Common questions about home loan rates and fees

October 4th, 2017 Kerri Higgins

Buying your first home will likely be one of the biggest purchases you’ve ever made. It’s a big step both financially and emotionally and it can quickly become an overwhelming experience.

We’re hoping to make the process less stressful for you by sharing our experience! In this article, we’re taking a closer look at mortgage loan rates and fees.

In addition to the actual down payment for the new home, there are other fees that are part of the home buying process. The mortgage rate, on the other hand, is something that will impact you for the duration of your home loan.

Here are some of the most common questions we receive about mortgage rates and fees.

What is an adjustable rate mortgage?

An adjustable rate mortgage, or “ARM,” is a type of loan that offers a lower initial interest rate than most fixed rate loans. The tradeoff is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.

The benefit of choosing this type of loan is that it offers a lower initial interest rate compared to most fixed rate loans. This can be appealing to buyers who only plan to live in the home for three to five years.

Should I lock in my interest rate or let it float?

This is a big decision, and one that many homebuyers struggle with. That’s because mortgage interest rate movements are as hard to predict as the stock market and no one can really know for certain whether they’ll go up or down.

If you think the rates are going up, you can choose to lock your rate and if you think the rates are going down, you can take a little risk and let your rate float. One important thing to do before you lock in a rate is to make sure you can close within the lock-in period. If you think rates might drop while your loan is being processed, take a risk and let your rate “float” instead of locking. After you apply online or when applying in person, ask about the option to lock in your rate. You can contact one of our Mortgage Banker to discuss the options to lock in your rate.

What is mortgage insurance and when is it required?

If you’re putting down less than 20 percent on your home, you may be charged a mortgage insurance premium that is based on loan to value ratio, type of loan and amount of coverage required by the lender. This helps protect the lender against the additional risk associated with low down payment lending. Typically, the premium is included in your monthly payment. However, some lenders offer other options so it’s always a good idea to ask.

You won’t be stuck paying this insurance forever. It may be possible to cancel private mortgage insurance when your loan balance is reduced to 80 percent of the property value, and your lender will automatically cancel it when your loan balance reaches 78 percent of the property value as long as your payments are current.

What exactly are closing fees and how are they determined?

Before your mortgage loan is finalized, you must pay various closing fees. These fees vary from state to state, and also from lender to lender. However, the government recently mandated all lenders use the same forms, making it easier for borrowers to compare between financial institutions. The “Loan Estimate” form outlines the key details of the transaction, such as the loan amount, the rate, monthly payments, closing costs and amount of cash you’ll need at closing. Since every lender now has to use the same form, it is easier for you to shop around and compare loan offers “apples to apples.”

The ”Closing Disclosure” form is the final transaction and outlines all the details of the home financing, including the closing costs and fees. It is designed to help prevent costly surprises at the closing table. The important thing to note is that the lender is required to give you this form at least three business days before closing. The idea behind this is that it should give you time to review the form and confirm that you’re getting what you expected, ask questions and negotiate over any changes.

Is comparing Annual Percentage Rates (APRs) the best way to decide which lender has the lowest rates and fees?

You should use the APR as a guide to help you determine which loan program is best for you, but keep in mind that the APR is an effective interest rate – not the actual interest rate. Your monthly payments will be based on the actual interest rate, the amount you borrow and the term of your loan.

You’ll want to take a close look at your Loan Estimate to see total fees, possible rate adjustments in the future if you’re comparing adjustable rate mortgages, and consider the length of time that you plan on having the mortgage.

Should I pay discount points in exchange for a lower interest rate?

You have the option of purchasing discount points at the loan closing in exchange for lower interest rates throughout the life of the loan. This means that you pay more money up front, but your monthly payments are lower.

To decide if this is the right choice for you, divide the cost of the discount points by the savings in each monthly payment to determine the number of payments you’ll make before you start saving money.

If purchasing a home is on the horizon for you, we encourage you to begin learning about loans sooner rather than later to avoid unnecessary worry. Selecting the best loan program for your budget and future plans will reduce stress and allow you to enjoy becoming a homeowner.

If you have questions, we have Mortgage Bankers who are ready to discuss your interest rate options and help guide you down the right path.

About the author

Kerri Higgins is Second Vice President and Mortgage Banker at MidWestOne Bank. NMLS ID 518361

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