Think of shopping for a mortgage like shopping for a car, a house, or any other major purchase. You wouldn’t walk into a car dealership without having done research on car features and prices, and you wouldn’t buy a home without knowing what similar homes have sold for, and you shouldn’t commit to a mortgage without researching loan types, features and prices. When shopping for a mortgage you need to do your research, to make sure that you are getting the best product available, that suits your situation, for the best possible rate and price.

Which Type of Loan Is Best for You?

Before recommending a loan, reputable lenders will want to find out more about you. Your lender will take a snapshot of your current financial situation.  They will review your income, assets, debts, credit history, available savings and give you an estimate of the loan you’re eligible for, and a price range for homes you can afford to buy.

Once they have created this snapshot, it is your turn to ask some questions and find out more about them and their loan recommendation.

What Are the Different Loan Options?

Ask the lender to thoroughly explain the pros and cons of fixed-rate loans, adjustable-rate loans, interest-only loans, and other loan options. Talking to your lender and questioning these options can help you determine which is right for you and your personal financial situation. 

How Much of a Down Payment Is Required?

Generally, buyers are expected to have a down payment equal to 20% of the purchase price, but that's not always the case. If you're well-qualified, you might be able to pay as little as 3% with some types of loans. One downside is that you'll most likely have to pay for private mortgage insurance (PMI) if you put less than 20% down. This can mean more closing costs and an increased monthly payment until you reach the 80% loan-to-value ratio. Lenders tend to offer the lowest interest rates when you have at least 20% equity in your home. 

What Is the Interest Rate and Annual Percentage Rate?

A loan's annual percentage rate (APR) is derived through a complex calculation that includes the interest rate and all related lender fees, divided by the loan's term. Not all brokers compute APR the same, and there's no way to calculate an APR rate for an adjustable mortgage accurately. An APR also does not account for early payoffs. Ask your mortgage lender about pinning down the adjustment frequency if your interest rate is adjustable, as well as the maximum annual adjustment, highest rate, index, and margin. 

What Are the Discount Points?

Each discount point is equal to 1% of the loan amount. For example, two points on a $100,000 loan would cost you $2,000. Points, which are tax-deductible, buy down the interest rate, so the more points you pay, the lower your interest rate.

What Are All the Costs?

Lenders charge origination fees, or lender fees, which are upfront fees charged for processing a mortgage loan application. The true cost of a loan includes these lender fees, as well as related third-party vendor fees—including appraisals, credit reports, the title policy, pest inspection reports, escrow where applicable, recording fees, and taxes. 

An estimate of these fees should be provided to you in a document called the Loan Estimate and Closing Disclosure Form, which is required by federal law. Lenders are required to deliver the Loan Estimate when an application has been completed. You should ask for an estimate of these costs upfront, however, before applying for the loan. 

Can You Get a Loan Rate Lock?

Interest rates fluctuate daily, so you might want to “lock” in the interest rate of your loan if you have reason to believe that rates are moving up. Be sure to ask if they charge a fee for a rate lock, if the lock-in protects all the loan costs, how long the rate will be good for, and if they'll give you the lock-in in writing.

Is There a Prepayment Penalty?

Prepayment penalties are no longer allowed in some states, so it's important to ask about this. These penalties let the lender collect additional interest if your loan is paid off early. Ask about the terms of the prepayment, and if the prepayment penalty would apply if you refinanced through the same lender later. 

How Much Time Do They Need to Fund the Loan?

The average loan processing time is around 30 days. You must include a closing date to write a purchase contract properly, so you'll have to coordinate this date with your lender. Ask about the anticipated turnaround time. Find out if any anticipated obstacles could hold up closing, and how long after final application approval will the loan fund. 

Do You Guarantee On-Time Closings?

Closing your transaction on time is a big issue. Your purchase contract will include a closing date, and not meeting this time frame can mean extra costs or problems for you if the lender can't do that for one reason or another. Ask about any increase in the interest rate if your lock-in expires, and what happens with any additional expenses that you might incur if the lender doesn’t complete the loan on time.

You're Not Limited to These Questions

Not everyone is an expert in mortgages and mortgage terms. A good rule of thumb is to question anything you're not sure about. Nail down all the details, so that there's less of a chance of signals getting crossed. It’s your money, so make sure that you know what you are getting for it. The answers you get can end up saving your or costing you thousands of dollars.