Getting a mortgage can mean keeping track of a lot of moving parts. Savvy shoppers know to ask lenders about interest rates, closing costs and how much they can borrow. But even seasoned buyers may not know to dig a little deeper.
Here’s a look at five key things homebuyers often forget to ask mortgage lenders:
What’s the Annual Percentage Rate?
Interest rates get advertising attention, but you need to pay equally close attention to the annual percentage rate (APR).
The interest rate, or note rate, is stated on the mortgage note and is used to calculate your monthly payments. But it may not reflect the overall cost of borrowing.
Let’s say Lender X offers you a 30-year fixed rate mortgage at 4.5 percent interest. Lender Y offers the same mortgage for 4.25 percent. This would seem to be a no-brainer. But we’re missing some key information, namely all the other costs associated with the loan, from closing costs and origination fees to mortgage insurance and more. Lender Y may have the lower rate, but this loan could cost you more in the long run if their costs and fees are higher.
That’s why you need to look at the APR, which factors in those costs beyond just your interest rate. It’s also why lenders are now required to disclose APR. Otherwise, they could hide fees and charges behind an incredibly low — yet ultimately misleading — interest rate.
Do I Have to Escrow Taxes and Insurance?
Homeowners paid on average about $800 per year for homeowners insurance in 2008, the most recent year for which data is available, according to the Census Bureau. The average property tax bill that year was $1,200.
A lender may require you to escrow funds to cover those bills. Instead of writing a $1,200 check at year’s end to pay those taxes, a lender will have you split that total into 12 equal payments. Your mortgage payment would include that month’s portion of your property tax and homeowners insurance bills.
The money sits in an escrow account until your lender pays the bills on your behalf. Some homeowners would prefer to pay those bills all at once rather than part with a portion each month. Whether you have to escrow funds can depend on where you live, your loan-to-value ratio and other factors.
Is There a Prepayment Penalty?
These have gone out of vogue in the mortgage industry. But you really don’t want to be the exception. Ask lenders if there’s any financial penalty for paying off the mortgage early.
A clause like this could potentially impact your ability to refinance or even sell the home. The good news is government-backed loans like FHA and VA loans don’t allow prepayment penalties as a rule. Fannie Mae doesn’t purchase mortgages with prepayment penalties, and Freddie Mac will follow suit beginning next month.
Is There Anything I Shouldn’t Do Before My Loan Closes?
Don’t confuse loan preapproval with loan approval. Lenders will double-check financial information, employment status, credit scores and other important metrics before giving your loan a green light.
Don’t change jobs if you can help it. Don’t move lots of money around, or suddenly make big deposits. Save your furniture-buying spree for after your loan closes. Any changes to your credit or your overall financial stability can spell major trouble for your credit file.
If you absolutely have to make a major change, be sure to update your loan officer as soon as possible.
Who Will Service My Loan?
It’s kind of jarring for some first-time homebuyers, but you may not send your mortgage payment to the lender that originated your loan. Many lenders sell their loans and the right to service them. Companies are legally required to notify you regarding these kinds of changes.
The mortgage servicer will receive your monthly payment and manage your escrow account for taxes and insurance. This is also the entity you’ll turn to if you run into problems paying your mortgage on time.
This isn’t uncommon or a harbinger of trouble. Loans and servicing rights get sold all the time. But it’s important to know who will be responsible for processing your payments and ensuring your bills get paid on time.
Image: Fengyuan Chang
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December 13, 2023
Mortgages
