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.

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

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.

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.

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.

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.

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?

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.

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?

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.

Looking to hire an a mortgage broker/planner? Before you do, Contact us today for a complimentary consultation to see how this decision affects your financial plan and to receive, if appropriate, a referral to one of our trusted partners.

Other financial professionals: Hiring a Financial Planner, What is the CFP^® Mark, Hiring an Insurance Agent, Hiring an Accountant, Hiring an Attorney, Hiring a Real Estate Agent

 

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