The details buried in the many pages of your mortgage contract can cost you thousands unless you know what to look for. The more you know, the better your position to negotiate and the better able you are to ensure you won’t be caught off-guard by the fine print.
Pre-Approval and Escrow
Before you go house-hunting, it's wise to get mortgage pre-approval. After you get pre-approval and while you are looking for a home, market rates may change, so be sure to ask your lender to "lock-in" the mortgage rate quoted in writing for 30 to 60 days. Some lenders will offer to discount the interest rate for a fee, generally one percent of the principal amount of the loan for a discount of 0.25 percent.
Therefore, if the mortgage amount is $200,000 with an interest rate of 4 percent, you can pay $2,000 up front for an interest rate of 3.75 percent. This can make financial sense, depending on how long you are going to stay in your home. The Real Estate Settlement Procedures Act, requires lenders to provide a good-faith estimate of all costs associated with your mortgage within three days of receiving the loan application.
Term and Interest Rate
The “term” of a mortgage is how many years to will take to pay off the loan. The interest rate is how much the lender will charge you for loaning you money. A fixed-rate mortgage is a loan that charges the same interest rate throughout the life of the loan. An adjustable-rate mortgage starts out at a rate that is usually lower than a fixed-rate mortgage but changes after a predetermined period, adjusting to a certain index identified in the mortgage agreement. It is important that any ARM have a cap, a maximum amount of increase, to protect you from a big jump in the rate.
Unless you have an interest-only loan, the mortgage payment consists of principal and interest. The amount of interest you pay is calculated monthly on your outstanding principal balance. Because your monthly mortgage payment stays the same, most of your monthly payment is consumed by interest, leaving little available to be applied to principal until you’re almost half way through the term of your loan. If you can make additional payments to pay down the principal, you can cut years off the term of your loan.
Make sure your mortgage contract allows you to make principal pay-downs without pre-payment penalty charges. You can also save substantially on interest if you pay half of your mortgage payment bi-monthly, instead of one payment a month. Make sure your mortgage contract includes this option. Be aware of your lender's late-fee policy. This includes the day of the month a late fee will be assessed if your mortgage payment is not received on time and the amount that will be charged.
Some lenders require that the mortgage agreement include an impound account. This means that your payment has been adjusted to include a pro-rated monthly amount for taxes and insurance. If your mortgage includes an impound account, the lender is responsible for issuing payments for homeowners insurance and your annual property taxes.
Lisa Dorward was a corporate financial executive and business consultant for more than 15 years before becoming a writer in 2003. She has B.A. degrees in both history and creative writing and earned her M.F.A. in creative writing in 2008, specializing in novel-length historical fiction.