SAMPLE SYSTEM FOR
1. Company Name/Phone Number:
down the name of the loan officer with whom you speak, so that you can get back in touch
if you decide to apply for a loan at that financial institution.
2. Mortgage Type:
Your task will be simpler if you've
narrowed your search to the type of mortgage loan you prefer. When comparing mortgages
among lenders, compare the same loan among the lenders you call -- in other words, a
30-year fixed rate with a 30-year fixed rate, a one-year Treasury adjustable rate mortgage
(ARM) with a one-year Treasury ARM, etc.
3. Interest Rate and Points:
change often, even daily. Make sure you record the date of your rate quote. Try to call
all lenders on the same day, so that you have an accurate comparison. Another way to
evaluate rates is by examining the annual percentage rate (APR). It indicates the
"effective rate of interest paid" per year. The figure includes points and other
closing costs and spreads them over the life of the loan. While the APR provides you with
a common point for comparison, it's important to look at the whole product before deciding
which mortgage to get.
4. Interest Rate Lock-ins:
When a lender
agrees to hold the quoted rate for you, this is called a "lock-in." Ask when the
rate can be locked in, at the time of application or only upon approval? Will the
lender lock in both the interest rate and points? Can you get a written lock-in
agreement? How long does the lock-in remain in effect? Is there a charge
for locking in a rate? If the rate drops before closing, must you close at your
locked-in rate, or can you get the lower rate?
5. Minimum Down Payment Required:
loan officer what the lowest allowable down payment is -- with and without private
mortgage insurance (PMI). If PMI is required, ask how much it will cost. Find out
how much is due up front at closing and the amount included as monthly premiums. Ask if
you can finance the closing cost of PMI. Also ask how long PMI will be required. In
some cases, lenders may be willing to cancel the PMI when your loan balance drops below a
certain percentage of the value of the property.
6. Prepayment of Principal:
Some states allow
lenders to charge borrowers a prepayment penalty if they pay the loan off early. If you
think you may sell your home before the loan is paid off (most mortgages are repaid early)
or plan to make principal payments before they are actually due, you need to know if there
will be a penalty and for how long it will remain in effect. Some penalties are in effect
only for the early years of the loan.
7. Loan Processing Time:
Loan approvals can
take 30 to 60 days or more. Peak business periods, particularly when rates are
dropping and many homeowners are refinancing, can affect a lender's response time. Ask
each lending institution for its estimate, and see which can promise very short approval
times. If interest rates are rising or you have an urgent need to move in,
these "express" services may be the answer.
8. Closing Costs:
Closing costs are fees
required by the lender at closing and can vary considerably from one financial institution
to another. Ask specifically about the application fee, origination fee,
points, credit report fee, appraisal fee, survey fee (if required), lender's attorney fee,
cost of title search and title insurance, transfer taxes, and document preparation fee.
9. Financial Index and Margin:
rate on an adjustable rate mortgage (ARM) is determined by adding a margin or spread to a
specified financial index. This is called the fully indexed rate. Find out
both the financial index used (Treasury, Certificate of Deposit, Cost of Funds, etc.) and
the margin (that is, how much higher is the ARM rate than the index rate?).
10. Initial Interest Rate:
Is the initial
rate quoted the fully indexed rate or a lower introductory rate, sometimes called a
teaser or discount rate? A teaser rate may sound like a bargain today,
but it may turn out to cost you more in the long run. This low rate lasts only until
the first adjustment. After that, you will be charged the fully indexed rate,
at which point your payments may become unmanageable.
11. Adjustment Interval:
How often can the
interest rate be adjusted -- every six months, one year, three years, five years? A
loan that adjusts its interest rate after six months is called a six-month adjustable rate
mortgage (ARM); after one year, a one-year ARM; etc.
12. Rate Caps:
Rate caps limit how much your
interest rate can move, either up or down. Periodic caps limit the change per
adjustment period, and a lifetime cap governs the maximum amount the interest rate can
increase or decrease over the life of the loan. For example, you may find a one-year
adjustable rate mortgage (ARM) with a 2 percent periodic cap and a 6 percent lifetime cap.
If this one-year ARM is originated at 8 percent, after the one-year adjustment
period it could be adjusted upward to as much as 10 percent, or downward to as low as 6
percent, depending on the movement of the index. Remember to consider the adjustment
interval when comparing rate caps. The one-year ARM just described could reach its
lifetime cap of 14 percent (original interest rate of 8 percent plus lifetime interest
rate increase of 6 percent) in three years if interest rates rose steadily. A
three-year ARM would just be making its first adjustment after such a three- year period.
13. Payment Caps: Payment caps may appear
similar to rate caps, but do not be misled. While they can limit how much your
monthly payment increases, they do not restrict the interest rate from going up.
Many adjustable rate mortgage (ARMs) with payment caps have no corresponding interest rate
caps. As a result, you may end up paying the lender less than the amount of interest
you owe each month. If this happens, this unpaid interest is added to your loan
balance, and the principal amount you owe increases rather than decreases with each
payment. This is called negative amortization -- and generally should be avoided.
14. Conversion to Fixed-Rate Loan:
adjustable rate mortgages (ARMs) let you convert to a fixed-rate mortgage at specified
times, typically during the first five years of the loan. Because the convertibility
feature is often an added expense (some lenders charge an extra point, for example), find
out the exact conversion terms and how much it would cost you to convert your ARM to a
fixed-rate loan. You'll want to compare this cost with the costs incurred and
the interest rate savings you might gain by refinancing your mortgage to a fixed-rate
loan. This will help you decide the relative advantages of each option to determine
which is most cost-effective for you.