Before you sign on the dotted line to buy a home, ask your mortgage broker these questions.
Signing a mortgage is a big deal — a BIG, big, big, big, deal that comes with a lot of paperwork. Even if you read the entire document, some information may still feel unclear. Before you sign on the dotted line to buy a home, ask your mortgage broker the following four questions:
What is the APR?
Notice that this question isn’t “What’s the interest rate?” — the question states, “What’s the APR?” There’s a crucial difference. The APR factors all of the ancillary costs of the loan — such as the interest rate, discount points and loan origination fees — while the interest rate only reflects one piece of the overall puzzle. Some lenders, recognizing that the average person might not understand the difference, will advertise a low interest rate for a mortgage that holds a higher APR due to the other associated costs. By law, lenders are required to disclose the loan APR, so search for that number to make sure you’re comparing apples-to-apples when you’re looking at different loans.
Does this Carry a Prepayment Penalty?
Let’s imagine that your boss calls you into his office and announces that you’re getting a sizable raise. Hooray! You decide that you’d love to put this money towards becoming mortgage-free, so you start making extra payments towards your home. But wait! Some mortgages carry a “prepayment penalty,” which is a fee that gets assessed if you pay off your mortgage early (or refinance into another loan). These fees can typically cost between 2% to 4% of the overall loan, and are usually applied against borrowers who repay their mortgage in less than 5 years. Some are flat rates, while others are on a sliding-scale depending on how early you pay off the loan. Read the documents carefully to see if your mortgage has a “prepayment penalty” (sometimes called an “early payment penalty”), and talk to your broker to clarify the terms and conditions around this clause.
Can we Review the GFE and HUD-1 Together?
By law, you’re required to receive a Good Faith Estimate, or GFE, within three days after your lender has accepted your loan application. As the name implies, this document is supposed to give you a reasonable estimate of the loan terms and the settlement charges. You’ll receive the HUD-1 at the closing table. This document will offer an itemized list of every charge and credit, including escrow fees, title insurance, loan origination fees, attorney fees, rate lock fees and more. The HUD-1 can be overwhelming in its scope, but it’s also quite comprehensive. Ask your real estate agent or mortgage broker if you can review the GFE and HUD-1 together, so that you can make sure that the HUD-1 (your final costs) are aligned with the expectations that the GFE established. Bear in mind that you may not receive the HUD-1 until you’re at the closing table, so you’ll need to make prior arrangements with your mortgage broker (or you’ll have to ask your agent if you can receive the HUD-1 early).
How Long will my Rate Lock, and what’s the Maximum Cap?
If you’re taking out an adjustable-rate mortgage, your interest rate will remain “fixed” for a limited number of years (such as 3, 5 or 7). After that, your rate may change. However, each ARM will have a “cap” on that adjustment — meaning that the rate can only adjust a limited number of times, at a limited rate. For example, the ARM might lock in your current interest rate for 5 years. After that, the rate will adjust at a maximum of once every six months, with a maximum rate hike of 1% at each adjustment, and an overall lifetime cap of no more than 6% above your current rate. If you’re taking out an ARM, clarify these limits and guidelines with your broker — and check your budget to make sure you can afford these higher rates.