affordability planning: questions for your lender
Finding a lender is easy, finding the right lender is not. Given the competition across lenders, it is virtually certain that for similar mortgage products and identical down payments, your interest rates will be similar. Rates are set by the market, not the lender, so lenders differentiate on the incentives (like closing cost credits), access to private mortgage insurance, and types of programs they can offer. Every borrower should speak to at least three different lenders to understand these difference and find the best possible fit.
It is common for real estate agents to partner with a preferred lender, who mutually benefit from shared referrals. It may be in your best interest to speak with that lender, but you should not feel obligated to use them. The benefits may include additional incentives and an ability to move more quickly. Here are some questions to help you throughout your due diligence.
What are rates for different programs, down payment amounts, and mortgage amounts?
The lender will be able to run a few different scenarios for you based on the above variables to help you piece together what your monthly housing cost may be. Interest rates fluctuate daily, so keep in mind what is quoted today may not be the same tomorrow.
A key thing to note is the difference between the interest rate and the annual percentage rate (APR). The interest rate is the base rate used to calculate your mortgage payment. The APR, however, is a critical element to determining which mortgage you should choose.
The APR differs from the baseline interest rate because it accounts for the additional fees that are associated with the mortgage, such as closing costs, processing and underwriting fees, and private mortgage insurance (PMI). By comparing APRs across different mortgage options, you can see which mortgage is the least expensive overall.
Should You Choose the Lowest APR?
While choosing the lowest APR may seem like a good strategy, it doesn’t make it the optimal mortgage. A higher APR means you’re simply combining those fees you would normally pay upfront into the long-term cost of your mortgage. Take APR into consideration with the baseline monthly mortgage rate as that is ultimately what will come out of pocket month to month.
What Are Rates and Benefits Between a Fixed Rate and Adjustable Rate Mortgage?
As the name suggests, a fixed-rate mortgage is one where the interest rate remains unchanged throughout the life of the loan, providing stability. On the other hand, Adjustable Rate Mortgages (ARMs) typically offer a starting period of fixed rates then convert to what’s called a floating rate, or one that fluctuates at regular intervals depending on changes in market rates. The benefits here occur when rates are trending downward, but of course if rates are rising over time, your monthly payment increases.
What Are Your Fees?
There are closing costs and processing fees related to acquiring a mortgage. Many of these, as your lender will explain, are paid to the municipality, while some are retained by the lender. These are the fees incorporated into your APR. You do have the option to request to pay no closing fees, but all that means is they’ll be baked into a higher interest rate — there is no free lunch!
What Is The Minimum Down Payment and Your Quote for Private Mortgage Insurance?
Different lenders may be able to provide different mortgage products with different fees at different down payment amounts (i.e. 10% vs 15% vs 20%). Similarly, for those buyers who put down less than 20%, you will need to pay private mortgage insurance. These rates can vary across institutions as well, so be sure to ask — it can make a big difference in your monthly payment.
Do You Service the Loan Or Sell It?
Often, lending institutions play only one part of providing your mortgage, in that they provide the initial loan and due diligence, and then sell your mortgage and have it processed elsewhere. Unfortunately, you have little control over if, when, and by whom your mortgage is bought and processed, but it may be worth asking if there are any benefits to the mortgage being retained in-house.