When you are buying a home and getting a mortgage for the first time, the entire process can be overwhelming. And your checklist for must-haves and must-dos is often very long.
You might naturally focus on knowing your monthly mortgage payment and making sure you can cover this bill. But there are other key facts you should know about your mortgage before signing all the documents and taking possession of your new home.
Be sure to ask about the following:
1. Interest Rate
Know the interest rate you’ll be paying each month, and whether that rate is fixed over the term of the mortgage or whether the rate will fluctuate. If you have a fixed-rate mortgage (FRM), then the rate should remain stable. But if you have an adjustable-rate mortgage (ARM), then the rate will change or adjust periodically.
Also, figure out the annual percentage rate (APR), which reflects the total cost of the loan over its term. This number is especially important when comparing loans as a mortgage with a low interest rate may be loaded with extra costs (pertaining to points and closing expenses) that increase your total payments overall.
2. Mortgage Points
Determine how many points you are paying to get your mortgage. You might pay mortgage points (or extra money) to get a lower interest rate; such points are called discount points because you pay them to get an interest-rate reduction (or discount). You might also pay points just to get the mortgage in order to cover the lender’s costs of making the loan.
Note that the dollar value of a point varies, depending on the mortgage loan balance. A point equals a percentage of the balance. So, one point on a $200,000 mortgage is $2,000 (1% x $200,000 = $2,000).
3. Prepayment penalty
A prepayment penalty is charged when you pay off the mortgage loan earlier than expected. The prepayment term may be three years, five years, or another timeframe; you are charged a penalty if you pay off the mortgage before the end of this term.
Though an early pay-off may not be top of mind when you are buying a new home, this issue may become more important if you need to sell your house or would like to refinance soon after getting the first mortgage.
4. Monthly payment
Pin down the exact figure of your monthly payment. You may have been focusing on calculating the principal and interest on the mortgage, an important number. But there are more items added to that dollar amount. For example, many mortgage payments also include monthly charges for homeowners’ insurance and property taxes.
In addition, you may have figured the principal and interest on the price of the home minus your down payment. However, there are additional expenses that may be capitalized (or added to the loan balance); these include mortgage points and closing costs.
5. Loan servicing company
Find out what company will service your mortgage loan after closing. This company is responsible for applying your payments to the principal balance; collecting, holding, and dispensing money for home-related bills in escrow such as property taxes; and handling customer service issues.
It’s common for mortgages to be originated by a mortgage broker, sold to another financial institution, and serviced by yet another firm. Knowing the name (and reputation) of the servicing firm is useful when making a mortgage borrowing decision.
6. Private Mortgage Insurance (PMI)
PMI is charged when your down payment is less than 20% of the home’s value. This insurance is paid by the borrower but protects the lender from borrower default, covering the difference between the loan amount and the value of the property.
There are multiple ways to take care of this expense. You might roll the cost into closing expenses, pay the entire bill upfront, pay annually, or include this charge in your monthly mortgage payments.
Generally, PMI is to be cancelled automatically when the mortgage balance becomes 78% of the home’s original value. Borrowers may also request cancellation when the loan reaches 80% of that value. Not only should you know the dollar amount of this payment but you should also know when PMI is to be discontinued for follow-up purposes.
There’s a lot to know about mortgages. Don’t be afraid to ask your mortgage broker and your closing attorney (or other professionals) about the terms and nuances of your mortgage. You will be glad you fully understood all the details before making such a major financial commitment.