15 Frequently Asked Mortgage Questions

Understanding these responses can significantly ease the mortgage application process.

For most individuals entering the realm of homebuying for the first time, securing a mortgage may seem daunting. Yet, armed with insights into the requirements and expectations throughout the mortgage application journey, from initiation to the closing phase, one can dispel those anxieties. In this context, we've addressed 15 commonly asked questions that prospective homebuyers often have about mortgages.

1. Is an excellent credit score necessary for a mortgage application?

While not mandatory, a higher credit score, such as 740 or above, can result in substantial interest savings over the life of a loan.

2. What's the minimum down payment required?

Conventional mortgages can be obtained with as little as 3% down, FHA loans with 3.5% (zero down options available to most), and VA or USDA loans with no down payment. However, lower down payments may necessitate private mortgage insurance (PMI) in some cases.

3. Define closing costs and what's the typical amount?

Closing costs encompass various charges incurred before completing a loan, including origination fees, title insurance, recording fees and setting up an escrow account (taxes and insurance). Generally, anticipate paying around 2% to 3% of the home's price in closing costs.

4. Fixed-rate or adjustable-rate mortgage?

In a low-interest-rate environment, a fixed-rate mortgage is advisable. However, circumstances such as an expected home sale before the fixed-interest period ends may make an adjustable-rate mortgage (ARM) more advantageous.

5. Should I lock my interest rate?

Locking in your interest rate guarantees the current rate for a set period, recommended when rates are trending upward or unstable.

6. Which mortgage type suits me best?

Options include conventional mortgages, FHA loans, VA loans for veterans, and USDA loans for those buying in rural areas.

7. What are discount points, and should I pay them?

Discount points, paid upfront for a lower interest rate, can be worthwhile if the interest savings over the loan's life exceed the points paid. Typically you want to divide the cost of the point by the savings to determine a break even point. Once you have that time period, the questions is, will you be in that loan that long?

8. 15-year or 30-year term loan?

A 15-year mortgage offers a better interest rate, quicker home payoff, and substantial interest savings, while a 30-year mortgage allows lower monthly payments.

9. What documentation should I prepare?

Expect to provide income verification, identification, bank statements, and proof of funds for closing, in most cases.

10. What is an escrow account?

A fund for ongoing property expenses, like taxes and insurance, funded through lump-sum payments at closing and monthly mortgage contributions.

11. Why does getting a mortgage to closing take so long?

Numerous tasks, including document gathering, home inspection, appraisals, repairs and underwriting, contribute to the 20-day or longer mortgage origination period.

12. How is my mortgage payment determined?

Mortgage payments typically consist of principal, interest, taxes, and insurance (PITI).

13. Will my monthly payments change during the loan term?

Yes, even with a fixed-rate loan, fluctuations in property taxes and insurance costs may necessitate adjustments to the escrow portion of your payment. If you do not escrow and you pay your taxes and insurance on your own (sometimes an option) than your payment would not change.