8 must-ask mortgage and refi questions
|By Holden Lewis
Whether you're buying a house or refinancing, there is more to
a mortgage than the rate. Here are eight questions to ask while
mortgage shopping. You'll have to ask yourself some of these questions;
others can only be answered by mortgage professionals and insurers.
1. How long do I plan to stay in the house?
That's often a hard question to answer. Try anyway because a lot
of your decisions depend on the answer.
"I always say, 'What's the game plan? How long
do you plan to be in the property?'" says Ellen Bitton, CEO
of Park Avenue Mortgage Group in New York.
The answer affects whether you would be better off
paying points to lower your rate, whether you should get a fixed-rate
or adjustable-rate loan, whether you should accept a prepayment
penalty. If you're thinking of refinancing, the answer helps you
decide whether you should refinance at all.
If you have no idea how long you'll live in the house,
keep in mind that homeowners stay in one residence for a median
duration of 8.2 years, according to 1998
U.S. Census data. In other words, half of homeowners move within
8.2 years. The other half, naturally, stay in their homes longer.
Do you feel "average"? If so, maybe it means you'll stay
home for about eight years or so.
(FYI, with renters, the median stay in one residence
is 2.1 years.)
2. How much are the costs
of getting the loan?
When you apply for a loan, you'll get a federally mandated document
called the Good Faith Estimate of closing costs. It estimates how
much the lender will charge you for origination and discount fees,
an appraisal, a credit report, document preparation, title insurance,
a pest inspection and myriad other costs. Compare good faith estimates
and especially take note of the line that reads "Estimated
cash at closing." That's an educated guess of how much you'll
have to pay out of your checkbook to get the loan.
3. How long will it take to
If you're buying a home, how long will it take to break even if
you pay discount points to get a lower rate? If you're refinancing,
how long will it take to recoup the closing costs from your monthly
In either case, all you have to do is divide the upfront
cost (of discount points if you're buying a house and of all the
closing costs if you're refinancing) by the monthly savings you
would get. That tells you how many months it will take to break
even. If it's going to take five years to break even but you expect
to stay in the house four more years, it's probably not worth it.
4. What makes me feel comfortable?
Bitton says some of her clients insist on paying zero discount points,
while others want to pay a lot of points to get absolutely the lowest
interest rate, "even if it takes four or five years to break
As far as Bitton is concerned, there often is no right
or wrong answer when people ask whether they should pay discount
points or choose a 15-year or 30-year mortgage. "There's not
just an objective, dollars-and-cents number," Bitton says.
"There's also the psychological factor: What are you going
to feel comfortable with?"
She has clients in their 70s and 80s who get 30-year
mortgages because that's what makes them feel comfortable. Some
homeowners would rather refinance once and never have to bother
with refinancing again, so they pay a lot of points for a rock-bottom
rate. As a bonus, they have something to boast about at cocktail
parties. Other clients simply want the lowest possible payments,
so they snag an interest-only, five-year ARM. All understand what
they're getting into and have found their comfort zones.