozens of ways for lenders to take advantage of you, from hidden charges to prepayment penalties and more.

Let your lender explain all the various home loans and home finance options available. However, when you finally decide on a product you like, ask as many of the following that are relevant to your loan situation. These are the questions that will help protect you.

Home Finance - Questions for The Lender

- What is the interest rate? Found at Bankrate you can get the most current interest rates.

- What is the APR (annual percentage rate; includes fees, points, and mortgage insurance (PMI))? The APR is often confused with interest rates, but the difference is with APR adds closing costs, mortgage insurance if you do not out down 20%, and any points. For more information on APR visit APR.

- What is the initial rate if it is an ARM – adjustable-rate mortgage? These loans were highly popular prior to the financial crisis in 2008 when there were numerous variations of ARMs available to borrowers. And once the market stabilized, they remained popular as interest rates stay at historic lows, but with today’s inflation and interest rates rising these can be dangerous to have depending on the cap the rate can rise in a given period. Most ARMs offer a low-interest rate at the start of the loan that will adjust after a set period to a higher rate as a rule.

- What is the highest the rate can go to next year (ARM)? ARMs do have caps on how much the rate can be raised in a period, but they also will generally have a maximum amount that they can charge, and it is vital that you know and understand how the rates will change.

- What are the annual and lifetime caps on the interest rate and payment (ARM)? As ARMs are more complex than a traditional 30-year fixed loan it is imperative that you understand how your ARM will react in different interest rate environments.

- How often is the rate or payment adjusted, and when (ARM)? Again, this is vital to know and understand due to some ARMs can rest on an annual basis while others may be semi-annual or quarterly.

- What index is the rate based on (ARM)? An ARMs interest rate is set to a benchmark and here is a list of some of the more common ones and their current rate, base rate.

- What margin is added to the index (ARM - it might be the index plus 3%, for example)? An amount will be added to the base rate to provide you with your interest rate on your ARM.

- Is credit life insurance required (this pays off the loan if you die)? II have not seen this as a requirement on any of my mortgages and I have had four. The first was an FHA First Time Homebuyer, my second was an 80/20 with the 80% loan being an ARM that adjusted after five years and the remaining 20% was basically a 20% credit line with a fixed rate and a 20-year term, I refinanced this loan to an FHA during the financial crisis of 2008 with better terms. In both cases with the FHA loan, I had PMI. On the third mortgage, I did a 30-year conventional fixed-rate loan paying no points and having no PMI. On none of these three loans was I required to purchase a credit life insurance policy, but I cannot understate this, I received so many solicitations offering this it was unbelievable. For some, this approach may make sense, but it boils down to a life insurance policy you have that will pay off the loan and the benefits may decline as the loan is repaid. You are much better off just buying a term policy that has the same length as your mortgage due to better rates and a constant death benefit. And they are generally cheaper to obtain.

- How much would the payment be without it? Here you need to understand the numbers and how one will affect the overall payment for your mortgage. PMI can and is eventually be removed and here as the four ways to do so,  removing PMI.

- Can any of the fees or costs be waived? When dealing with different mortgage lending companies will waive certain components of the loan and others may offer discounts. It pays to shop around for the best deal and loan for you and your needs.

- Is there a prepayment penalty? Most loans will allow you to pay extra principal monthly with no penalties or refinance paying off that loan and getting a new one with better terms for you. In some cases, these actions are not allowed as the loan excludes prepayments and could charge you a fee or penalty if you were to prepay the loan.

- How much is the prepayment penalty? This will vary from lender to lender so always understand this component to your mortgage.

- For how long is the penalty in force? This too will vary from lender to lender but in many cases the prepayment penalty will drop after a certain number of payments have been made or after a set date.

- Are extra principal payments allowed? Extra principal payments are considered a prepayment and all of my loans have allowed the payment of extra principal with no adverse effect.

- Is an interest rate lock-in available (guarantees interest rate for a time)? This is when you are able to lock in your interest rate for the period of time between getting pre-approved or approved until your closing. For more on this visit lock-in.

- Can I have the lock-in in writing? It is best to get all the details of your mortgage in writing as in many instances you may be working with more than one person or the time between getting approved and closing on your house can be considerable.

- Is the rate locked in at the time of application or time of approval? Here it can vary from lender to lender so be sure to ask and understand the lock-in criteria.

- If rates drop, can I get a lower rate locked-in? Again, this issue will and can vary from lender to lender so ask and get the answers in writing, but there are numerous things that can and do affect your lock-in rate from the time you apply to closing so visit lock-in for more information.

- What inspections and/or surveys are required? Most lender will require a survey if one is not current, and I would always have a home inspected prior to closing to aid in determining if anything is wrong with the house prior to purchase.

- Is a title search and/or title insurance required, and what is the cost? Title insurance comes in two forms, lender and buyer. The lender will require this insurance and as the buyer your policy is optional. For more information on title insurance visit title insurance.

- Can I get an estimate of prepaid amounts that I'll have to pay at closing? As a rule, both title insurance policies will run from anywhere from 0.5% to 1.0% of the purchase price so it will pay to shop around when looking for this insurance.

- Are there "points," and what will these cost (discount points to reduce interest rate)? A point will cost 1% of the mortgage amount and typically reduce the interest rate on the loan by 0.25% for the life of the loan. Points will vary from lender to lender and depending on how long you plan to own the home can aid in determining if points are worth their costs.

- What state taxes, local taxes, stamp taxes, and transfer taxes will I have to pay? Your mortgage company can provide these taxes to you prior to closing. In most instances, any taxes owed on the property will be made part of your monthly payment as placed in an escrow account to pay them on your behalf.

- Will a flood determination be required (to see if the home needs flood insurance)? Depending on where you live you may be required to obtain flood insurance to protect your home in the event of a flood. This is insurance that is offered by most insurance companies but is actually run by the government. If your house is flooded the damage is not covered by a typical homeowner’s policy and depending on the location of the house, may be required by the lender to obtain the mortgage.

- What other costs will there be? Different lenders will have different fees that are charged for a variety of reasons. It is important to understand what you are getting and paying for when it comes to other fees and costs as some can and often will be waived if you simply ask.

- Is there anything else I should know? If you have a good realtor, they can assist you in other issues that may arise during the process and always work with people that you are comfortable with and trust.

Lenders may not like getting two dozen questions thrown at them, but you have a right to ask before you agree to a loan. Did you know that a 1% higher interest rate on a $150,000 loan can cost you an extra $30,000 over the years? Home finance can be as important as a good price when it comes to saving money on your home. For more information on the differences and advantages of 30 and 15-year mortgages visit my prior post HERE.

We are here to assist you in understanding how much home you can afford and what the mortgage company may have approved you for. For any assistance on a mortgage feel free to contact me if you are in or near the Metro-Nashville area. For those outside Tennessee find a fee-only Registered Financial Consultant to assist you.

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