Mortgages 101: Essential questions answered

1. What type of mortgage should I apply for?

Mortgages fall into 2 categories:

Conventional mortgages

These are granted by private lenders such as banks and credit unions. Under this category are fixed rate mortgages and adjustable rate mortgages, all offered in terms of 10, 15, 20 or 30 years.

Government backed loans

• FHA (Federal Housing Administration) loans. With a 3.5% down payment, they are great for

first-time buyers.

• VA (Veteran Affairs) Loans. Issued to veterans and those in active military service.
• USDA (U.S. Department of Agriculture) loans. Offered if you are interested in buying rural property.

Government backed loans are cheaper because they are guaranteed by the government bodies that issue them. On the contrary, conventional loans don’t have this backing, so not only are they more expensive, but you need good credit to qualify.

Nevertheless, your options may be limited to conventional loans if you’re not a good fit for a government backed loan. In such a case, your loan officer should advise you to raise your credit score or increase your down payment.

2. What is the current interest rate for mortgages?

When talking about current interest rates for mortgages, your loan officer should advise you about interest and APR.

Interest: Fixed or adjustable

The interest rate can be fixed or adjustable. A fixed-rate interest never changes. A fixed-rate loan is a great option if you are settled, have a family and envision yourself staying in your house for years.

Interest on adjustable-rate mortgages (ARMs) usually starts low (even lower than fixed-rate loans) for a set period. After that time is up, interest can go up or down. If you plan to stay in a home for a few years, this loan is a good option. Your loan officer should tell you:

• How often the rates will be adjusted
• The maximum adjustment annually
• If there is a cap

Annual Percentage Rate (APR)

Annual Percentage Rate (APR) is higher than the interest rate because it is a sum of the interest on your mortgage, origination fees, points and other costs. In other words, APR is the total cost of a mortgage. You can use a mortgage calculator to estimate your interest and APR.

Once you agree on an interest rate with your lender, you need to lock the rates so that it doesn’t go up. Note however that if you lock, you won’t be able to take advantage of downward fluctuations in current mortgage rates. Find out the following regarding locking interest rates:

• If there is a fee for locking your interest rate
• If all the loan costs be protected by the lock
• The duration of the interest lock
• If the interest lock can be recorded in writing

3. What down payment do I need to provide?

Typically, most loans require a down payment of 20%. Sometimes, a lender can allow for a lower down payment depending on factors such as credit score and income stability. Government backed loans can go as low as 3.5% or even require no down payment.

Note that you will be charged mortgage insurance if your down payment is lower than 20%. You’ll want to find out if it will be an upfront cost or if it will be charged in your monthly payments. Mortgage insurance will affect your interest rate and monthly instalments, so you’ll need to weigh up all these factors and decide whether it’s better to raise your down payment or pay insurance costs.

4. Will you do a hard credit check on my account?

As mentioned earlier, credit scores and credit history are important elements of any loan application. Your lender has to conduct credit checks in order to get your credit information. Your credit information will determine the interest rate you’ll get on your mortgage.

Such checks, however, can affect your credit score, so it’s good to find out if your lender will perform a “hard pull” or “hard credit check”. Hard pulls should happen within a short period as this minimizes their impact. If you intend to shop around and find out about different types of mortgage loans from multiple lenders, make sure to do so within a short period as all lenders are likely to do hard pulls.

5. How much time will it take you to fund me?

Loan processing typically takes 21 to 45 days. Inform your lender of the closing date stated in your purchase contract and find out:

• The anticipated period for loan processing
• How long the loan will take to be funded after your application is approved
• Any obstacles to expect

Your lender should guarantee on-time closing as failure to do so will raise costs and problems such as:

• Higher interest rates if the lock period expires
• Having to reschedule with your movers, which may cost more
• Losing the home and needing to start house hunting all over again

6. What fees and costs will I pay upon closing?

The associated mortgage costs and fees include:

• Origination fees
• Discount points
• Appraisal fees
• Title search
• Property taxes
• Inspection fees

There could be other costs but these are the most common ones and they will be included in the loan estimate. You can pay these costs upfront or ask about mortgages with no closing costs if you’d prefer to spread them out over the timeframe of the mortgage.

Summary

Understanding mortgages is something we all have to do before buying a house. As you shop, don’t stop at these 6 questions. Go online and fill out your loan amount and loan terms on bank rate mortgages to see what different lenders will offer you.