By TJ Freeborn, Discover Home Loans
Buying a home will likely be one of the largest financial decisions you make. You may have done your research and read everything carefully but still have unanswered questions about the process. I know I did!
I get asked a lot of questions from both new and previous buyers who sometimes feel unsure about the process. To help you navigate with confidence, I’ve compiled a list of common questions about mortgage basics, along with the answers:
Q: How long does the mortgage loan process take?
A: Processing a mortgage loan typically takes between 30 and 45 days, although timing may vary depending on circumstances. Your lender can provide an estimate of the time it will take to close your loan, which will allow you to plan accordingly.
Q: What are interest rate and APR?
A: The interest rate is the cost of borrowing money and is used to calculate the monthly payment to your lender. The lower the interest rate, the lower your monthly payment. The APR (annual percentage rate) is the interest rate plus other fees associated with your loan, including certain processing and closing fees. Because the APR includes other fees, it gives you a better idea of the true cost of the loan. Compare the APR when you’re deciding among multiple lenders, but be sure to compare the actual interest rate, as well.
Q: What are the most common types of mortgages?
A: The two most common types are fixed-rate and adjustable-rate mortgages.
The main features of a fixed-rate mortgage are:
- The interest rate doesn’t change on your loan.
- Your monthly mortgage payment (principal and interest) will always be the same amount throughout the entire term of your loan.
The main features of an adjustable-rate mortgage (ARM) are:
- The interest rate changes over time. The initial interest rate term can be from one to 10 years, and that rate is generally lower than the rate on a fixed-rate loan.
- The rate adjusts annually after the fixed-rate term, and your monthly mortgage payment may increase or decrease depending on each rate adjustment.
Q: For an ARM, what will an increase in the interest rate do to my monthly payments?
A: An adjustable-rate loan has a fixed interest rate for a predetermined length of time. Once that time is up, the rate will adjust to reflect current rates. If the rate goes up, so will your monthly payment amount. If you are interested in an ARM, there are additional questions you should ask your lender:
- How frequently will the interest rate change?
- What’s the maximum amount the interest rate can increase in a year?
- Are there limits to how high interest rates can rise during the life of the loan?
- Can interest rates ever decrease during the life of the loan?
- What’s my monthly mortgage payment if my rates go up between 1 and 5 percent?
- Can you share an amortization table with me that includes different scenarios?
Q: What are discount and origination points?
A: Discount points represent cash you pay upfront to lower your loan interest rate. Origination points are administrative fees your lender charges to process your loan, but they do not lower your interest rate. Both fees add to the overall cost of your loan and increase the APR. Make sure you know which kinds of “points” are included in your particular loan.
Q: What are ALL of the itemized costs associated with a home loan?
A: The multiple services required to process your loan all come with their own costs, such as:
- Title insurance
- Home appraisal
- Credit report
- Recording fees
- Legal fees
You may think that many of these associated services are free or already included, but you may be surprised, as I was, to learn that these services have their own costs. Be sure to ask your lender to itemize each service that will be required along with an estimate of the amount you will be charged to process your home loan.
Q: What do I need to know about a prepayment penalty?
A: Prepayment penalties vary by lender. Some lenders may offer lower interest rates if you accept their prepayment penalty as part of your terms. If you do accept the offer, be sure to ask under which conditions the penalties apply and the potential costs.
Q: Is there a fee to lock in an interest rate?
A: Since interest rates can fluctuate during the time it takes to process and close your loan, it makes sense to lock in your rate during that time so you don’t end up with a higher rate by the time the loan closes. Ask your lender if there’s a fee to lock in the rate and how long you can keep it locked (most rate locks are for 60 days).
Make sure you understand all the information provided to you by the lender and don’t be afraid to follow up with additional questions. The more you know about the process, the more confident you will feel about the loan that fits your needs.
About TJ Freeborn and Discover Home Loans
TJ Freeborn is a mortgage professional at Discover Home Loans, where she confers with mortgage bankers and consumers to understand current industry trends and consumer-facing lending issues. Discover Home Loans, a subsidiary of Discover Financial Services, is a source for consumers seeking prime variable- and fixed-rate conventional, FHA and HARP home loans from a trusted name in the financial services industry.
Note: This is a guest post; the views and opinions expressed are those of the author and do not necessarily reflect the opinion or position of Redfin.