Before you sign on the dotted line, ask your mortgage broker these questions.
Signing a mortgage is a big commitment that comes with a huge pile of paperwork to sort through. Even if you read every document, some information may still feel unclear. Whether you feel completely confident signing on the dotted line or a little nervous, read through these four questions to ask a mortgage broker before you commit.
What is the APR?
There is a crucial difference between asking, “What’s the interest rate?” and “What’s the APR?”
The APR factors in all the ancillary costs of the loan — such as the interest rate, discount points, and loan origination fees — whereas the interest rate reflects only that one specific piece. Some lenders recognize the average person might not understand the difference between the two, and they advertise low interest rates for a mortgage that holds a higher APR due to other associated costs.
By law, lenders are required to disclose the loan APR, so search for that number to make sure you’re comparing apples to apples when looking at different loans.
Does this carry a prepayment penalty?
Planning to save up a little every year to make extra mortgage payments? Be wary of “prepayment penalties,” which are fees that get assessed if you pay off your mortgage early or refinance into another loan.
These fees can typically cost between 2% and 4% of the overall loan and are usually applied against borrowers who repay their mortgage in less than five years. Some are flat rates, while others are on a sliding scale depending on how early you pay off the loan. Read the documents carefully to see if your mortgage has a prepayment penalty or early payment penalty, and talk to your broker to clarify the terms and conditions around this clause.
Can we review the GFE and HUD-1 together?
By law, you’re required to receive a Good Faith Estimate, or GFE, within three days after your lender has accepted your loan application. As the name implies, this document is supposed to give you a reasonable estimate of the loan terms and the settlement charges.
You’ll receive the HUD-1 at the closing table. This document will offer an itemized list of every charge and credit, including escrow fees, title insurance, loan origination fees, attorney fees, rate lock fees, and more.
Overwhelmed yet? Ask your real estate agent or mortgage broker if you can review the GFE and HUD-1 together, so that you can make sure that the HUD-1 (your final costs) is aligned with the expectations that the GFE established. Bear in mind that you may not receive the HUD-1 until you’re at the closing table, so you’ll need to make prior arrangements with your mortgage broker (or ask your agent if you can receive the HUD-1 early).
How long will my rate lock, and what’s the maximum cap?
If you’re taking out an adjustable-rate mortgage (ARM), your interest rate will remain “fixed” for a limited number of years (such as three, five, or seven). After that, your rate may change.
However, each ARM will have a “cap” on that adjustment — meaning that the rate can adjust only a limited number of times, at a limited rate. Clarify these limits and guidelines with your broker, and check your budget to make sure you can afford these higher rates.