Mortgage Lender Q&A
Asking The Hard Questions
Buying a house is, for most people, the single biggest investment of their lives and one that requires some serious consideration before committing to a lender. Just as you wouldn't expect to have a tooth extracted without having a dental checkup to see if it is necessary, you don't want to become encumbered with a loan that may not be the best option for you. Make sure the person who is arranging the loan is working on your behalf, and that they have taken enough information to be sure the loan you get is the right one for your circumstance.
Asking good questions is key to ensuring the loan you get is well researched for you. Don't be afraid to ask questions, and if the answers are not to your satisfaction, keep shopping until you find a lender/broker you feel comfortable with and one who will work for you. There are answers to the questions that are most acceptable to lenders. Below we offer some questions and answers to help guide you through this process.
Which Type Of Loan Is Best For Me?
Perhaps one of the first questions to ask is which type of loan is best. There are several to choose from: fixed rate loans, adjustable-rate loans, interest-only loans, and negative-amortization loans. In answer to this question you want to look at the spread of points that are offered on a fixed-rate mortgage as opposed to an adjustable-rate mortgage loan. If there isn't a great difference, something around .5%, then the better choice would be a fixed-rate mortgage. If your intention is to remain in the house for a long time, (five years or more), then interest-only loans are an option. If you move before the property has gained value, which often takes five or more years, then you may not have enough equity to make a sale profitable.
What Is The APR and Interest Rate?
The next question concerns interest rates and annual percentage rate (APR). The APR is calculated in a very complex and confusing way. It includes the interest rate as well as all of the other lender fees associated with the loan-then that number is divided by the term of the loan. It is important to recognize that the APR is often not calculated properly nor is it possible to compute it for an adjustable loan. It doesn't account for early payoffs, either. If the interest rate is adjustable, ask about frequency of adjustment, maximum annual adjustment, margin, index, and highest rate. In a typical computation, the APR includes the loan costs over the maximum length of the loan. If the lender is advertising an APR that is the same as the interest rate, then the interest rate exceeds the ability of the market to bear it. Since an APR includes costs, these rates are higher than interest rates. If the spread between the APR and interest rate is significant, then the loan charges are too high. The normal spreads for loans at par (zero points) are usually less than .5.
How About Discount Points and Origination Fees?
The next item to ask about is discount points and origination fees. Each point is equal to one percent (1%) of the amount of the loan. So, if a loan is $100,000, then 2 points on the loan is $2,000. In addition to points, some lenders also charge origination fees. The purpose of points is to lower the interest rate so by paying more points, the rate of interest drops. Regardless whether the seller pays any of the points, they are tax deductible. If you don't plan to stay in the property for at least a couple of years or more, then paying points is not a good idea since you probably won't recover them in savings on the monthly payment. Do the math and find out the difference between monthly payments with points and without points then divide the difference into the points that are charged. The answer you arrive at will tell you how long you will pay before you break even.
If the lender or broker you have chosen is unable to supply you with answers to your questions, move on until you find someone who can.
