Asking the right questions when shopping for a mortgage is crucial. Failing to do so could cost you thousands of dollars.
However, the first question you need to ask is to yourself. And that is how many mortgage loan applications are you going to fill?
Unfortunately, almost half of borrowers only consider one lender when looking for a mortgage. It’s actually worse than that because even though 50% may look around to see which mortgage lenders offer best rates and terms, less than 25% actually submit more than one application form. Think about that. More than three in four borrowers go with the first lender that gives them a quote.
You can save a significant amount of money long term by investing some in mortgage comparison shopping.
For instance, the spread in 2018 for the highest and lowest mortgage rates was approximately 1% (3.95% vs. 4.94%). That is a pretty narrow range, historically speaking. In 1981 the mortgage rate spread was nearly 3% (14.8% vs. 18.63%. But even just a 0.5% difference on a $300k 30-year mortgage can save you enough money to buy a 2019 Subaru Legacy in cash and still have enough left to keep the gas tank full for a year (~ $31,600). Incidentally, interest rates can vary by more than half a percent even for people with good credit depending on which lender you choose.
Here are some questions you should ask your lender:
Is there anything I can do to apply for a better rate?
You may be surprised by the options available. Some lenders may offer a lower rate if you increase your down payment or reduce your debt-to-income ratio. Adding a well-qualified cosigner can improve your rates considerably, although it comes with its own issues.
Do I need to buy points to get the advertised rate?
Most lenders will offer a better rate if you buy points. Points are a form of prepaid interest that allows you to buy a lower interest rate for the duration of the mortgage. To illustrate, let’s say credit score and income qualify you for a 5.27% APR on your mortgage. Your lender may offer you a 0.27% reduction of your APR if you pay $2,000 for 2 points.
Is buying points a good investment? It all depends how long you plan to stay in your home, your cash flow, and what returns you could obtain from your money if you invested it somewhere else. How long would you have to make mortgage payments before the points pay for themselves? On a $100k mortgage with a 30-year term, you would have to stay in your home approximately 7 years before you could recover the cost of your investment in points. The details will change depending on your mortgage terms so be sure to ask your lender what your break-even time is before you choose to buy points.
Lenders are required to make disclaimers clear and conspicuous but it’s easy to miss a footnote when comparing multiple loan offers. Check all the rates you’re comparing don’t have strings attached.
Can I pick my own homeowners insurance?
Lenders are only allowed to pick your home insurance for you when you choose not to buy a policy and your mortgage terms require it. However, some unscrupulous lenders do push borrowers to buy overpriced policies from their insurance subsidiaries.
What is the rate lock and what happens if we haven’t closed by the time it runs out?
A rate lock is an agreement between you and the lender to guarantee a rate for a specified time period. This is useful because your interest could change during the application process for all types of reasons. Your credit score could drop. The appraisal of your home may not go as you expected. Your lender’s method of calculating your income may be different. And, of course, the market interest rates could change at any time. Some rate locks come with a float down option, which allows you to take advantage of a better APR if the rate drops. In both cases, lenders may charge a fee for lock fee for the service. Make sure you understand the cost and the consequences when the lock expires.
Ask how much it will cost to extend the lock if the closing process lasts longer than expected. Note that initial loan estimates will specify the terms and cost of the rate lock but will not tell you how much extending it will cost. You need to ask this specifically to avoid surprises.
How long should I expect for the mortgage to close and when can I expect my letter of commitment?
This information is particularly important when you’re buying in seller’s market and properties sell fast. Look for lenders with a fast underwriting process that provide preapproval letters.
Can you give an estimate of the total closing costs?
Closing costs are the part of the mortgage process borrowers are least familiar with. Only 49% of buyers reported being very familiar with closing costs and 14% described themselves as completely unfamiliar according to a recent survey by the Consumer Financial Protection Bureau.
Again, the spread in costs from one lender to another is significant. The names of closing fees are often suspiciously vague. For example, origination fees can vary from 0% to 1.5% of the loan principal. But lenders may also charge a document preparation fee (anything from $50 to $250) or charge “processing fees” that vary from $500 to $1,200.