Refinance .net

Elizabeth Weintraub, About.com’s Guide to Home Buying / Selling says:

Before you commit to a lender, ask these top 10 questions. If you don’t like the answers you receive, continue shopping for a loan until you find a mortgage broker / lender with whom you feel comfortable.

1. Which Type of Loan is Best?

Reputable lenders will find out more about you before throwing out loan options. You wouldn’t expect a doctor to suggest surgery before she assessed your medical situation, would you? Choose a lender who gathers enough information from you before she suggests a certain type of loan. Don’t be afraid to ask a lender to explain the pros and cons about:

* Fixed-rate loans.
* Adjustable-rate loans.
* Interest-only loans.
* Negative-amortization loans.

2. What is the Interest Rate & Annual Percentage Rate

The annual percentage rate (APR) is derived by a complex calculation that includes the interest rate and all the other related lender fees divided by the loan’s term. However, bear in mind that:

* Many lenders do not compute APR correctly.
* There is no way to accurately compute an APR rate for an adjustable loan.
* It does not account for early payoffs.

If your interest rate is adjustable, ask about its:

* Adjustment frequency
* Maximum annual adjustment
* Highest rate (Cap)
* Index
* Margin

3. What are the Discount Points and Origination Fees?

Each “point” is equal to 1 percent of the loan amount. Therefore, 2 points on a $100,000 loan cost $2,000.

* Sometimes lenders charge origination fees in addition to points.
* Points “buy down” the interest rate, meaning the more points you pay, the lower the interest rate.
* Points are also tax deductible, even if the seller pays some or all of the points.

4. What Are All the Costs?

All the costs of a loan include not only fees that go into the lender’s pocket but also related third-party vendor fees such as:

* Appraisal
* Credit report
* Lender’s title policy
* Pest inspection reports
* Escrow (where applicable)
* Recording fees
* Taxes

An estimate of these fees constitutes the Good Faith Estimate or GFE, which the lender is required by federal law to give to you.

5. Will the Lender Guarantee the GFE?

According to the Real Estate Settlement and Procedures Act (RESPA), lenders have three days after you’ve applied for a loan to give you the Good Faith Estimate, containing all the costs of your loan. Points to consider:

* Since lenders are not required to guarantee GFEs, this document is worth about the cost of the paper on which it is printed.
* However, there is a lot of pressure on lenders by consumers to guarantee their GFEs.
* If your lender refuses to stand behind its estimate, go elsewhere.

6. Do You Offer Loan Rate Locks?

Interest rates fluctuate and change daily. If you have reason to believe that interest rates are moving up, you might want to lock your loan. Lenders typically charge zero to one point to lock a loan rate and points. Ask your lender:

* Do you charge a fee to lock my interest rate?
* Does the lock-in protect all the loan costs?
* For how long will you lock this rate?
* Will you give me the loan lock in writing?

The alternative is to pay the prevailing rate and points on the day your loan funds.

7. Is There a Prepayment Penalty?

In some states, prepayment penalties are no longer allowed, so ask. Typically, prepayment penalties let the lender collect an additional six months of “unearned interest” if you pay the loan off early through a refinance of sale of the property. Be sure to ask:

* How much is the prepayment penalty?
* What are the terms of the prepay? Some are in effect only during the first 2 to 5 years of the loan.
* Would the prepayment penalty apply if I refinanced through you at a later date?

8. Are You Equipped to Approve Loans In-House?

Underwriters review loans and issue conditions before approving or rejecting a loan.

* Ask if a lender can handle its own underwriting.
* VA and FHA loans typically take longer to process, but some lenders meet government requirements to automatically approve or disapprove a loan without sending it to the VA or FHA.

9. How Much Time Do You Need to Fund?

Average loan processing time periods fall between 21 and 45 days. To properly write a purchase contract, you will need to include a closing date, and that date should be coordinated with your lender. Find out:

* What is your anticipated turnaround time?
* What obstacles could possibly hold up closing?
* How long after final application approval will the loan fund?

10. What is the Yield Spread Premium?

If your loan officer is receiving a yield spread premium (YSP), a commission paid directly by the lender to your representative, this fee will be disclosed on your settlement statement at closing. YSPs are a controversial matter because:

* Lenders say if borrowers are happy with the terms, the fact the loan officer receives a bonus is not relevant.
* Borrowers say if the loan officer did not receive a YSP bonus, the loan would have cost less.
* You should negotiate upfront; at closing is too late.

An option adjustable-rate mortgage is a complex type of hybrid mortgage originally designed for a narrow segment of people: sophisticated borrowers with inconsistent incomes. But because an option ARM has such a low initial payment, it became popular during the housing boom, with about $250 billion in option ARMs issued during the past three years.

More recently, the loan’s appeal has dimmed amid higher short-term interest rates, as well as horror stories. But the mortgage is still being marketed aggressively.

If you are thinking about taking out an option ARM, here are some important tips:

Know your options. Each month, an option ARM gives you a choice of four payment amounts:

1. The highest amount, if paid every month, would be enough to pay your loan off in 15 years.
2. The next-highest amount is calculated to pay off the loan in 30 years.
3. Pay only the interest accruing that month – and none of the principal.
4. The minimum payment / teaser – is the most tempting, and usually the one that’s advertised. It is calculated based on a “teaser” interest rate that can be as low as 1 percent or 2 percent a year. But after the first month, if you make the minimum payment, not only are you not paying down the loan, you’re not even paying all of the interest that’s accruing. As a result, your total debt is actually increasing.

Understand the teaser. The artificially low initial interest rate on an option ARM is known as the teaser rate because it’s the number that lures you into taking the loan. But although the payment may be fixed for several years, the teaser rate expires after the first month. The additional interest is added to the mortgage balance.

Borrowers are often tricked into believing that the teaser rate will last for as long as the fixed minimum payment does.

Examine your income. Option ARMs can be good for borrowers whose take-home pay varies widely. For instance, a good candidate might be a salesperson who earns huge commissions in some months and not much in other months or a person who reliably gets a large year-end bonus. But if you have a fairly stable income, an option ARM is probably not for you.

Don’t plan to refinance. If you’re thinking about getting an option ARM and refinancing if the payments get too high, don’t count on it. Three things could keep you from refinancing, particularly in today’s market:

• You may no longer have sufficient equity. If you borrowed $100,000 on a $120,000 property, for example, making only minimum payments could put your loan balance above the value of your home, especially if it has not appreciated in the meantime.
• If you struggle to make payments before trying to refinance, that could lower your credit score, making it more difficult – and costly – to refinance.
• Your option ARM will probably have a prepayment penalty, which would boost the cost of refinancing the loan.

Read the documents. The only way to really know how your mortgage works is to read the loan papers. That can mean making your way through a 2-inch stack of documents. Even then, you may run into trouble.

Consumers can go to a loan broker to help them find the best deal among competing mortgage lenders.