Step 7: How to Know if the Mortgage You’ve Chosen is Right
It is essential for a new homebuyer to be fully satisfied with the mortgage they choose. This is because their loan payment will be a significant part of their finances for the next 15 or 30 years, or at least as long as they choose to remain in the home. Unfortunately, many first-time homebuyers are so excited to purchase their first home that they get caught up in the process and lose sight of what is important – making sure that the mortgage they agreed to is right for them.
In this section, we provide everything you need to know for choosing the right mortgage, including:
- How to be sure you are comfortable with the mortgage you choose
- What rate lock is and how it impacts your mortgage
- How to avoid common mortgage pitfalls and handle potential problems
- Making known your intent to proceed with the loan
How to Be Sure You Are Comfortable With the Mortgage You Choose
When it comes to choosing a mortgage, a buyer needs to ask several questions before signing on the dotted line. These questions include:
Can I Afford to Repay the Loan?
If you plan to live in your new home for the extent of the mortgage, you need to consider your current and future finances. Is your job stable enough that you don’t have to worry about losing it at any time during your mortgage’s repayment period? Can you afford to pay the mortgage with one income in the event your partner becomes unemployed? If you are confident in your ability to repay the loan, then you are starting off in a strong position.
Am I Comfortable with the Monthly Mortgage Payment?
You need to be able to comfortably manage your monthly mortgage payment without it putting immense pressure on your finances; all it takes is one thing to completely disrupt your budget. The bank may tell you that you can afford a certain amount, but proceed with caution and a thorough understanding of your budget. Consider all of your expenses and subtract them from your total household income. If the mortgage payment is less than 28% of your income, then you should be able to make the payment comfortably each month.
Am I Confident with the Lender’s Decision?
It’s crucial to be confident in the lender you choose and to trust they are working to secure you the best rate and terms on your loan. This is why researching lenders before you apply for your loan is so important. If you are hesitant about the lender’s financing decision, then you may want to take a step back and find another lender.
Are There Any Risky Features in My Loan?
Some lenders include language in the mortgage agreement that might not be beneficial to the borrower. Before agreeing to a mortgage offer, make sure it doesn’t include any risky features like prepayment penalties or balloon payments.
Will the Loan’s Principal and Interest Change in the Future?
Most homebuyers want the security and peace of mind that comes with having the same payment amount every month. This is what is known as a fixed-rate loan, which allows the buyer to factor their payment into their budgets because it doesn’t change. Other mortgages, like adjustable rate loans, feature payments that can fluctuate. With these mortgages, the principle remains the same but the interest rate changes. The interest rate can increase or decrease, depending on where the national rate is.
When the answers to the above questions are favorable to you and the lender, then you can confidently say that the mortgage you have chosen is the right one for you.
What is Rate Lock and How Does it Impact Your Mortgage?
When you apply for a mortgage, the lender will discuss your loan application’s “rate lock.” A rate lock is a guarantee from the lender that your loan will have a set interest rate for a certain price for a certain period of time. That length of time is typically 30, 60, or 90 days, but the terms could be set lower or higher.
Once a lender locks the rate on your loan, you are guaranteed to have that interest rate as long as you close on the home within the determined length of time. In the event that you are unable to close within the set time period, the rate on your loan will revert to whatever the rate is at the time of your closing.
Pros and Cons of Locking in Your Rate
The benefit of a locked rate is that you are guaranteed to pay the rate even if interest rates go up. The disadvantage is that should the interest rate drop after you have your rate locked, you won’t be able to get the lower rate on your loan. But, there are some exceptions that may allow you to still get the lower rate.
One such exemption is if your rate lock agreement includes a “float down” provision. This provision permits the loan’s interest rate to be reduced if the rates drop during the locked-in period. The downside to having this provision included, however, is that it can be costly. Another exemption is to have your rate lock agreement re-written so the new, lower rate is included. But, it is also expensive to do this and, should the rate stay the same, you could be spending extra money for no reward.
How to Avoid Common Mortgage Pitfalls and Handle Potential Problems
Buying a home is an exciting time, but it is not without its share of risks. To ensure everything goes as planned, you need to be aware of certain potential problems that could wind up hurting you in the end.
Here is a list of common issues to avoid when buying a new home.
Avoid Signing Partially Filled or Blank Documents
Never sign any blank document or any document that isn’t properly filled out with the agreed upon terms. Once your signature is on the page, the lender can fill in any blanks with whatever information they want. Make sure this doesn’t happen – only sign completed documents.
Avoid Buying More Home Than You Can Afford
If the lender tells you that you can qualify for a $300,000 loan, it does not mean that you can afford a $300,000 loan. Review your income and expenses to find out what you can comfortably afford before applying for the highest loan possible, or else you may find yourself in financial trouble in the near future.
Don’t Think About Refinancing; Focus on Getting the Best Loan Now
One way homebuyers convince themselves to buy a home at a higher rate is by thinking they can simply refinance it at a lower rate in the future. This is not always true. Instead of thinking about refinancing when you’re buying a home, focus on getting the best loan you can right now. Refinancing isn’t cheap and there is no guarantee the interest rates will go down.
Don’t Try to Enhance Your Application with False Information
Some applicants believe they can improve their loan approval odds by enhancing their applications with false information. Examples of this include claiming a higher income than you actually have, or attempting to hide information that might be considered negative. Completing your application with false information could make you guilty of mortgage fraud, so complete the application truthfully to avoid a potential legal situation.
Additional Problems You May Run Into
Not all mortgage problems are the fault of the borrower. In fact, there are several reasons why a lender might prove problematic for the homebuyer. Such examples include:
- Predatory practices
- Illegitimate programs offered by the lender
Should you come across a lender who exhibits any of the above, file a complaint against that mortgage company. You can file complaints with each of the following:
- The Better Business Bureau
- Your state regulatory board
- Your state’s Attorney General office
- The U.S. Department of Housing and Urban Development (HUD)
- The Federal Reserve (if the lender is a bank)
- The Federal Bureau of Investigations (FBI, if the lender is committing fraud)
Making Known Your Intent to Proceed With the Loan
Before your mortgage lender will move forward with the loan approval process, you must first inform the lender of your “intent to proceed with the loan.” This is done by signing and submitting a Notice of Intent to Proceed with Loan Application (NIPLA) document. By signing this document, you accept the terms and fees listed in the Good Faith Estimate (GFE) and permit the lender to move forward with the approval process and charge you the fees related to your loan processing.