Questions To Ask About Your New Mortgage
By: Jeff Tompkins
Often times I run into clients whose worried looks tell me, "I want to ask all the right questions so I get a good deal, but I don't know what all the right questions are!" It's easy to forget sometimes that while we in the mortgage profession are very familiar with what a good loan looks like, our clients often are not. Some things end up being inconsequential, but many can make a huge difference in how well your loan works for your purposes. Here are some questions to ask on every home loan, so that you get a good sense of exactly what you are getting into:
When, if ever, can my interest rate adjust?
This is very important, because adjustable rate products are very popular these days, including the "Option ARM". The Option ARM can adjust on monthly to yearly schedules, so be very careful with these. Likewise, most home equity loans are tied to the prime rate, which can move often at the direction of the Federal Reserve Board.
Does my loan have a pre-payment penalty?
Many of the "less than perfect credit" lenders automatically put pre-payment penalties on their loans (usually 2-3 years long) that basically state if you payoff your loan whether through refinancing or selling your home within that period, you will owe them a percentage of the loan amount, which usually ends up being thousands of dollars. Lenders usually classify pre-payment penalties as "hard" or "soft". A soft penalty allows you to sell the home without having to pay the penalty, but refinancing the home will still incur the charges. A hard penalty means you will pay the pre-payment penalty on either a sale or a refinance during that time period. In some cases, like with bad credit situations, a pre-payment penalty is unavoidable. Most lenders though, will waive the pre-payment penalty in exchange for a higher interest rate.
Is an escrow account being established to pay my taxes and hazard insurance?
In general, if you have 20% + equity in your home, lenders do not require that you keep an escrow account with them into which a portion of your payment will go every month. For those good at saving, it might be a better option to pay for your insurance and taxes yourself when they are due, as the money that would be sitting in an escrow account can be sitting in an interest-bearing account of your own, making your money work for you rather than the lender.
Does my loan have negative amortization?
Negative amortization happens when a payment is made that is less than the required interest payment per month, thus sending the extra unpaid interest to the back of the loan. This can happen with the Option ARM's; in offering people the lowest payment possible, the unpaid interest is basically pushed off to be paid at a later date. We all know the saying "out of sight, out of mind", and noone wants that surprise at the end of the loan. Try to avoid a negative amortization loan.
Jeff Tompkins is owner and president of Teacher's Funding Group, LLC, a Colorado mortgage broker that specializes in providing home financing to those in the education industry and all those who need it. Feel free to email Jeff at firstname.lastname@example.org if you have any mortgage/financing questions. Visit http://www.teachersfunding.com/ for more information.