Questions to Ask When Buying a House
After helping thousands of home buyers, each one unique, we recognize some common traits. When shopping for a mortgage, most clients think about the size of their monthly payment. However, there are many other important factors to consider. Here are the top six questions that you and your home loan advisor will work through before closing on your home.
“What interest rate can you offer me?”
This might be the first question you’ll ask. When discussing your rate with a home loan advisor, it can be helpful to have a little background on how interest rates are determined. Available interest rates can vary day-to-day and, in some cases, hour-to-hour depending on financial market conditions. Your home loan advisor can provide an estimated interest rate based on available rates, but will need specific information before offering you an interest rate for your unique situation.
While many factors influence your interest rate, the rate alone is not the true cost of your loan over time. The APR you are offered includes the interest rate, any points you may choose to pay, and fees and other charges you will pay to get the loan. Your APR will usually be higher than your interest rate and is a more accurate representation of what your loan will cost over the full repayment term. If you decide to compare interest rates from a few lenders, you should compare the APR offered by each lender so you can understand the true cost of each lender’s loan scenario, including fees and other charges. While interest rates and APRs are important, don’t forget how important a lender’s reputation for service and closing on time is before deciding which lender and rate to choose.
“Does the rate come with points?”
Also known as “buying down the rate,” points are fees that you can pay your lender at closing to secure a lower interest rate and, by extension, lower your monthly payment. One point equals 1% of your total mortgage value. The rate by which your interest decreases is not standard, however. If you’re considering paying points, it’s important to look at how long it will take you to recoup your cost. To find your break-even period, simply divide the cost of the points by how much you’ll save on your monthly payment. The resulting number is the number of months it will take for you to get back your initial investment. If you plan on staying in the home for longer than that amount of time, points may be a worthwhile expense. However, if you plan on moving sooner, consider putting that money toward your down payment instead.
“Is the interest rate fixed or adjustable?”
These days, most would-be homeowners are going for fixed-rate mortgages, or ones where the interest rates stay the same over the length of the loan. If you’re thinking of choosing an Adjustable Rate Mortgage (ARM), your home loan advisor will discuss how long the initial, fixed-rate period lasts, how often the rate will adjust, how the adjusted rate is calculated, and what the rate cap is. From there, work with your home loan advisor to weigh the benefits and risks to determine which rate structure works best for you. Consider how long you’re planning on staying in the home and the frequency at which your rate will climb if you end up overstaying the fixed-rate period.
“When can you lock my rate?”
A rate-lock on a mortgage is a guarantee from us that your rate will stay the same for a specified period, no matter how they fluctuate industry-wide. Traditionally, lock periods last between 30 and 60 days. If possible, you’ll want to make sure your closing date falls within your lock period. Additionally, you’ll want to ask about the specific terms of your lock period. Ask if there is there a fee for locking in at a certain interest rate. You should also check to see if your lock has a float down option. A float down option allows you to take advantage of a decline in interest rates, during your lock period, but may have an upfront fee associated with it
“Will I have to get private mortgage insurance?”
If you’re planning on putting less than 20% down on the home, the answer will probably be yes. Since a smaller down payment means that you have less of a stake in the home, private mortgage insurance (PMI) on many types of loans may be required to protect the lender’s investment in the event you would default on the loan. Ask your home loan advisor about your options. Most conventional loans only require PMI until you’ve paid down over 20% of the loan, while FHA programs require it for the entire term of the mortgage. VA programs, on the other hand, allow for up to 100% financing on some transaction types. Your home loan advisor will help you weigh how much PMI will affect your monthly payment versus the benefit of making a larger down payment or switching loan programs.
“What fees can I expect from you?”
You’ll need to pay a few different kinds of fees or costs for getting your loan. There are typically charges for third-party services like title insurance or an appraisal that you pay at closing. You’ll also pay local government fees or taxes that are part of the transaction. Your closing costs will include prepaid interest on the loan calculated from the time you close to the end of that month, the first year’s homeowner’s insurance premium, and will usually include deposits for an escrow account, which will accrue funds to pay future homeowner’s insurance and property taxes. Lender charges for underwriting, processing, and administrative fees are also included in your closing costs. In some cases, your lender may also charge an origination fee for making the loan.
When you are working with your loan advisor to decide which loan option is the best fit for your personal financial situation and your short- and long-term goals, it is important to look at the upfront costs for getting your loan such as the interest rate and closing costs, as well as the APR, or the cost of your loan over time.