10 essential questions to ask your mortgage lender before borrowing

Securing a mortgage is a significant financial commitment in any economic landscape, but especially right now. Not only are home prices high in most markets — but so are mortgage rates. While it was easy to find mortgage loan rates in the 3% range in 2020 and 2021, the average rate is now above 7% on 30-year conventional mortgage loans. 

Buying a home can still be a smart move in today’s high-rate environment, of course, provided that the financials make sense for your budget. But given today’s elevated home buying costs, it’s crucial to gather all the information you need before making this substantial investment. 

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10 essential questions to ask your mortgage lender before borrowing

Before you borrow money to purchase a home, make sure to ask prospective lenders the following questions. Doing so can help ensure that what’s being offered is a good fit for your needs:

What types of mortgages do you offer?

What types of mortgage loans a lender offers is an important question to start with. After all, the mortgage market is diverse, and not all lenders offer every type of mortgage loan. Plus, some may have access to unique borrowing programs or mortgage loan offers that you qualify for, but you won’t know unless you ask.

So, be sure to inquire about the types of mortgages each lender offers, such as fixed-rate mortgages, adjustable-rate mortgages (ARMs) or government loans. Understanding the options available to you will help you choose the best mortgage lender — and the mortgage loan that best aligns with your financial goals.

Find out the mortgage loan rates you may qualify for here.

What is the interest rate and annual percentage rate?

The interest rate tied to your mortgage loan is a critical factor in the cost of your mortgage. The difference of even a fraction of a point could have a big impact on what you pay each month — and on your total mortgage loan costs — so it’s important to fully understand what your rate is before agreeing to borrow money for a home. 

But the interest rate is just one part of that equation. It’s important to understand both the interest rate your lender is offering and the annual percentage yield (APR). The APR reflects the total cost of the loan, including interest, fees and other charges. By comparing APRs among different lenders, you can get a more accurate picture of the total cost of each loan.

What are the closing costs?

The closing costs on your mortgage loan can add a significant amount to the total expense of buying a home. These costs generally range from about 3% to 6% of the total cost of the loan — but it can vary significantly based on the lender, the location of the home and other factors. 

So, before borrowing, be sure to ask your lender for a detailed breakdown of the closing costs, which may include loan origination fees, appraisal fees, title insurance and other charges. Understanding these costs upfront will help you budget appropriately and avoid any surprises at closing. In certain cases, you may also be able to negotiate these fees to lessen the total cost of your loan.

Are there prepayment penalties or hidden fees?

Paying off your mortgage loan early can be a smart move, but be careful. Before you borrow money for your home, it’s important to understand that some mortgage agreements include prepayment penalties, which impose fees for paying off the loan early. And if you plan to try and pay off your loan early, that could have an impact on the mortgage loan you choose.

It also makes sense to inquire about any hidden fees or charges that may not be explicitly mentioned in the mortgage loan agreement. Being aware of these potential costs before you borrow can help prevent unexpected financial burdens down the road.

What is the down payment requirement?

Different mortgage loan programs can have varying down payment requirements, so clarify with your lender the specific down payment percentage needed for any mortgage loan you are considering. Understanding this requirement will help you plan your budget and assess the feasibility of the home purchase.

What is the loan term?

The loan term, or the number of years over which you’ll repay the mortgage, significantly impacts your monthly payments and overall interest costs. Common mortgage loan terms are 15, 20 or 30 years. Discuss with your lender the pros and cons of each term so you have the information necessary to choose the one that aligns with your financial goals and capacity.

What is private mortgage insurance and how can I avoid it?

If your down payment is less than 20%, you may be required to pay private mortgage insurance (PMI) on certain types of loans (like conventional loans). In turn, it’s important to understand how PMI works, its cost and how to avoid or eliminate it. 

For example, some lenders offer options such as lender-paid PMI, and mortgage loan servicers are required to cancel PMI on certain loans once you reach a certain level of equity in your home. Knowing this information can help you make an informed choice on what options work best for you.

What documents do you need for approval?

You can help streamline the mortgage application process by asking prospective lenders about the required documentation for loan approval. Common documents include proof of income, tax returns, employment verification and credit history — but depending on your borrower profile, the loan type and other factors, you may need to provide other documentation to be approved for your mortgage loan. 

Being prepared with these documents upfront will expedite the approval process and help you secure your mortgage more efficiently. By asking this question early in the mortgage loan borrowing process, you’ll know what to be prepared with when you formally apply for your loan.

Can you lock in the interest rate — and what is the rate lock period?

As we have seen over the last several years, interest rates can fluctuate, and in some cases, they can do so drastically. If this happens while you’re still in the loan process, it can affect the overall cost of your mortgage loan. 

To help avoid this type of issue, you may want to inquire about whether your lender offers the option to lock in your interest rate — and, if so, for how long. A rate lock ensures that the agreed-upon interest rate remains unchanged during a specified period, so locking in a rate can provide you with rate stability during tumultuous markets.

What happens if I encounter hardship?

Life is unpredictable, and financial difficulties can arise without much warning. As such, it’s important to discuss with your lender their policies regarding financial hardship, such as job loss or unexpected medical expenses. 

Understanding your options, whether it’s a temporary forbearance or loan modification, can provide peace of mind in case you encounter unexpected challenges.

The bottom line

Asking these important questions can help to empower you with the knowledge necessary to make informed decisions when borrowing money for a home with a mortgage. Remember that your mortgage lender is a valuable resource, and open communication is key to a successful borrowing process. By taking the time to understand the terms of your mortgage, you can ensure that you’re on a path to financial security and homeownership.