20 Things to Know About Your Mortgage Loan

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.

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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

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.

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.

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?

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.

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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.

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.

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.

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.

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.

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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.

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?

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.

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.

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

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.

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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.

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.

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.

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.

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.

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