When you first sit down with your mortgage broker, you may feel like you need a translator. “Points” are not sharp objects, “ARMs” are not body parts, and prepayments may not be a good thing. Learn enough of the lingo before you start mortgage shopping to ensure that you know exactly what you are getting into before you sign the contract.
What Is the Mortgage's Interest Rate?
The interest that you pay over the life of your mortgage could exceed the amount of money you initially borrowed. A $200,000 30-year fixed-rate mortgage at 6.5 percent will cost you more than $255,000 in interest charges over the life of the loan. It is critical that you understand what rate the lender is charging you, whether that rate may change at any point during the mortgage, and whether the mortgage offer is the best rate available for someone with your credit history.
Can My Interest Rate Change?
If your lender offers you an adjustable-rate mortgage, or ARM, make sure that you have a thorough understanding of how often the lender can change your interest rate, what index the lender will base the rate change on, and if there is a limit on how much the rate can increase both annually and over the life of the loan.
Are You Locking In This Interest Rate?
Interest rates can change very quickly, and you could find that the mortgage you decided on at 5.0 percent is over 6.0 percent by the time you close on the loan. Lenders frequently lock in interest rates for 30 days or more to give the application time to process. Ask your lender how long it will lock in the rates for and if there is any charge for that privilege.
What Is the Annual Percentage Rate?
Many people use the annual percentage rate, or APR, of the proposed loan to compare loan offers from other lenders. Lending Tree defines the APR as the cost of interest and other fees the lender charges you over the life of the loan, expressed as a percentage. Some lenders do not include all costs in their APR calculations, so ask for an itemized list of what the lender does include. If the APR is .75 to 1 percentage points more than your quoted interest rate, the lender is adding hefty fees to that mortgage.
What Are the Total Fees?
Lenders typically charge an origination fee, closing costs and points on mortgages. Points are up-front fees paid to the lender in return for a lower interest rate, and one point is usually equal to 1 percent of the money borrowed. Mortgage lenders normally roll these costs into the total mortgage so that your starting principal balance is the amount of money borrowed plus any fees minus your down payment.
Are There Any Prepayment Penalties?
Some states allow lenders to charge a prepayment penalty if you pay any or all of the principal before it is due. Prepayment penalty clauses usually expire early on in the loan, usually after three to five years. Make sure you understand how this will impact you if you need to sell or refinance your home.
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