Getting the right loan can make the difference in whether you can afford your house or not. Be sure to understand all the hidden terms on your loan.
1. What’s the rate now -- and what can it go up to later? If you’re getting a fixed rate loan, the question is pretty straightforward. Your interest rate --and your monthly payments -- are fixed. You can check the going rate on a particular type of mortgage at sites like bankrate.com. Remember that the farther your credit history is from perfect, the higher your rate will be. If you have an Adjustable Rate Mortgage (ARM), it gets much trickier. You’ll get a better deal on the beginning rate, but it could go up from there. The loans are usually labeled with a fraction. A 3/1 ARM means that the rate stays put for three years, then re-adjusts every one year afterwards.
What stops ARM payments from going to the moon are important safety features called a caps. The cap limits on how much the payments could go up the first time, in each subsequent time or overall. So, it’s crucial to understand what you could be getting into if rates continue to rise, but it’s something easy to miss. A recent survey by the Federal Reserve Board found that 41 percent of homeowners with ARMs didn’t know how much the rate could go up overall and 35 percent didn’t know how much it could go up at once.
2. How about those points? Points are a way to pay your lender to reduce the rate. Each point costs 1 percent of the loan balance. Points and interest rates work like a see-saw. As your points go up, your interest rate goes down. Some lenders are now offering “negative points.” They give you cash for settlement costs, but come with the steep price of higher interest rates.
The longer you plan to stay in your home, the more valuable points are to you. Several online calculators are available to help figure out how long you would need to stay put to make each point worth it. Usually points are paid upfront, but sometimes they can be added to the principal.
3. Is there a penalty for paying off the loan early? Homeowners are often surprised to learn that they can get stuck with a fee for paying off the loan early. Sometimes that fee can be quite hefty: up to 3 percent of the loan balance or 6 months interest. Lenders use the penalties to keep homeowners from quickly jumping to cheaper mortgage rates.
The penalties aren’t all bad: You may be able to get a better rate if you agree to pay a penalty for prepayment of a loan. Though, if you’ve had trouble getting a loan, you may be required to accept a prepayment penalty -- because if your credit improves, you’ll surely be tempted to refinance.
Be sure to understand the terms of the penalty before you agree to it. Many penalties gradually decline and then disappear after a set number of years. When will your penalty go away? Will it apply if you sell your home or only if you refinance?
4. Can I lock in this fabulous rate right now? In today’s rising interest rate environment, locking in a good rate is vital. Traditionally buyers looked for a mortgage after they found their home. The lender would then lock that rate for 15, 30, 45, or 60 days to allow time for processing the application and for any delays in settlement. Today the lock is as flexible as everything else in real estate. The lock can last from a week to four months. Some buyers get the loan first with a “lock and shop” agreement, which can fix the loan price for up to a year.
Be sure to ask your lender: How long does it usually take you to approve a mortgage? Can I get the lock in writing? Does the lock cover both interest rates and points? What are the fees -- if any -- for the lock? Are there any conditions that will allow the lender to break the lock? If your lock expires, you’ll probably have to pay the prevailing rate. Lenders who resell their mortgages to other investors may be unwilling to cut you a break. So, you may want to ask your lender if they keep the loans or resell them.
5. What do I need to do to get that loan? Each loan comes with two kinds of requirements -- what you need to qualify and what you need to prove it. “Qualifying guidelines” are the basic requirements of each loan. Have you had steady or increasing income for the last couple years? How much of a downpayment is required? How big of a bite of your monthly income will the payment take? If you have credit problems, are they far enough in the past? If you meet all the conditions, you have to prove how much you make. Typically, that involves two years of income tax returns and W-2 forms, two months of pay stubs and recent statements from anywhere you save or owe money. For the self-employed or others with complicated financials, there are mortgages that require no documents, but come with higher rates.
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