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There are a few important mortgage questions to ask when you’re comparing various offers, provided you are able to get any in the current market. The fact is that lenders are becoming so restrictive when it comes to mortgages and refinancing that many excellent credit risks are being shut out of the market completely.

That is part of the reason for the economic troubles we’re facing these days. People want to get mortgages to buy houses, they have shown that they are trustworthy and historically are fairly unlikely to miss payments. However, many lenders (or their investors) are so skittish that these folks are being denied the opportunity for a mortgage in many cases.

If you are one of those that gets through the net and is in the position to be offered a mortgage, you shouldn’t just take whatever then lender is offering. There are some questions you should be asking first, even though you may just feel damn lucky to get a mortgage at all.

Here are mortgage questions to ask when analyzing your mortgage offer.

Mortgage Question to Ask – 1
What is the interest rate?

That is numero uno. The interest rate will have the greatest impact on how much you’ll pay every month and how much you’ll end up paying over the term of the loan. (For mortgages of the same amount, obviously.)

Mortgage Question to Ask – 2
Is this an ARM or a fixed rate mortgage?

In a survey of mortgage holders last year, over 30% of respondents were unsure of what type of mortgage they had. That amazed me so much I did a post on it. (Type of mortgage post) How so many could fall into this situation still amazes me, but don’t end up being one of these borrowers.

If you don’t know the difference between the different types of mortgages, here it is in a nutshell. A fixed rate mortgage is basically what the name implies. The interest rate will stay the same over the term of the loan. On the other hand, an adjustable rate mortgage (ARM) will change, or adjust, the interest rate at various times throughout the term of the loan. Rest assured the interest rate adjustment will be up, and so will your monthly payment. For more on this, see a post I did last year on how to select a mortgage.

Mortgage Question to Ask – 3
Are there prepayment penalties?

This is of huge importance. The majority of borrowers keep their mortgages for 5 years or less. That means you’ll pay off the mortgage and either get another one for your existing home, or you’ll buy a different house. In any case you’ll hold the mortgage for less than the full term. If you are charged a prepayment penalty it will cost you a hefty premium to do this.

Prepayment penalties are charged by lenders to help mitigate the risk that they’ll not get the entire revenue stream provided by the loan going full term (sounds like a pregnancy). Typically prepayment penalties expire after the first 2 – 5 years, but in some cases can persist longer than that. The penalty is monetary, you’ll not be asked to pledge your first born or classic ’57 T-bird. The normal prepayment penalty is about 2 – 3% of the outstanding balance at the time of the loan payoff.

You may be offered some consideration for agreeing to a prepayment penalty, such as a lower interest rate. On the other hand, you may be required to agree to one if you have bad credit, although at the present time few borrowers with really bad credit are able to get a mortgage at all, unless they have absolutely huge down payments.

A prepayment penalty may apply to a refinance only, in which case it is termed a “soft” penalty. If it applies to both a refi and a payoff of the mortgage, it is called a “hard” prepayment penalty.

Mortgage Question to Ask – 4
How much will this mortgage cost me in addition to the principal and interest?

Paying fees and closing costs for your loan are completely normal. There are a myriad of fees associated with securing your loan, such as appraisal fees, title insurance, documentation fees, recording fees imposed by the county for recording the deed, prepaid insurance, notary fees, application fees (try to negotiate your way out of that one), and so on.

You are required by law to be informed of any and all such fees and closing costs within three days of your loan application being received by the lender. These fees and closing costs can vary widely so it bears checking up on. Be aware that any such fees that are rolled into your mortgage will cost you a substantial amount of money after you’ve paid interest on them for 20 – 30 years.

Mortgage Question to Ask – 5
How long will it take to close the loan?

Closing is when you actually receive the proceeds for the loan. When it closes can affect your house deal, so you have to know how long it will take to happen. About 3 – 4 weeks is normal.

Mortgage Question to Ask – 6
Are you charging me points?

Points are an interest rate buy down. If you are charged points, you will pay a fee to the lender in exchange for a lower interest rate on the mortgage. It’s important to know this when comparing different mortgages, because if for example, one lender quotes you a 5.9% mortgage and another a 6.4% mortgage, you aren’t making an apples to apples comparison if the lower rate was obtained by your paying points to buy it down.

Points on a mortgage are equal to 1% of the mortgage amount. So a point on a $350,000 mortgage would cost you $3,500 up front. See the specific term of the offer to see how much each point is worth in terms of rate reduction. Normally it’s only a good idea to buy points if you are going to stay in your home and not refinance for at least 5 years, probably longer, otherwise you will not have time to recoup your added costs.

These are some of the most important mortgage questions you should ask when comparing different mortgages and before you sign your loan agreement. Before going into the process, make sure you have all your ducks in a row, they’re easier to shoot that way. Get all your required documentation in order, such as bank statements, tax documentation, check stubs, and anything else the lender may ask for. Also, you should have any offer reviewed by a good real estate attorney before you sign it. Here’s to hoping you get that mortgage!