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1. Company Name/Phone Number:
Write down the name of the loan officer with whom you speak, so that
you can get back in touch if you decide to apply for a loan at that
financial institution.
2. Mortgage Type:
Your task will be simpler if you've narrowed your search to the type
of mortgage loan you prefer. When comparing mortgages among lenders,
compare the same loan among the lenders you call -- in other words, a
30-year fixed rate with a 30-year fixed rate, a one-year Treasury
adjustable rate mortgage (ARM) with a one-year Treasury ARM, etc.
3. Interest Rate and Points:
Interest rates change often, even daily. Make sure you record the date
of your rate quote. Try to call all lenders on the same day, so that
you have an accurate comparison. Another way to evaluate rates is by
examining the annual percentage rate (APR). It indicates the
"effective rate of interest paid" per year. The figure
includes points and other closing costs and spreads them over the life
of the loan. While the APR provides you with a common point for
comparison, it's important to look at the whole product before
deciding which mortgage to get.
4. Interest Rate Lock-ins:
When a lender agrees to hold the quoted rate for you, this is called a
"lock-in." Ask when the rate can be locked in, at the time
of application or only upon approval? Will the lender lock in
both the interest rate and points? Can you get a written lock-in
agreement? How long does the lock-in remain in effect?
Is there a charge for locking in a rate? If the rate drops
before closing, must you close at your locked-in rate, or can you get
the lower rate?
5. Minimum Down Payment
Required: Ask the loan
officer what the lowest allowable down payment is -- with and without
private mortgage insurance (PMI). If PMI is required, ask how much it
will cost. Find out how much is due up front at closing and the
amount included as monthly premiums. Ask if you can finance the
closing cost of PMI. Also ask how long PMI will be required. In
some cases, lenders may be willing to cancel the PMI when your loan
balance drops below a certain percentage of the value of the property.
6. Prepayment of Principal:
Some states allow lenders to charge borrowers a prepayment penalty if
they pay the loan off early. If you think you may sell your home
before the loan is paid off (most mortgages are repaid early) or plan
to make principal payments before they are actually due, you need to
know if there will be a penalty and for how long it will remain in
effect. Some penalties are in effect only for the early years of the
loan.
7. Loan Processing Time:
Loan approvals can take 30 to 60 days or more. Peak business
periods, particularly when rates are dropping and many homeowners are
refinancing, can affect a lender's response time. Ask each lending
institution for its estimate, and see which can promise very short
approval times. If interest rates are rising or you have
an urgent need to move in, these "express" services may be
the answer.
8. Closing Costs:
Closing costs are fees
required by the lender at closing and can vary considerably from one
financial institution to another. Ask specifically about
the application fee, origination fee, points, credit report fee,
appraisal fee, survey fee (if required), lender's attorney fee, cost
of title search and title insurance, transfer taxes, and document
preparation fee.
9. Financial Index and
Margin: The interest
rate on an adjustable rate mortgage (ARM) is determined by adding a
margin or spread to a specified financial index. This is called
the fully indexed rate. Find out both the financial index used
(Treasury, Certificate of Deposit, Cost of Funds, etc.) and the margin
(that is, how much higher is the ARM rate than the index rate?).
10. Initial Interest Rate:
Is the initial rate quoted the fully indexed rate or a lower
introductory rate, sometimes called a “teaser” or discount rate?
A teaser rate may sound like a bargain today, but it may turn out to
cost you more in the long run. This low rate lasts only until
the first adjustment. After that, you will be charged the
fully indexed rate, at which point your payments may become
unmanageable.
11. Adjustment Interval:
How often can the interest rate be adjusted -- every six months, one
year, three years, five years? A loan that adjusts its interest
rate after six months is called a six-month adjustable rate mortgage
(ARM); after one year, a one-year ARM; etc.
12. Rate Caps:
Rate caps limit how much your interest rate can move, either up or
down. Periodic caps limit the change per adjustment period, and
a lifetime cap governs the maximum amount the interest rate can
increase or decrease over the life of the loan. For example, you
may find a one-year adjustable rate mortgage (ARM) with a 2 percent
periodic cap and a 6 percent lifetime cap. If this
one-year ARM is originated at 8 percent, after the one-year adjustment
period it could be adjusted upward to as much as 10 percent, or
downward to as low as 6 percent, depending on the movement of the
index. Remember to consider the adjustment interval when
comparing rate caps. The one-year ARM just described could reach
its lifetime cap of 14 percent (original interest rate of 8 percent
plus lifetime interest rate increase of 6 percent) in three years if
interest rates rose steadily. A three-year ARM would just be
making its first adjustment after such a three- year period.
13. Payment Caps:
Payment caps may appear similar to rate caps, but do not be misled.
While they can limit how much your monthly payment increases, they do
not restrict the interest rate from going up. Many
adjustable rate mortgage (ARMs) with payment caps have no
corresponding interest rate caps. As a result, you may end up
paying the lender less than the amount of interest you owe each month.
If this happens, this unpaid interest is added to your loan balance,
and the principal amount you owe increases rather than decreases with
each payment. This is called negative amortization -- and
generally should be avoided.
14. Conversion to Fixed-Rate
Loan: Some adjustable
rate mortgages (ARMs) let you convert to a fixed-rate mortgage at
specified times, typically during the first five years of the loan.
Because the convertibility feature is often an added expense (some
lenders charge an extra point, for example), find out the exact
conversion terms and how much it would cost you to convert your ARM to
a fixed-rate loan. You'll want to compare this cost with
the costs incurred and the interest rate savings you might gain by
refinancing your mortgage to a fixed-rate loan. This will help
you decide the relative advantages of each option to determine which
is most cost-effective for you.
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