Buying a home will probably be the biggest financial decision of your life. But most people have plenty of misgivings about the mortgage loans that make that decision possible.
A new GOBankingRates survey of more than 1,000 adults found that less than half the population agrees that a mortgage is the best path to the dream of homeownership. The largest percentage by far — 44% — are neutral on the subject, which indicates widespread confusion regarding the process of taking out a home loan.
It’s not hard to understand why. Applying for a mortgage, getting approved and closing the loan is a long, complicated and often overwhelming process filled with countless micro-decisions that can have lifelong consequences. Before you sign on the dotted line, make sure to get answers to the following questions.
Only you can answer the first question — how long before you refinance? You’re borrowing money at a time when interest rates are at their highest point in 15 years, a fact you should consider when they offer to let you buy down your rate with points.
“We’re in a high-rate environment and you likely won’t stay in this loan long term,” said Tyler Warrick, strategic financing advisor at Real Estate Bees. “Keep your costs low so you can spend money or equity on the refinance when rates are more favorable.”
Once you answer your own question about when you plan to refi, the loan officer has to answer your second question — are there any penalties for doing so?
“We’ve lived in a rising-rate environment for months now and the expectation would be that, whether it’s two or five years from now, there will be an opportunity to refinance with a benefit on rate pricing,” said Ross Pierson, loan officer and team leader at Veterans United Home. “They need to know if there are any restrictions if the shift happens sooner than later, but also what that process would look like as well.”
You’ll know your interest rate early in the process, but that’s not the only cost. You have to pay money for the privilege of borrowing money — never sign until you know how much.
“What are the origination costs, processing costs, underwriting costs, application fees, etc.?” said Warrick. “More times than not, these are bloated figures to keep the lender’s costs low. Not all companies charge them, so do your due diligence. In rate environments like today, most of my clients seek free or no-cost loans — loans that either have no cost for the loan, or a loan that comes with a rebate to cover the remainder of closing costs.”
Affordable monthly payments are contingent upon predictable monthly payments. But your monthly obligation can change even if you chose a fixed-rate loan over a variable loan.
“If the homebuyer has applied for an ARM or any other type of mortgage that can adjust, the lender should have already covered the scenarios in which mortgage payments can change,” said Pierson. “Buy they also want to clarify if there is an escrow account and what happens if taxes or insurance are reassessed and increase. They should make sure to request examples of what can happen so that they can avoid surprises.”
It’s important to have a reliable contact who knows your loan and your situation so you can ask any questions that come up as you settle into your mortgage.
“I would recommend a single point of contact, if possible, rather than the general phone line,” said Pierson. “If the point of contact needs to be redirected based on expertise, that’s perfectly fine. In most cases, the contact tends to have an inside track and a good understanding of the inner workings of the company. This also solidifies additional accountability for the company and the individual.”
There’s a very good chance that shortly after you close, the person you’re supposed to call with questions will work for a different company. That’s because many lenders specialize in originating loans but can’t afford to wait three decades to get a return on their investment.
“Many brokers and lenders pass off the mortgage and servicing to another lender and service provider,” said Jennifer A. Anderson, vice president and mortgage loan officer at Cornerstone Bank. “This can be difficult for new homeowners when trying to get information. It is also disconcerting when you do not know who holds your mortgage.”
If you don’t have one dollar to put down for every five you borrow, most lenders will require you to be covered by private mortgage insurance (PMI) — and that will make your loan even more expensive.
Chris Allard, founder and lead mortgage broker at Chris Allard Mortgage Team, said, “If you are putting down the minimum down payment, ask your lender or broker how much you will be charged in monthly insurance premiums, as mortgage insurance is required for down payments of less than 20%.”
Other Questions To Consider
Even with the main bases covered, there are still a few questions you might want to ask depending on your specific loan and situation.
“While we start the education process from the first hello, many consumers go to the signing table with some uncertainty,” said Suzanne Downs, president and mortgage broker at Palm Beach Mortgage Group. “I would recommend the buyer fully knows the terms of the loan they are signing.”
She recommends getting granular with the following secondary questions:
- Is there a prepayment penalty?
- My mom is co-signing for this loan with me but she would like not to incur this debt in the future. How should I proceed with payments if that’s the case?
- When is my first mortgage payment and where do I send it?
- Will there be any supplemental property tax bills that I might be responsible for?
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