June 11th, 2016 7:19 AM by Jackie A. Graves, President
From weeding through paperwork to
searching for optimal loan terms, purchasing a home can be
as mentally taxing as navigating a foreign country without knowing the
language. Let’s face it: Channeling your energy toward finding the perfect home
in Atlanta, GA, or Sacramento, CA, is a much more pleasurable
experience than agonizing over potential lenders and loan applications.
loan and lender you ultimately choose should be just as important as the neighborhood you explore or the home on
which you put an offer; therefore, the amount of legwork for each chore should
be comparable. In an effort to bolster consumer education, improve the
loan-shopping process, and cut through the jargon on loan documents, the Consumer
Financial Protection Bureau (CFPB) last year established the Know Before You Owe mortgage program. (Now there’s really no excuse
for not doing your homework before buying a home.)
quick rundown on what Know Before You Owe entails — and what mortgage questions
you should ask along the way.
Wield the Loan Estimate tool
October 2015 and the start of Know Before You Owe, loan applicants would have
received two forms upon applying for a loan: a Good
Faith Estimate and a
Truth-in-Lending disclosure. Created by two separate federal agencies and
filled with overlapping information, the forms made it difficult for consumers
to compare everything from loan amounts to interest rates.
Before You Owe’s streamlined Loan Estimate, it’s easier to find pertinent loan
information, which in turn can encourage comparison
shopping instead of hindering the process. (You can explore a sample Loan Estimate on the CFPB
Seek details from lenders
Once you’ve become familiar with the paperwork and application process, start
interviewing lenders about their mortgage products. Here are six questions to
1. Are points included in the quoted interest rate?
are upfront fees —
equal to 1% of the loan amount for each point — paid to reduce the interest
rate on the loan. It’s important to clarify whether the quoted interest rate
includes points and, if so, how many.
2. What are the closing
costs associated with this loan?
Closing costs typically fall between 2% and 5% of
the total loan amount — a large enough range to make this question an important
3. What is the required down payment?
of loan types are available, and not all of them require the same down payment.
Make sure to ask how much you will be required to put down and, if it’s less
than 20%, ask if tacking on Private
Mortgage Insurance (PMI) will
be an additional requirement.
4. Is it a fixed-rate or adjustable-rate mortgage?
mortgage keeps your
interest rate and mortgage payment locked for the entire duration of the loan
(yep, all 15 to 30 years). An adjustable-rate
mortgage (ARM) can
adjust after a designated period depending on the market, potentially increasing
your monthly mortgage payment substantially.
Can the interest rate be locked down? If so, for how long?
rate offered by a
potential lender isn’t a guarantee — unless the lender can lock it down for
you. If you are offered a particularly low rate, make sure you know when you
need to lock it down and how long it can be held.
6. Are there any prepayment penalties on this loan?
exchange for a lower interest rate or lower out-of-pocket costs upfront, some
lenders will charge a prepayment penalty. Depending on the terms, the
prepayment penalty might have to be paid before refinancing or selling the home
within a designated period. It’s important to know beforehand exactly what
your loan requires.
It pays to shop around
to a survey
conducted by the CFPB, only 47% of consumers shop around for a home
loan, and for those who do, rates can vary by as much as a half-percent from
lender to lender — a substantial difference over the life of a loan. In
addition, some banks or mortgage lenders might not have access to the type of
mortgage that would be the best fit for your specific situation. But without a
little extra searching and knowing to ask the right questions, you would never
be the wiser.
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