Please ensure Javascript is enabled for purposes of website accessibility

20 Things to Know About Your Mortgage Loan

Author: Christy Bieber | March 05, 2021

Mortgage application with red Approved stamp

Source: Getty Images

1 of 22

Don't commit to a mortgage without knowing the facts

A mortgage is typically the largest financial obligation most people take on. When you commit to borrow hundreds of thousands of dollars and enter into a relationship with a lender that lasts decades, you better be sure you know what you're getting into.

So, when you're considering taking a mortgage -- or even if you have a home loan already -- make sure you know the answers to these 20 important questions.

Our credit card expert uses this card, and it could earn you $1,148 (seriously)
As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.

That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.

Previous

Next

Couple signing loan document

Source: Getty Images

2 of 22

1. What type of loan are you taking out?

Mortgages can be broadly divided into two different types: conventional loans and government-backed loans.

Government-backed loans come with a guarantee from a federal agency, such as Veterans Affairs (VA), the U.S. Department of Agriculture (USDA), or the Federal Housing Administration (FHA). This guarantee protects your lender if you default. These loans are often easier to qualify for if you have imperfect financial credentials, but fees can be higher.

Conventional loans don't have a government guarantee. More lenders offer them, but they can be harder to get if you have a lower credit score or a lot of debt already. Make sure you understand which type of mortgage is best for you, given your financial circumstances.

ALSO READ: The Ascent's Complete Guide to Mortgages

Previous

Next

Family of five standing in front of home with dad holding up keys

Source: Getty Images

3 of 22

2. What's the total amount you're borrowing?

Your lender will approve you for a loan up to a certain amount, but it's up to you to decide how large of a mortgage you should take out. Remember, the more you borrow, the higher your payments will be and the more interest you'll owe over time.

Aim to keep your housing costs to no more than 30% of your income, and ideally less. This includes your mortgages, but also taxes, insurance, and other costs of homeownership.

Previous

Next

Stack of coins propping up blocks that read FEES

Source: Getty Images

4 of 22

3. How much are your loan origination fees?

Lenders typically charge you a fee to get a loan. These fees vary by lender, and some don't charge them at all. They make your loan more expensive and add to the up-front costs you have to pay -- but they can be worth it if the lender offers you a more competitive rate than others.

Just be sure to take them into account when you compare mortgage loan offers and confirm that you're prepared to pay them as part of your transaction.

Previous

Next

A small model house sits atop cash next to house keys and a calculator.

Source: Getty Images

5 of 22

4. What other closing costs will you have to pay?

Origination fees are just the start of the costs you're responsible for when you get a home loan. Whether you're taking out a new mortgage or refinancing, closing costs are an inevitable part of the transaction.

Make sure you understand what costs you're responsible for and how much they'll add up to. Your mortgage lender should give you an estimate of fees and expenses within three days of the time you apply for a loan.

ALSO READ: What Are Closing Costs?

Previous

Next

An hourglass on a table next to a calendar

Source: Getty Images

6 of 22

5. What's your loan repayment term?

Mortgage loans come with different payoff timelines. The most common repayment term is 30 years, but you could opt for a 15-year or 20-year loan or pick another time frame your lender offers.

When you choose a loan with a longer repayment term, each monthly payment is lower but you make more of them. And total costs are higher over time. By contrast, a loan with a short repayment timeline comes with higher monthly payments but you make fewer payments and your total costs over time are lower since you don't pay interest for as long.

Make sure you know what loan term you're looking at and that it makes sense with your financial goals.

Our credit card expert uses this card, and it could earn you $1,148 (seriously)
As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.

That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.

Previous

Next

Depiction of interest rates with dollar bill and blocks with up and down arrows and percent symbol

Source: Getty Images

7 of 22

6. How does your interest rate work?

When you get a mortgage, you'll have a choice of a fixed-rate loan or an adjustable-rate loan.

Fixed-rate loans are predictable. Your rate is fixed for the life of the loan and can't ever change. You'll know up front what your monthly payments will be during the whole repayment process. And you'll know total costs over the life of the loan.

Adjustable-rate mortgages (ARMs) aren't predictable. Your rate is fixed for an initial period, and then it can move with a financial index. Your monthly payment and total loan costs change as the rate adjusts.

ARMs are much riskier loans, but can sometimes make sense if they allow you to get a lower starting rate than fixed-rate options offer -- and you plan to move or refinance before rate adjustments start.

Previous

Next

Interest rates on pieces of paper

Source: Getty Images

8 of 22

7. What is your interest rate?

Your interest rate is what you pay to borrow. If it's higher, more interest accrues each month. You have to make higher payments to cover both the interest due and the principal balance you're paying down.

Interest rates vary based on lender and loan type. Be sure to compare rates to find the most affordable loan. And if you already have a mortgage but your rate is high, you may want to consider refinancing.

Previous

Next

Toy house on paper with percentage symbols

Source: Getty Images

9 of 22

8. What is your APR?

APR is different from interest rate. It's a reflection of the true cost of your loan. Comparing APRs can be a better way to shop around for loans than looking just at interest rates alone.

See, APR takes into account your interest rate, as well as any fees your lender charges. Your APR will be higher than your interest rate, as it annualizes all of the added fees and costs of your mortgage loan.

Previous

Next

Model of house next to bag of money with dollar sign and stacks of gold coins

Source: Getty Images

10 of 22

9. What's the total cost of interest over time?

Often when people buy homes, they focus only on whether the monthly payments are affordable without thinking about the total cost they're paying to borrow for their home. Don't make that mistake.

Your lender has to disclose the total amount of interest you'll incur over the life of the loan. Take a look at that amount and consider whether it's reasonable. If you don't want to pay that much to borrow for a home, you'll need to reduce the size of your loan balance or shop around to find a better rate.

Previous

Next

Woman sitting at table with computer and paying bills

Source: Getty Images

11 of 22

10. How much will your monthly payment be?

Obviously, you also need to make sure the monthly payment you'll be required to make is affordable. Find out the total amount that will be due each month. For most people, their monthly payment consists of four costs: principal, interest, taxes, and insurance.

Make sure your total monthly payment is well within your budget -- even after accounting for all of your financial goals.

Our credit card expert uses this card, and it could earn you $1,148 (seriously)
As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.

That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.

Previous

Next

Man looking at documents with coins and dollar bills in front of him

Source: Getty Images

12 of 22

11. Can your monthly payment change?

In some cases, the monthly payment on your mortgage loan could change. This can happen if you opted for an adjustable-rate mortgage and your payment could go up, or if you chose a loan with a balloon payment (a large lump sum payment due after a certain number of years).

If it's possible your payment could change, find out when and how this could happen. And make sure you can easily afford the highest possible monthly amount you might end up owing.

Previous

Next

Insurance policy document

Source: Getty Images

13 of 22

12. Is escrow required?

Most mortgage lenders require you to make payments into an escrow account as part of your monthly mortgage payment.

Essentially, insurers add up to the cost of your mortgage and property taxes and divide it by 12. You then pay that amount each month as part of your monthly payment. The lender deposits the money into an escrow account from which the lender pays your property tax and insurance bill.

Escrow is convenient, because you don't have to worry about coming up with the money when you get your annual property tax or insurance bill. But not everyone wants to make their monthly payment higher every month to account for these costs.

ALSO READ: What Is Mortgage Escrow and How Does It Work?

Previous

Next

Woman inserting coin into piggy bank

Source: Getty Images

14 of 22

13. Do you need to make an up-front escrow deposit?

When you're closing on a mortgage loan, you may have to make a deposit of several months' worth of escrow payments at the start of your transaction. This can be expensive, so find out if this is required so you aren't caught by surprise and left struggling to come up with a lot of cash.

Previous

Next

Young man looking sad as money flies out of his wallet

Source: Getty Images

15 of 22

14. What fees, if any, will you incur during repayment?

Some lenders charge various fees for things such as online payments or making a payment over the phone. Make sure you understand any added costs you may incur as a borrower once you've got your loan.

Previous

Next

Person writing a check

Source: Getty Images

16 of 22

15. Are you paying points?

Mortgage lenders allow you to buy down your interest rate by paying points. Points typically cost 1% of your loan amount and reduce your rate by 0.25%.

Paying points can be a smart financial move if you'll stay in your home long enough for the interest savings to make up for the up-front cost. Carefully weigh whether paying them is worth it.

Perhaps even more importantly, when you compare mortgage quotes, pay attention to whether your lender factored in any points. If one lender gives you a loan at 3% with no points and the other gives you the same rate but you have to pay a point to get it, the second loan is a lot more expensive.

ALSO READ: Understanding Mortgage Points

Previous

Next

One hand handing another a wad of money across a desk

Source: Getty Images

17 of 22

16. What's your loan-to-value ratio?

Your loan-to-value ratio refers to the amount borrowed relative to the value of your home (as determined by an appraisal).

Lenders won't approve you for a loan if your loan-to-value ratio is too high. Borrowing too much relative to what your home is worth also puts you at risk of owing more than you could sell your home for. This creates a lot of problems if you ever need to move or refinance.

Our credit card expert uses this card, and it could earn you $1,148 (seriously)
As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.

That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.

Previous

Next

House For Sale sign seen through frame of a tablet

Source: Getty Images

18 of 22

17. Will you have to pay for mortgage insurance?

If you take out a conventional loan and your loan-to-value ratio is more than 80%, you're typically required to buy private mortgage insurance (PMI). Certain types of government loans, such as FHA loans, also require you buy mortgage insurance.

Although you pay for this insurance product, it's not meant to protect you. Instead, it actually ensures your lender doesn't lose money if it has to foreclose on you.

Mortgage insurance premiums can be costly, so consider whether it makes sense to buy a home when you have to pay PMI or if it would be better to wait until you have a larger down payment. And if you are paying PMI, make sure you understand when and how you can stop.

Previous

Next

Debt free wooden sign on a tabletop

Source: Getty Images

19 of 22

18. Are there prepayment penalties?

If you want to pay your mortgage off early, you don't want to get hit with a penalty for doing so.

The Dodd-Frank Act eliminated this type of prepayment penalty for conforming mortgage loans issued after Jan. 10, 2014. But if you have an older loan or don't get a conforming loan, it's possible you could end up owing an added fee just for becoming debt-free.

Previous

Next

Man paying bills online from laptop

Source: Getty Images

20 of 22

19. When are your payments due?

Make sure you find out exactly what your payment due date is. You don't want to be late making payments. And find out what the grace period is before you'd be charged a late fee or have a late payment reported on your credit history.

Previous

Next

Two businessmen having a discussion inside a bank branch

Source: Commerzbank

21 of 22

20. Who will actually service your loan?

In most cases, lenders resell mortgage loans. That means the bank or online lender you obtain your loan from may not be the one who services the loan.

Your original lender should inform you who your servicer is, as that's the company you'll be making payments to and that you'll need to contact with any questions.

Previous

Next

Handing over house key to new homeowner

Source: Getty Images

22 of 22

Make sure you're an informed borrower

Ideally, you'll get answers to all these questions before you borrow. But it's never too late to find out the details about your home loan to ensure you have a full understanding of this major financial obligation you've taken on.

Our credit card expert uses this card, and it could earn you $1,148 (seriously)
As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.

That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.

Previous

Next