10 Questions to Get the Best Mortgage Deal

Undoubtedly, the inflation rate has decreased considerably since mid-2022, when it was above 9%. But things haven’t returned to normal yet. The Fed’s benchmark rate is still halted at a 23-year high since the current inflation rate, at 3.2%, is still much higher than the 2% target rate. As a result, interest rates for borrowers have increased on various loans, including mortgages and credit cards, particularly when compared to rates in 2020 and 2021.

The good news is that borrowing money for a home is now more reasonable, thanks to a minor reduction in mortgage rates, particularly during the past few months. Furthermore, many potential purchasers are beginning the pre-approval procedure to obtain a mortgage loan as the springtime homebuying season heats up.

However, getting the best mortgage rate is only one aspect of choosing the correct mortgage loan. To make the finest financial selection possible, you must also comprehend the essential information, costs, and specifications provided by your lender.

And it all starts with the following questions to ask a mortgage lender:

1. How Much Should I Borrow to Buy a House?

When calculating your loan amount, lenders may consider your work status, credit history, and income level relative to debt. Before you go house hunting, find out how to get prequalified for a mortgage from a lender.

This will not only prevent you from getting disappointed if you accidentally look at a house that is out of your budget but also speed up the process and improve the overall experience. First-time homebuyers and military veterans can qualify for unique government-sponsored mortgage schemes. Ask what you might be eligible for from your lender.

2. Are There Any Specific Documents You Need?

Your lender will need various documents, such as bank statements, gift letters, pay stubs, and tax returns, to confirm your income, assets, and other details needed to approve your home loan. Obtaining a comprehensive list of necessary documents in advance might streamline the pre-approval procedure, which in turn speeds up the loan acceptance process.

3. How Much Down Payment Is Required?

This is one of the most important questions to ask a mortgage lender, as it helps you set a budget. For conventional loans not insured by a government agency, lenders generally require a down payment of at least 20% of the purchase price to avoid private mortgage insurance (PMI). PMI is a type of insurance that protects the lender if the borrower defaults but adds to the monthly mortgage cost.

Some conventional loans may allow for lower down payments, such as 5% or even 3%, but these usually come with the added cost of PMI. This will also impact other factors, including your terms, interest rate, and monthly payments. Determine what's best for you by getting further information from your lender regarding the minimum down payment needed for your loan and whether you qualify for any cost-saving or down payment assistance programs.

4. What’s the Current Interest Rate?

This is the most straightforward and essential question. The interest rate will determine your monthly payments and the total interest you will pay over the life of the loan. Interest rates can vary depending on the type of loan, the length of the loan, and your credit score.

The average interest rate for a 30-year fixed-rate mortgage is around 7.13% to 7.55%, according to Freddie Mac (Money). For a 15-year fixed-rate mortgage, the average rate is approximately 6.53%. A 5-year ARM has an average rate of around 8.14%, while a 7-year ARM has rates near 7.97%

5. What’s the Difference between an Adjustable-Rate and a Fixed-Rate Mortgage?

The interest rate on a fixed-rate mortgage remains constant throughout the loan, usually 15 or 30 years. As a result, your monthly principal and interest payments remain consistent and predictable.

On the other hand, with an adjustable-rate mortgage, your payment will fluctuate since the interest rate is subject to market fluctuations. Most ARMs are based on a 30-year term and often begin with a pre-set fixed interest rate for a certain length of time, usually 5, 7, or 10 years. To determine which of these two mortgage options is best for you, it is essential to compare quotes from different lenders.

6. What Are the Discount Points and Origination Fees?

Discount points are fees paid directly to the lender at closing in exchange for a reduced interest rate. Each point typically costs 1% of the loan amount and can lower your interest rate by about 0.25%. On the other hand, origination fees are the costs associated with processing the loan.

Request a detailed breakdown of all points and origination fees. This will help you understand the upfront costs and how they impact your interest rate and monthly payments. If you are paying points, ask about the breakeven point — the time it takes for the savings from the lower interest rate to exceed the cost of the points. This will help you decide whether paying points makes sense based on how long you plan to stay in the home.

7. Can I Lock in the Interest Rate? When?

Interest rates are never static. Locking the rate quoted to you when it’s low can be very beneficial occasionally. Find out from your lender when and how long you can lock in a specific rate. Remember that lenders often charge a higher rate for longer-term locks and a cheaper one for shorter ones.

Common rate lock periods are 30, 45, or 60 days. Some lenders charge a fee for locking in the rate. The question to ask a mortgage lender is if there is a cost and how much it is. Inquire about the possibility and cost of extending the rate lock if your closing is delayed.

8. What Should I Expect in Closing Costs?

Closing expenses are included in the down payment and vary depending on your lender. They usually make up 2% to 5% of the total cost of the home. Make sure you ask your lender for an estimate or a fee worksheet so you can understand this substantial up-front cost.

Furthermore, you might be able to negotiate a deal with your lender to waive some of the fees and closing charges. Knowing these fees might help you decide if it would be worthwhile to evaluate your lender and loan options.

9. What Should I Do After Getting Pre-Approved?

An important element of guaranteeing the mortgage loan procedure's success is clarity regarding the next steps following pre-approval. Thus, make sure to find out from your lender how long it usually takes for things to move forward after pre-approval.

This way, you will be aware of the amount of time you have to look for a house, the time frame for putting a house under contract, the deadline for obtaining the appraisal, and the approximate amount of time needed for the underwriting procedures to receive final approval.

10. Will You Charge a Prepayment Penalty If I Pay Off the Loan Early?

Lenders earn money from the interest on your loan over time. When you pay off a mortgage early, they lose expected interest income. Prepayment penalties are designed to compensate for this loss. However, nowadays, many lenders don’t charge a fee for early payment. Still, make sure to ask about it and get the agreed terms in writing on an official document.

Wrapping Up

Collecting all the necessary information is highly important when it comes to the mortgage process. This can be intimidating, particularly in the current high-rate environment. Since this will probably be one of the largest financial decisions you will ever make, don’t be afraid to ask your lender many questions as you proceed through the mortgage loan process. That’s why selecting the best mortgage option during the homebuying season requires working with a knowledgeable and approachable lender.

Transparency is key when it comes to making important financial decisions. RateSimple allows you to compare mortgage options side by side, making it easy to understand the terms, rates, and fees associated with each loan. With clear and concise information at your fingertips, you can make informed decisions with confidence.