When former attorney Laynie Jensen thought about refinancing her 7% mortgage she said her head would spin. “As a busy stay-at-home mom the last thing I wanted to do was spend time learning about necessary credit scores, fees and points,” she said. “The process is so complicated and I know going into something like refinancing without any knowledge or understanding seems to be overwhelming right now. I don’t want to overpay on my mortgage but I don’t even know where to begin.”
Buying or refinancing a home the right way can save the borrower a boatload of cash, but also the process can be extremely intimidating for even the savviest businessperson. For Jensen, the idea of refinance was insurmountable so she will continue to pay 7% on her $250,000 mortgage, despite being most recently quoted rates as low as 4%.
Although the Internet is filled with well-meaning advice and information, wading through the copy and determining which aspects are vital can lead some borrowers to either throw in the towel or go in blind (or with the wrong advice).
Credit Unions Online sought expert guidance on what kind of questions every mortgage loan borrower should consider before agreeing on a mortgage loan or refinance. Anie Akpe, vice president of mortgage operations at Municipal Credit Union (NYC, NY) provided a concise list of questions all borrowers should ask:
Do you sell your loans? Once you close on your loan, you will be dealing with the lender throughout the life of the loan. In some cases, the lender who granted that loan may not also be servicing it. Financial institutions can make fee income from loans sold on the secondary market. While this practice is not necessarily bad for the borrower, it is important to know if the lender sells the loans or will sell the loan but retain the servicing rights.
Is the rate you are offering me a fixed rate mortgage? Fixed and variable (or adjustable) rate terms are often on the forefront of determining the type of loan that will best suit your needs. A fixed rate will be the same rate you will pay for the life of the loan. So if you lock in now at 4% you will still be paying 4% on that loan in 20 years, even if rates have drastically increased (or dropped). An adjustable rate mortgage (ARM) allows for rate fluctuations based on the market. If rates drop, so does the rate you pay. However there are many types of products associated with an ARM so have your lender explain the terms and details before moving forward.
Do I need an escrow account? The answer largely depends on your needs. An escrow account allows you to save reserves for paying taxes and insurance on your new home purchase. While this provides for more structure and discipline during the home buying process, some buyers may have more of a sporadic income flow, such as those who are self-employed or live on commissions and prefer to pay those fees as cash becomes available.
What can I do to pay off my loan quicker? Depending on your individual financial circumstance you can own your home free and clear, faster than what your mortgage term dictates. Some ways include paying extra on the principal balance each month, refinancing into a shorter-term mortgage or making biweekly payments.
Are there pre-payment penalties? Unfortunately some mortgage contracts includes a pre-payment penalty typically based on the percentage of the remaining mortgage balance. Before you start paying extra every month, review and inquire about the lender’s policy so you don’t end up paying extra.
What are your DTI and LTV limits? Sounds like code but LTV = loan-to-value and DTI = debt-to-income ratio. In terms of LTV, you will want to know how much you can finance (loan) your home based on its market value. When it comes to DTI, your lender will need to know how much of your income is being consumed by current debts. Every lender has a different set of limits and guidelines for determining both DTI and LTV so this question is key to ensuring you find the situation that is best for you.
Akpe says borrowers should take other aspects into consideration as well. “Borrowers should research the lender’s mortgage default and foreclosure rate. A high foreclosure rate could be a red flag.”
Additionally, borrowers should also research the special programs and other added benefits that lenders offer a prospective buyer. “For example, what are the lenders’ hours of operation? Are they available nights and/or weekends in case I have an issue with my loan? Also, do they offer any special programs for first-time homebuyers? Last, what is the lenders’ policy regarding providing assistance to borrowers who are in danger of default?”
Also, don’t forget to consider both rates and all other costs and fees associated with obtaining a mortgage (ex: closing costs) when performing a cost assessment, Akpe adds.
In most cases, starting with your local credit union is an ideal place to have your questions answered and obtain important mortgage information. Also, inquire about homebuyer’s seminars and online resources that can make the process even easier.By Gina Ragusa