8 Important Mortgage Questions to Ask Yourself
No matter if you are buying a house or simply thinking about refinancing your mortgage, there are always important questions that you need to ask; either by yourself or by mortgage professionals.
1. How long do I plan to stay in my house for?
Yes, we all know things don't go according to plan sometimes, but try to figure out how long you plan to stay in the house. The reason is that it effects which type of mortgage loan is best for you. The answer also affects if you would be better off paying points to lower your rate.
If you absolutely have no idea, studies show that homeowners typically stay for a median duration of 8.3 years. So, half of homeowners move out within 8.3 years while the other stay longer.
2. What are the costs of getting the loan?
While applying for a home loan, you should get a federally mandated document called the Good Faith Estimate of Closing Costs. The document estimates how much the mortgage lender will charge you for origination and discount fees, an appraisal, document preparation, a pest inspection, myraid other costs and a credit report. Make sure you compare the good faith estimates and pay close attention to the line that reads, "Estimated cash at closing."
Thats roughly how much you will have to pay out of pocket to get the loan.
3. How long will it be till I break even while payiing discount points to get a lower rate?
All you do is divide the upfront cost (of discount points if you're buying a house and of all the closing costs if you're refinancing) by the monthly savings you would get. That tells you how many months it will take to break even. If it's going to take five years to break even but you expect to stay in the house four more years ...
4. Am I comfortable refinancing only once?
Bitton says some of her clients insist on paying zero discount points, while others want to pay a lot of points to get absolutely the lowest interest rate, "even if it takes four or five years to break even."
As far as Bitton is concerned, there often is no right or wrong answer when people ask whether they should pay discount points or choose a 15-year or 30-year mortgage. "There's not just an objective, dollars-and-cents number," Bitton says. "There's also the psychological factor. What are you going to feel comfortable with?"
She has clients in their 70s and 80s who get 30-year mortgages because that's what makes them feel comfortable. Some homeowners would rather refinance once and never have to bother with refinancing again, so they pay a lot of points for a rock-bottom rate. As a bonus, they have something to boast about at cocktail parties. Other clients simply want the lowest possible payments, so they snag an interest-only, five-year ARM. All understand what they're getting into and have found their comfort zones.
5. How long can I lock a mortgage rate for?
Today's mortgage refinance boom has meant that lenders and mortgage service providers (such as appraisers and title companies) are swamped. Some banks are taking three weeks to process home loans that used to be processed in 24 to 48 hours. If you want to lock a rate, follow the broker's or lender's advice on how long you should lock. You might be told to lock for 45 days or even longer.
6. Will I be able to make the payments when I include all the monthly mortgage expenses?
Principal and interest are only part of your monthly mortgage payment, notes Rudy Cavazos, spokesman for Money Management International, a Houston-based credit counseling service with offices in Texas, Arizona, Illinois and New Mexico. "When you start adding private mortgage insurance, association fees and periodic maintenance to the house, it might look like a totally different picture," he says.
Not to mention property taxes and homeowner insurance. Cavazos points out that a lot of people don't find room in their budget to save up for the inevitable roof repairs, furnace replacement and painting. Then they step on the debt treadmill to pay for those things.
Cavazos recommends that couples qualify for a mortgage based on one partner's income. "Consumers need to focus on the worst-case scenario," he says. "If we lose one income, will we be able to make a mortgage payment? Many consumers today are one paycheck away from financial disaster."
He says there has been a recent influx of couples who seek credit counseling because a spouse was laid off and the mortgage lender has started foreclosure proceedings.
7. Is my credit good enough to get that attractive rate?
The advertised rate isn't necessarily the rate you'll get. If your credit history is merely OK instead of excellent, you'll be quoted a higher rate than your chum with flawless credit. To be more specific, if you have been more than 30 days late with your mortgage payment anytime in the last couple of years, you are unlikely to get the best rate. Ditto if you've been more than 30 days late three or four times in the last couple of years on other types of debt, such as credit cards and auto loans.
"They're not going to turn you away, but you're going to be dealt a slightly higher interest rate from what you see on TV or Bankrate.com," Cavazos says.
Before applying for a mortgage, check your credit reports to make sure they're accurate.
8. Can I get homeowner insurance?
This question is especially important in Texas and to a lesser extent in other Gulf Coast states. There has been an epidemic of mold-damage claims in Texas, along with multimillion-dollar lawsuits against insurance companies. One prominent insurer has pulled out of Texas altogether. Mold claims are a big reason why Texas has the nation's most expensive homeowner insurance (hot and humid Louisiana and Florida run second and third).
If you're buying a house with a history of insurance claims for water damage or mold, you might have trouble finding a company that will insure it. Shop for insurance long before the closing date.