Basics of Home Loan Lending

There are some basic, elemental things you will want to know about your prospective lender of choice and the program they're offering you before you proceed to sign on the dotted line for a new home mortgage loan.

To begin: quite simply, you want to know the interest rate. And not just the possible interest rate; you want to know the one that you are getting. You can pay a reasonable fee to “lock” an interest rate (one that is available today and that you like) for a specified period, typically 30 days, to ensure against fluctuation in the market during your loan processing period. If you are considering an ARM—an adjustable rate mortgage—then you'll want to know the starting interest rate and the floating, market-based interest rate to which it is tied so that you can know what to expect for payments from month to month. And needless to say, you will want to know what its cap-rate is (the highest rate to which it can go based on the market before it hits its ceiling). ARMs have both annual and lifetime cap-rates, and you will want to know what each of these is.

Keep in mind that if you paid “points” to get your interest rate lowered, these points are income tax write-offs.

You will also need to check thoroughly into the closing costs. Many times, lenders will allow you to roll your closing costs into your loan (meaning, increasing your loan amount by the sum total of all the not-out-of-pocket closing costs but not making you pay for most of them up front), and you'll want to know what your monthly payment would then go to if you did that.

Another matter that you'll want to look into is the possibility of holding what is known as a “credit life insurance” policy. This is a life insurance policy that will pay off the mortgage in full in the event that the breadwinner, or either one of the homeowners if both are paying contributing to the payment of the mortgage, were to die prematurely or unexpectedly. This is typically a “decreasing term insurance policy”, in which the death benefit (and correspondingly, your premiums) decrease in step with the mortgage balance still owed over the years until both go to zero.

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