Working well with your mortgage loan officer is critical to your home ownership dreams. He or she is the one that can make your mortgage a reality or deny the application outright. So, it is essential to have good communication with your loan officer from the start and before you sign mortgage disclosures.
But many home buyers end up signing their mortgage disclosures and other documents before asking many important questions about the home loan. Below are the most important ones to ask.
What Is The APR?
This is a vital question that far too many home buyers do not ask. There is a massive difference between the APR and the interest rate. The APR includes the various other costs of the loan, such as interest rate, points and loan origination fee. The interest rate only shows that one particular part of the home loan. Some lenders very well understand that consumers often do not understand the difference between APR and interest rate. They advertise super-low interest rates in their advertisements, but the APR is usually much higher. Plus, not every home buyer will qualify for the lowest interest rate, anyway.
However, lenders are required by law to state the loan APR in the loan disclosure documents. It is easy, however, to not see what the APR is in that big pile of mortgage disclosure documents. Be sure you understand what the APR on the home loan is before you sign on the dotted line. Also, you should realize early on when you are mortgage shopping what the difference between APR and interest rate is. You could choose a mortgage lender based upon the low-interest rate but find out when you are signing the disclosures that the APR is much higher. Be sure to compare the APRs of all home loans you are looking at before you commit to any lender.
Is There a Prepayment Penalty?
Many home buyers want to save on interest by making extra mortgage payments each year. This can potentially save you thousands of dollars in interest over time. But you need to look out for prepayment penalties on your mortgage. These are fees that are assessed if you pay off the loan early. Or, you could get whacked with a significant penalty if you decide to refinance the mortgage. Many people do not hold onto the same mortgage anymore for 15 or 30 years; as mortgage rates drop, homeowners often want to refinance. But if you have a prepayment penalty, you could be charged thousands of dollars to refinance.
A prepayment penalty can be between 2% and 4% of the loan. It usually is applied against the borrower who pays off the mortgage within five years. Some fees are flat rates, and others may be on a sliding scale, depending upon when you pay the loan off. Read your mortgage disclosure documents with care. See if there is a prepayment penalty and what it is.
Can I Review the GRE and HUD-1 With You?
Federal law requires that you get a Good Faith Estimate or GFE within three days of the lender accepting your mortgage application. This document should provide you a rough estimate of what the loan and settlement terms are.
The HUD-1 is what you get at the closing table. This document provides a list of every credit and charge – escrow fees, loan origination fees, rate lock fees, title insurance, commissions, and more.
These documents can be overwhelming for many home buyers, especially those who have never bought a home before. Ask your realtor or loan officer if you can review the GFE and HUD-1 with them. This ensures that the HUD-1 matches up with what you saw in the GFE. You might not get the HUD-1 until you get to closing. You will need to make prior arrangements with your loan officer if this is the case.
How Long Is the Rate Locked and What Is the Max Cap?
If you are getting an adjustable rate mortgage, there are some other questions to ask. The interest rate will stay fixed for a few years – usually one, three, five or seven. After that, the mortgage rate can go up or down based on a major index, such as the prime rate or LIBOR.
While the rate can increase, each ARM has a cap on it. There is a limit to how much the rate can go up in a year and during the entire life of the loan. It is essential to check what these caps are with the loan officer before you sign off on the mortgage. With rates generally on the rise in 2018 and probably 2019, you could pay substantially more in interest when your ARM rate resets.