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The saying “you don’t even know what you don’t know,” might be the perfect description of someone starting the complicated process of getting a mortgage. Prospective borrowers need to do substantial research to learn which fundamental questions to ask when interviewing lenders.
While there’s no shortage of advice on the critical questions to ask, most of those questions will only get you a little of the information you need, and some of the questions are just plain wrong. So what should you ask, or not ask, when you interview lenders?
In this post, you’ll learn four standard questions Not to ask a lender, and what you should ask instead. Knowing the right questions is half the battle.
Don’t Ask “Do you offer rate locks?”
All lenders offer interest rate locks and require you to lock in an interest rate. If you ask the lender if they offer rate locks, the answer will be yes. Instead, ask, “When can I lock in an interest rate?” Again, the answer is the same for all lenders.
You can lock in an interest rate when you have a property. If you’re refinancing an existing mortgage, you can lock in a rate as soon as you apply for the loan because there’s already a property. When buying a home, you can lock in a rate once you have:
- A signed purchase contract to buy a specific property.
- Applied for the loan.
The actual timing of locking in the interest rate is your decision. Rates fluctuate constantly, and no one knows the perfect time to lock in an interest rate. Much like investing in the stock market – if there were a formula to follow guaranteeing you’re buying a stock at the lowest price and selling at the highest value – everyone would use it. The same is true for mortgage interest rates.
Educate yourself on what’s happening in the economy as you prepare to apply for a mortgage. Also, discuss the recent movement of interest rates with the lender because they see what’s happening to interest rates every day. They will give you their opinion and advice, but ultimately you have to decide when it’s time to lock in your rate.
Don’t Ask “How much of a down payment do I have to make?”
Everyone’s financial situation is different, including income, savings, and the size of mortgage payment they can afford each month. To answer this question, a lender needs to learn about your current situation and long-term financial goals. Instead, ask what loan options are available with a low down payment.
Most lenders offer programs with as little as 3% downpayment on conforming loans, with a fixed rate or adjustable rate. There are also different options for paying mortgage insurance premiums when you put less than 20% of the purchase price down. FHA loans require a minimum of 3.5% down and have high mortgage insurance premium (some paid at the time the loan is funded, and some paid monthly for the life of the loan.)
Conforming loans sold to Fannie Mae or Freddie Mac (the two government-sponsored entities) allow as little as 3% down, with mortgage insurance premiums due monthly until there is more than 22% equity in the property. Lenders won’t automatically remove mortgage insurance, so borrowers must request the lender assess their equity to have it removed.
Another great option is lender paid mortgage insurance (LPMI) programs. LPMI loans carry a slightly higher interest rate, but no mortgage insurance premium is required. The higher rate offsets the cost of the premium the lender pays on the borrowers’ behalf. Ask lenders to compare rates and monthly payments with and without the monthly mortgage insurance premium.
Don’t Ask “What are your closing costs?”
Buyers are advised to ask prospective lenders about “their closing costs,” and for a Loan Estimate. The Loan Estimate (LE) is a disclosure lenders provide to all applicants which gives a ballpark estimate of the transaction costs based on a purchase price and loan amount. Buyers decide which lender to work with based on the lowest Loan Estimate they receive.
The problem with that is most of the costs come from Third Parties (appraisers, escrow, title or closing attorneys, cities and counties.) Third party costs “go with the property” since every loan will have appraisal fees, settlement fees, and city/county fees, regardless of the lender you use.
Instead, ask how much the lender fee is (also known as an origination fee.) Lender fees are collected to cover the cost of processing a loan and vary by lender. They only differ by a couple of hundred dollars between lenders and isn’t the way to choose the right lender for you.
Knowing the estimated closing costs for your proposed mortgage is essential, and the right lender will also provide you a detailed explanation of the costs. Look for this when you’re trying to pick the best lender for you.
Don’t Ask “How many points do you charge?”
Paying points on a mortgage loan is a controversial topic, but that’s a reputation earned mainly through misunderstanding. The term ‘point’ refers to one percent of the loan amount and, if paid by a borrower, will slightly reduce the interest rate. The decision to pay or not pay a point is entirely up to you, as the borrower.
Instead, ask the lender what interest rates are with, and without, one point included and the monthly payment for the two interest rates. Next, compare the monthly savings from the lower rate to the upfront cost of paying the point to estimate how many months it will take you to ‘save back’ that money.
For example, a $500,000 loan with a 30 year fixed rate at 4.75% with one point (1 Point = 1% of the loan amount, or $5,000) has a monthly payment of $2608. The interest rate is 4.875%, without paying any points, and has a monthly payment of $2646. You’d save $38 a month by choosing the lower interest rate, but it would take you over ten years to save back and break even on the $5000 in upfront costs.
As you can see, much of the standard advice on how to pick a lender – rate locks, downpayment amount, closing costs, and points – doesn’t give you enough information to you choose the right one for you. Instead, concentrate on experience, competitive rates and how they answer the questions in this post.