10 Essential Mortgage Questions

The decisions you make now can affect your life for up to 30 years. To make sure they are good ones, be sure you know the answers to these essential mortgage questions:

1. How much house can I afford to buy?

A standard rule for lenders is that your monthly mortgage payment should not exceed 28% of your income before taxes. In some cases, this means that you may be approved for a higher amount than is realistic for your budget. Be honest with yourself about your financial commitments each month for mortgage, insurance, utilities and other costs associated with the home. Don’t decide whether or not you can afford a home on how much you were approved for.

2. Do I qualify for an FHA mortgage?

FHA mortgages are backed by the Federal Housing Authority and can be a far more economical choice for most buyers. Because of the reduced risk to lenders, they have more flexibility in what products they can offer you when it comes to credit scores, down payment, income and other requirements. To qualify for an FHA loan, you must be a first-time buyer and be approved by an FHA-approved lender.

3. Do I have to put money down?

A number of loan programs require no down payment at all. The VA loan is the most common, but there are many available to other borrowers as well. However, a decent down payment will lower your monthly payments and also increase your chances of being approved for a loan.

4. What is PMI?

PMI is the insurance you probably need to have if your down payment is less than 20 percent of the home value. When the down payment is larger, this can eliminate the need for PMI. On a $100,000 loan, you'd pay as much as $1,000 a year for PMI, or $83.33 a month.

5. Is a 15 or 30 year mortgage a better fit?

Short term mortgages are paid off sooner and usually come with lower interest rates. A 30-year mortgage will give you lower payments, however, which may work better with your budget.

6. Is a fixed or adjustable rate mortgage better for me?

In a low-interest market like we are currently experiencing, a fixed rate makes sense. However, if rates go up, you might do better with an ARM, which gives low rates at first but then adjusts to market rates later on.

7. What is the difference between the rate and APR?

The interest rate is what lenders use to calculate the mortgage payment. The APR is the actual cost of the loan. For instance, a loan with an interest rate of 5% may actually be higher once closing costs are added in.

8. What are discount points?

If the rate seems high, you can choose to pay discount points as a part of your closing costs to get a lower rate. A point is equal to one percent of the loan. If you have a $100,000 loan with two points, the charge will be $2,000. Knowing about these in advance can make it easier to assure that you can afford the loan.

9. What documentation do I need to get a loan?

You'll need your tax returns, pay stubs, bank statements and a few other documents to start. If documents are missing, such as your taxes from last year, the process will take longer.

10. How many lenders do I need to talk to?

FICO scoring allows you to consult as many as you want during a normal shopping period without adversely affecting your rating. Talk to a number of lenders to tie in the best rate.

By having these and other mortgage questions out of the way before you start, you can assure the best rate and a loan that will work for you through the length of your mortgage. Compare lenders and find the lowest rates by visiting our comparison tables at BestCashCow.com.