5 Mortgage Details You Should Know Before You Sign

By Dan Rafter on 4 August 2017 0 comments

Taking out a mortgage is a big financial commitment. Not only are mortgage loans expensive, they also represent the biggest monthly payment for most consumers' budgets.

That's why it's so important to ask the right questions before signing the documents that officially close your mortgage. Here are five key questions you need to ask your lender when looking over your mortgage documents.

1. What are my closing costs?

Taking out a mortgage isn't free. Your lender and several third-party service providers will charge you what are known as closing costs, the fees you'll have to pay for your mortgage loan. You can expect to pay from 2 percent to 5 percent of your home's purchase price in closing costs.

This means for a home costing $200,000, you can expect to pay between $4,000 and $10,000 in closing costs. That's a lot of money, and often consumers roll the amount into their final loan, which can slightly increase their monthly payment.

Fortunately, uncovering your closing costs is an easy process. Your lender must send you a form known as a loan estimate within three business days of receiving your loan application. This form includes a list of your estimated closing costs. At least three days before closing your loan, your lender will provide you with another form, the closing disclosure. This form lists your final closing costs.

It's important to study both of these forms to make sure your closing costs are what you expected them to be.

2. What is my interest rate?

When you pay a mortgage loan, a good chunk of your monthly payment will go toward interest. In fact, during the earliest years of your mortgage, a far larger percentage of your monthly payment will go toward interest than toward paying down your principal balance.

That's why getting the lowest possible interest rate makes such a difference in both the amount of interest you'll pay during the life of your loan, and how much you'll pay each month.

Here's an example: Say you take out a 30-year, fixed-rate mortgage loan for $200,000 at an interest rate of 3.76 percent. Your monthly payment — not including property taxes and homeowners insurance — would be about $927.

If on that same loan your interest rate was 4.76 percent, your monthly payment would shoot up to $1,044, not including taxes and insurance.

3. What is my monthly payment?

Your monthly payment doesn't just include the amount you pay in interest and principal. Most lenders require that you pay extra with each payment to cover the yearly cost of your homeowners insurance and property taxes.

Your lender will then take this extra money and deposit it into an escrow account. When your taxes and insurance come due each year, your lender will use this money to pay these bills on your behalf. This can add hundreds of dollars to your monthly payment, so knowing this ahead of time is important.

Don't be fooled into thinking that your mortgage payment only includes your mortgage loan. Your property taxes and insurance make a big difference in your monthly bill.

4. What type of loan do I have?

There are several types of mortgages out there. The most common are fixed loans, usually with terms of 30 or 15 years. With these loans, your interest rate remains the same until you pay off the loan, sell your home, or refinance it.

You might also opt for an adjustable-rate loan. With an adjustable-rate mortgage, the interest rate remains fixed for a set period — usually five to seven years — and then adjusts according to whatever economic indexes your loan is tied to. Your loan's interest rate could adjust every year or it could adjust every five years. It all depends on your loan's specifics.

Consumers choose adjustable-rate loans because their initial interest rates are usually lower than those you'd get with a fixed-rate loan. But adjustable-rate loans do come with more risk: When your loan adjusts, your new rate could be higher than the rate you would have had if you had gone with a fixed-rate loan.

5. Is there a penalty for paying early?

They're not as common as they once were, but some loans come with a prepayment penalty. This means that you'll have to pay a penalty — often about 2 percent of your loan's remaining balance — for paying off your mortgage before it's due. Often, lenders who charge prepayment penalties assess them if you pay off your loan in the first two to five years.

You might not worry about such a penalty. After all, you'll never pay off your mortgage loan in two to five years, right?

But a prepayment penalty may also kick in if you decide to refinance your loan or sell your home during the penalty phase. Because of this, it's best not to sign onto a loan with a prepayment penalty.

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5 Mortgage Details You Should Know Before You Sign

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