Some homebuyers pay more on their mortgage in order to pay the mortgage down more quickly, or pay points upfront to lower their interest rate and their monthly payments – but are there reasons why you would ever want to pay more on your mortgage based on service from the lender? Here are a few questions that, if answered correctly, may make you decide the extra money is worth the lender service element.
Can You Explain These Documents In Terms I Can Understand? – To some first-time buyers, the documentation can be overwhelming. After days of trying to grasp all the terms and industry jargon, the forms may as well have been printed in Mandarin Chinese.
A detailed explanation of the Truth-In Lending Form, the Good Faith Estimate, the HUD-1 form and all the associated terms, and a full explanation of the APR (including what fees are included and which are not) in simple terms can go a long way to establishing trust with a lender. A detailed explanation of the myriad closing costs in layman’s terms can seal the deal.
What Are My Options For Avoiding PMI? – Private Mortgage Insurance (PMI) is generally required on any loan that contains less than a 20% down payment to insure the lender against default. While the easiest way to avoid PMI is to pay 20% down, some lenders offer creative options, including self-insuring through offering a higher interest rate. This may appeal to you if you do not have sufficient down money.
Are Your Timelines Accommodating? – You may need flexibility in your timeline to either accelerate or decelerate the process – for example, if you are you trying to sell one house and buy another simultaneously, the closing on your new house may be contingent on the sale of the old one. A lender that can accommodate the twists and turns of this process may be worth the extra fees or higher interest rate you may incur for the privilege.
Do You Offer a Float-Down Option? – At some point, you will want to lock the rate on your loan, to guarantee the rate does not rise between approval and closing. Of course, the rate could also fall, saving you money. Some lenders offer a float-down option, accommodating a lowering of the interest rate. Usually there is a fee involved for this privilege, but in higher-interest rate times, this may appeal to you.
How Long Do You Expect to Hold the Loan? – The majority of lenders do not hold onto the loan, but instead quickly sell it into the secondary mortgage market in order to free up more capital to make new loans. However, there are some lenders (generally known as portfolio mortgage lenders) that originate and hold onto some of their loans as part of an overall package service that they provide to their customers, such as deposit accounts. Their mortgage rates may be correspondingly higher to account for their lost opportunity costs.
If dealing with the original lender for any downstream problems appeals to you, or you can take advantage of other package deals, this approach may be for you.
There are indeed times where you may want to pay more for a mortgage for the privilege of extra service. However, most of these situations can be overcome with better education. Research the mortgage process as much as possible, and you are less likely to need to pay for extended service – although you may still choose to out of convenience.