With all the financing and refinancing going on these days, lenders are up to their eyeballs in mortgage applications.
But it can be dangerous to be looking for a loan when prospective lenders are too busy to take your calls and too busy to follow up with you.
One problem is that many home buyers and homeowners don’t thoroughly understand the process of getting a loan, much less some of the specifics. Important details, like what is the APR (annual percentage rate) sometimes slip through the cracks.
If nothing else, make sure you ask lenders the following five questions before you sign your application – and keep asking for clarifications until you thoroughly understand the answers.
- How will my credit affect the interest rates and terms I get? Last year 1.3 million individuals chose to face their creditors in bankruptcy court. The average individual has approximately $4,000 in credit card debt, and more than a dozen credit cards. (Go ahead. Open your wallet and count them!)
With credit issues like these, it’s not surprising many home buyers — and not just first-time buyers — have credit problems. What you may not realize is that even a handful of minor credit problems can have a disturbing affect on your ability to get a mortgage for the lowest rate and best terms.
If you have perfect credit, great. If you have blemishes and negatives, ask your lender to point out those that will be the most damaging to your mortgage application. Then, take the time to clean up your credit.
- Which loan is best suited to my personality and my personal finances? Considering that you’ll probably only live in your home for 7 to 10 years, why would you get a 30-year fixed rate mortgage?
The answer has to do with what “what if” fears. What if you stay longer? What if interest rates at that time are sky high at the time you have to pay off a loan with a shorter term? If these fears define who you are as a home buyer, you’re probably not spending the time you need to analyze what you should buy and how long you plan to stay.
On the other hand, that’s why lenders offer different loan programs. If you’re a worrier, you might be better off with the predictability of a fixed-rate loan. If you’re willing to take a bit more risk, you could save thousands of dollars with a 3-, 5-, or 7- year balloon. Your lender should be able to guide you further.
- What are all the lender fees associated with this loan? A junk fee is a junk fee by many other names. And the only way to know exactly what you’re paying for is to have the lender give you fax you the good faith estimate before you sign the application. If you don’t understand exactly what a fee is for and why it’s being charged, keep asking until you either get a clear explanation or the charge is removed.
Along the same lines, many home buyers and owners don’t really understand why the APR is, in some cases, so different from the super-low interest rates they hear bandied about in the news.
The “annual percentage rate” is the rate you’re actually paying for your mortgage after all the lender fees are factored in. It may be even higher if you have a variable rate loan. If you want a good basis of comparison between lenders, consider comparing APR to APR, and not just the low rate they’ll quote you over the telephone.
- How much of a premium is the end lender paying you for closing this loan? It’s not a particularly well-known fact, but mortgage brokers are usually paid by the end lender (also called the investor) for selling you their loan products. That fee is in addition to the fees you’re paying the lender. So your lender pockets fees from each side of the deal.
While few lenders forego the end lender premium, make sure the premium is limited to 1 percent of the loan or less. Anything above that, and it may be the lender has sold you a loan that is higher than the market rate. Lenders get a higher premium for loans closed that are above the market rate.
- Does this loan carry a pre-payment penalty? Although pre-payment penalties are illegal in some states, federally-chartered lenders claim they are exempt from those laws. That means, you might be offered a loan with a cheaper interest rate and a prepayment penalty even if you live in a no-prepayment penalty state.
But prepayment penalties aren’t necessarily a bad thing, especially if you know you’re going to stay in your home (without refinancing) for the penalty duration. In return, you get lower interest rate and save money.
But if your loan carries a prepayment penalty, you should understand exactly how the penalty is going to be calculated, just in case. Some penalties are straightforward – one percent of the loan amount. Some have more convoluted calculations. Ask your lender to figure out how much you’d owe if you paid off your loan early.
By the way, you can still prepay the balance of your loan even if you have a prepayment penalty. Just don’t pay off the loan within the prepayment period.
Oct. 17, 2003.