Mortgage rates hit an all time lows yet again last month according to CBS News. And nationally, home sales continue to struggle despite these record low interest rates. For borrowers, this is good news. Lenders want your business. However, before opening a loan in this rate environment, ask your lender a few important questions.
[Related: Is there a correlation between home prices and mortgage rates?]
What is the APR?
The U.S. government passed the Truth in Lending Act decades ago, in 1968. This means, your lender is required to quote the annual percentage rate (APR). For example, if you secure a 5 percent APR, you’ll pay $5 for each $100 borrowed annually.
What can makes things a tad more confusing is that the APR includes much more than just your interest rate. Processing fees, origination points and private mortgage insurance are all variables that can be included in your final APR. Ask for an itemized list of fees from your lender for a complete breakdown.
Does my Loan have Origination Points?
In today’s rate environment, lenders are advertising rates that are super low. For borrowers, these rates are attractive and offer low monthly mortgage payments, but before signing your name on the dotted line ask your lender about the cost associated with securing the rate – including origination and discount points. Lenders charge prepaid mortgage interest points, to reduce your rate over the life of the loan. For both discount points and origination points each point equals 1 percent. Therefor on a $100,000 loan you can purchase points upfront for $1,000 each – reducing your APR by 1 percent for every point.
Find out how many points the lender expects you to pay. And, more importantly, the cost.
Can I Lock my Interest Rate?
You just found a great rate. The fees are reasonable, and you’re anxious to secure the rate. So, what now? Most lenders allow borrowers to “lock” an interest rate, including the interest rate, points and other fees for a particular period of time.
However, some lenders charge a fee for this. Ask your lender if they charge a fee, the cost, and the time of the lock.
Are there Prepayment Penalties?
Does your loan have prepayment penalties? This is a question every borrower should ask. Prepayment penalties may apply in these situations:
The home is sold
The home is refinanced
The loan balance is paid off
Find out the total cost of the prepayment penalty, and decide if you can live with it. Expect to pay about one percent of the total loan amount, or six months of interest.
What is the Loan Type?
Most borrowers consider two basic types of loan products, including a fixed loan or an adjustable rate mortgage (ARM). ARM loans offer low interest rates, which are attractive to borrowers. A fixed loan, however, offers a fixed rate that doesn’t change over the life of the loan.
If you select an ARM loan, ask a few questions, such as:
How often can my interest rate adjust?
How high can the rate go (does it have a cap?)
Can this loan have a negative amortization (translation, can the loan increase in size?)
Usually, with an ARM, the rate is fixed for a specific amount of time (such as five years) – and then adjusts based on the terms of your ARM agreement. An ARM loan can offer very low payments for the initial term. But, it’s important to know the terms of your conditions, because your rate and monthly payment can potentially increase.
Have you purchased or refinanced a home lately? What’s the most important tip you have for other borrowers?