Consider both your current and future financial requirements in order to help you choose the best home mortgage for your needs. There are a variety of different loan types.
In a fixed-rate mortgage, the interest rate and payment amounts remain constant over the loan's life span. Therefore, this may be the best option if you're planning to stay in your home for a while, are buying when interest rates are low or are concerned about the possibility of a future rate increase.
2. What is the interest and annual percentage rate (APR)?
Once you've selected a loan type, the next important consideration is the interest rate. Your interest rate is used to calculate your monthly payments and how much you'll pay over the loan's term.
The annual percentage rate (APR) factors in other fees charged by the lender to better reflect the true cost of borrowing.
3. What are the discount points and origination fees?
Your lender may let you purchase discount points to secure a lower interest rate. One point is equivalent to 1 percent of the principal (e.g. three points on a $100,000 mortgage would cost $3,000). The longer you plan to stay in the home, the more it's worth it to pay for discount points.
Origination points are administrative charges that cover the cost of the processing of your application. They don't affect the interest rate.
4. What are the closing costs?
Be aware of the extra fees that will be included in your loan. They may include charges for appraisals and credit reports, and make sure you understand what each one is for. Ask for a "good faith estimate" of your loan's closing costs-your lender is required by law to give you one within three days of receiving your application. Ask if they'll guarantee it in writing and if there's room to negotiate on the extra fees.
5. What are rate locks and when can I take advantage of them?
Rate locks or lock-ins constitute a commitment from your lender to guarantee a certain interest rate and number of points for a specific time period. Interest rates can change daily, so you may want to lock in your rate early in the negotiations if they appear to be going up.
Ask if your lender charges a fee to lock in the rate, how long it can be locked it in for and if you can get the locked-in rate in writing. Most lenders offer "lock and shop" agreements that fix the loan price for 30 to 45 days while you shop around for the right home. Sometimes, however, lenders may be willing to hold the rate for up to four months. Lock in your rate "on application" as opposed to "on approval;" otherwise, if the market rises between the date you submit your application and the date your loan is approved, you'll have to pay the latter, presumably higher rate.
6. What is the minimum required down payment?
The amount of your down payment helps to determine the rate and term of your loan. Larger down payments reduce the overall cost of your loan by reducing the size of the principal and usually enabling you to obtain a lower interest rate.
If your down payment is less than 20 percent, you will probably be required to pay private mortgage insurance (PMI). You can ask your lender to cancel PMI once you've paid down 20 percent of the original price or once you have attained 20 percent equity in your home.
7. Is there a prepayment penalty?
Most lenders will charge you a penalty if you pay your mortgage off early, sometimes as much as 3 percent of the loan balance or the equivalent of six months' interest. Paying the penalty may be worth it if you can secure a better interest rate. Ask if the penalty would still apply if you refinanced your mortgage through the same lender. Determine in advance how the penalty is calculated; some penalties decline
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