Don’t overlook these when finalizing a mortgage

A mortgage is probably the biggest loan you’ll be taking in your lifetime. Every little misstep will have repurcussions on your finances. Here’s a simple checklist to help you make an informed decision.

Know your monthly payment

A mortgage loan is a numbers game. There are various fees, taxes and, confusing terms masked to sound more important than necessary! Feed the numbers into a mortgage calculator, to find out what your actual monthly payment will be. Even if you don’t have all the numbers, this will give you an approximation as to what to expect.

Verify that this is as close to the GFE as possible.

Know your interest rate *and* APR

The interest rate tells you only one side of the story! Know your APR. The APR gives you the overall rate you are paying for your loan. Stay away from loans that have a large interest rate-APR spread.

Think carefully before paying points

This is where a mortgage calculator comes in very handy! Points are prepaid interest for the entire term of the loan. An average family stays for about 7 years in a home. Considering the above statistic, points are usually a bad deal.

Don’t get too fixated on the rate you are getting by paying points. If you must, use the money to pay down your principal instead of paying points!

Shop around

Goes without saying! Compare GFEs to get an accurate picture. You need not go with what the lender recommends to get a title. Titles incur a significant cost. Shop around.

Know your credit score

The rate you get is not what’s advertised. This depends on your credit score. Know you credit score before applying for a mortgage. Here’s one way you can check your credit score for free!

Check your credit history

Before applying for a loan, get a record of your credit history from all three bureaus. This service is free. The link provided is the only official site to get your credit reports from all three bureaus for free and without having to sign up for trial offers or fork over your credit card info.

You shouldn’t have to pay for your credit reports.

Errors could have a significant impact on your score. Correct them before applying for a loan.

Know what a PMI is

If this is your first time buying a home, you may not have heard of PMI. That’s insurance for the lender in case you default. You usually have PMI if you are unable to put in at least 20% down payment. While this may not be feasible for everyone, do consider this when deciding how much to put in as down payment.

The sooner you get rid of PMI, the more money you save.

Sign up for rate changes

Most lenders provide this service for free even before applying for a mortgage. Make sure to sign up for these alerts. You want to lock in a rate as low as possible.

Know your rate lock-in period

Usually a mortgage closes in 30 to 45 days. But sometimes it could take longer. If the lender has a very short rate lock-in period, you might have to re-lockin the rate if the closing doesn’t happen within the lockin time.

Each enquiry into your credit report is a hard pull

Remember that each inquiry into your credit report is a hard pull when it comes to mortgages, and hard pulls will reduce your credit score. But the good news is, if the pulls are with a short period of time (usually within a month), multiple pulls are treated as a single pull. Shop around for lenders at the same time!

Prepayment Penalty

And finally, don’t get suckered into a loan that has prepayment penalties. Some of ING Direct’s mortgages have this! Always ask!

Did you know: The word ‘mortgage‘ comes from the french words ‘mort‘ meaning death and ‘gage‘ meaning pledge, literally translating to ‘death pledge’

Recommended reading:
Demystifying Mortgages For The First Time Home Buyer

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24 thoughts on “Don’t overlook these when finalizing a mortgage

  1. You offer some great tips regarding investigating the mortgage process. As you mentioned in the beginning: this is among the largest (and preferably the only) loans most people will obtain. It pays significantly to be judicious in the process.

  2. These are great. We found shopping around to work really well. We used a broker and got ourselves a really good plan. We are able to double up on payments and pay back and additional 10% a year. We also got a really nice and low interest rate.

  3. Being aware of how expensive your mortgage is, is not as simple as it sounds. There are many moving parts. I would suggest being aware of all of the items you mention above,as well as the sum total fees and charges on top of the amount of the purchase. This is wrapped into the APR, but it’s useful to see this expressed as a dollar amount. This helps when comparing the cost of loans from different lenders.

    • Well put Hunter! Ultimately what matters is how much you’ll have to fork out month after month! Rates can be confusing as hell!

  4. Do your research upfront is very important and making sure that you receive what you were promised is equally important. I would add to negotiate on all of your closing costs. Believe it or not they are negotiable.

  5. I really need to get an updated credit report. I’ve had it on my to do list for longer than I want to admit. I do monitor my bank accounts actively at least. Research and thoroughness really is vital with mortgages! -Sydney

  6. I second Krantcents. Get what is promised. When we closed we were told there would be three bushes in the front yard. There were two. The agent gave a puppy dog look and asked whether we wanted her to buy a bush. We said we didn’t care where it came from but somebody would have to put up the money before we signed.
    In my experience they are experts at nickle and dimeing you at closing because they know you want the house.
    If people would have understood their mortgages there would not have been a housing crisis. They took ARMs and were told if they couldn’t make the payments when the adjustment came they could just refinance because home prices always go up. We still have a few more years to go to work out of this mess.
    As usual a very informative and useful post.

    • Excellent point DIY! If people really understood what they were getting into as opposed to going by what the real estate said, we wouldn’t have this crisis in the first place.

      ARMs are not for everyone and the surprise at the end can be quite nasty.

  7. As a first time home buyer (in the next year or two), these posts are really useful. So I have nothing to add contentwise, but can I suggest a design addition. This is the 4th post I am bookmarking on this (home buying) topic from you blog. I know you have tags, but it will only let me find more about mortgages and loans, can you add a “home buying” or something that collects a series of posts on a very useful topic? It might be useful to other too. Esp. as your related post shows only mortgage/credit card posts. Just a thought…

    • Thanks for the feedback Suba! I’m thinking of upgrading to a different blog theme soon. I’ll do this along with that overhaul.

      Much appreciated!

  8. I came to an interesting conclusion recently on a refi. Even though the spread to the new rate was pretty good, switching to a 15yr from my 30 at the higher rate didn’t make sense for me from an NPV standpoint. The closing costs were too damn high! A good thing to compare is how you’d fare if you just took the closing costs and pre-paid that amount into your current mortgage – to see if you’d fare just as well (while hanging on to that cash!).

    • We both think alike Darwin! The other day I was thinking the exact same thing when I was trying to refinance and one lender mentioned closing fees!

  9. Great tips, especially about PMI and points!

  10. Are you in the mortgage industry? Thanks for the detailed breakdown. Hope I can take advantage of these low interest rates. One day I’ll make sure to bring your How To posts! :)

    • Mortgage industry? If that were the case, I would either be at the top 1% or the bottom 1% depending upon what role I played! :)

      No Buck, just a recent home buyer who went through the pains of making sense of getting a mortgage!

  11. Yikes, I didn’t know that some ING Direct mortgages had prepayment penalties- I just refinanced with them. (However, we did clarify there was no prepayment penalty, but it still made my heart skip a beat when I read it.)

    Great post, as always!

    • When I was shopping around, I specifically asked and the rep mentioned that for that loan, there would be a pre-payment penalty.

      That took me by surprise and thought I should mention it. Always ask!

  12. Fascinating… mortgage means death pledge lol…. they usually say that you are signing your life away as you sign the closing documents; guess this is how you define mortgage ;)

  13. I used to be a mortgage banker and everything you mentioned are great tips. Most states banned prepayment penalties.

    When shopping around for a mortgage, compare the interest rate you’re getting and the origination fee. You can get a feel for what the “par” interest rate is. You can try to negotiate on the origination if you bring a GFE from other lenders.

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