If you're shopping for a mortgage, you probably know there are all sorts of things you should ask the lender - what is the APR, what will my monthly payment be, how much are the closing costs, how much of a down payment do I need?
But those are the basic, obvious questions. If you really want to be a savvy mortgage shopper, here are a five things you ought to be asking that may not have occurred to you.
1 - Is your company a mortgage lender or mortgage broker?
There are two main ways to get a mortgage. The first is to go directly through a mortgage lender, which is the actual entity that lends you the money and has the full authority to approve and underwrite your mortgage. The second is to go through a mortgage broker, an independent agent who acts as an intermediary in arranging a loan through a lender.
The advantage of using a mortgage broker is that they represent the mortgage products of a variety of different lenders, so they can help you find the one that has the best rate, lowest costs and is best suited to your needs.
If you deal with a mortgage lender, you're limited to that lender's products. However, your loan will be processed in-house, which can lead to quicker service and it may be easier to iron out any complications that may arise with your application, since you're dealing with the lender directly.
Brokers deal with wholesale lenders, so they can obtain discounted mortgage rates that allow them to charge a commission and still be competitive with loans offered directly by the lenders themselves. However, however, if you're the industrious type, you may be able to find a somewhat better deal by contacting a number of lenders and sorting through their various offers.
2 - What are the total closing costs of this loan with no points?
Points are one of the things that make shopping for a mortgage difficult. While in theory all you're doing is comparing rates and balancing in the effect of closing costs, points make it a lot more difficult to do.
Discount points, of course, are a way of buying a lower mortgage rate through higher upfront fees. They're technically a type of prepaid interest. But when you're comparison shopping for mortgages, they can do a lot to muddle the picture.
Lenders won't just cite you a rate of, for example, 4.75 percent and one point, or 4.87 percent with half a point. You may get quotes for rates like 4.93 percent with 0.3 points or 4.64 percent with 1.42 points or some other hairsplitting fraction. It can make it all very hard to determine just what the basic cost of the mortgage is.
Instead, ask the lender to quote you a rate with zero points and let you know what the closing costs will be. This will give you the simplest look at what the lender is actually charging. You can then go from there and ask what the rate would be if you were to pay for one point or two points, for example.
3 - Ask when the break-even date for buying points would be
The break-even date is a key concept to understand when you're thinking about paying for points. It's how long it will take the money you save each month by paying for points to equal what you paid for those points in the first place. So, if you save $50 a month on your mortgage payment by paying for two points at a total cost of $3,000, it would take you 5 years (60 months x $50 = $3,000) to recoup your upfront costs.
This doesn't give you the exact cost - you may be able to deduct the cost of your points on your taxes, while there is also the opportunity cost of laying out all that money up front. But requesting the break-even date will give you a good idea of how long you'll need to stay in the home to make the extra expense worthwhile.
(Lenders will often let you simply roll the cost of these points into the loan, so you can see exactly how much they would reduce your monthly mortgage payment, but even then you're still liable for their full cost over time and the break-even point still matters).
4 - How would a different down payment affect my loan costs?
The usual approach people take toward a down payment is that they save up toward a certain figure - perhaps 5, 10 or 20 percent of the projected purchase price of their home - and when they reach that, they seek a mortgage with that amount of a down payment.
However, your down payment options may be more flexible than you realize. Lending requirements have eased significantly since the early days after the crash, and lenders are again willing to extend mortgages with 5 or 10 percent down to borrowers with decent credit.
You can also inquire about your eligibility for loan programs that offer even lower down payments. The FHA is noted for allowing down payments of as little as 3.5 percent, while those with modest incomes may be able to qualify for a USDA loan for no money down.
It's worth noting though, that lower down payments come with a price. Interest rates are generally higher for loans with smaller down payments, and private mortgage insurance - required on conventional mortgage with less than 20 percent down - can result in an additional charge of one-half to 1 percent of your loan balance each year. The FHA has its own structure of insurance and fees that go along with its low down payments.
At the same time, you may find that you prefer to make a smaller down payment and pay those extra costs in return for not depleting your cash reserves. It's well worth checking into all your options here.
5- Who will service my loan?
This is something a lot of first-time mortgage borrowers don't even consider. Most mortgages are handed over to a servicing company - often a major bank - to handle billing, collecting payments, maintaining escrow accounts and other administrative tasks that go along with your loan. Your relationship with your lender will only be for a few weeks, but you'll be stuck with your servicer for a very long time.
Your servicer will be the one you'll call if you have questions about your billing statements, will make the call as to whether you can cancel private mortgage insurance when you reach an 80 percent loan-to-value ratio and will be the one you deal with if you find yourself in a financially tight spot and need to negotiate a modified payment schedule.
A servicer will also have its own rules for submitting payments beyond those specified in your mortgage agreement. For example, some servicers may charge you a "convenience fee" for making payments online. Others may only charge such a fee for online payments during the 15-day grace period after your payment due date during which you can avoid late fees - but the convenience fee may be nearly as much as the penalty itself.
It helps to check into servicers to see what their reputation among clients is before you commit to a loan, because you have no power to change servicers once your loan is assigned to one. You can't even object before the transfer takes place - it's out of your hands.
If this is important to you, it helps to know that certain lenders tend to service their own loans, so you'll still be dealing with your original lender over the life of the loan. This is particularly true for credit unions, savings and loans, and mortgage banks, all of which tend to keep mortgages on their own books, rather than selling the loans to investors as major banks usually do.