By Heinz Bulos
If you’re in the market for a new house, lot, or condominium unit, choosing a mortgage—more commonly referred to as a housing loan—is one of the most important financial decisions you have to make.
Unfortunately, most people just look at the interest rate when shopping for a housing loan. There’s more to it than just the rate. And don’t rely on advertisements, which don’t tell you everything. Here are the ten most important things you need to ask your bank or mortgage lender:
1. How do you calculate your interest rate?
Don’t just ask for the rate. Some banks offer a very low teaser rate for the first year, and then jack it up the following year. Most offer variable-rate loans, also called adjustable-rate mortgages. They adjust every year or are fixed for a number of years, from two to ten, and then change thereafter. It’s only recently that a few lenders started offering fixed-rate mortgages that lock the rate for up to 25 years, the entire duration of the loan.
For adjustable-rate loans, you will only know the initial rate when you apply. After that, the “prevailing rate” will apply. But that doesn’t tell you anything. That’s why you have to ask how the bank computes the interest rate in succeeding years. After the fixed period, banks will charge you a rate based on a formula, which is an index plus a certain spread. The index is usually the 364-day T-bill rate. The spread or margin is how much the bank will earn to cover its expenses and make a profit.
2. How often do you adjust the rate and up to how much?
For variable-rate loans, after any fixed period, rates are adjusted or repriced every year. But you have to ask if they can also reprice every quarter, in case you want to opt for this. Ask also if you can switch between yearly or quarterly. Plus, you need to ask if the bank offers a rate cap or rate protection for yearly repricing, which is the ceiling or maximum rate they will charge every year during a certain period, say for five years. There could also be a floor or minimum rate for their own protection, so banks wouldn’t lose in case rates fall sharply.
3. How do you compute the maximum loan amount?
Banks will lend you a maximum amount based on the appraised or market value of the property you want to buy or collateral you’re offering. Don’t be shy to ask how liberal they are in appraising your property. Some banks are more conservative in their estimates—in the case of developed properties, setting the value lower than the actual selling price—while others are more generous, especially if coursed through property developers.
The maximum you will theoretically get is computed as a percentage of the appraised value. For lots and condominiums, it’s typically 60%. For house and lots, it’s 70%. Some banks lend as much as 80% depending on the property’s location and developer. Alex Ilagan, senior vice president of East West Bank, says, “The higher the loan to collateral value ratio, the better it will be for the borrower because it will require him to pay a lower equity.” The flip side to this is the required down payment or equity you have to cough up.
4. What will I actually get?
Keep in mind though that you won’t automatically receive the maximum loan amount as the bank will assess your capacity to pay based on your income. The bank will compare the corresponding monthly loan amortization to your monthly income (it often has a minimum gross monthly income requirement). Ask what the credit ratio is, the limit it will actually lend you. Banks usually set their credit ratio to up to 30% of your gross monthly household income. So even if your property has a high appraisal value but your income is not as high, banks will just offer to lend a smaller amount than what you applied for, lengthen the original term, or propose other measures to make sure you can better afford the loan. The worst-case scenario, of course, is your application will be disapproved.
5. How do you compute my amortization schedule?
An amortization schedule is a table detailing your periodic loan payments. Ask the bank if it offers both straight-line and declining-balance options. With straight-line, your monthly payments are fixed. With declining-balance, you start off paying higher amortization in the first few years but as your loan balance—which is the basis for the monthly interest—declines throughout the term, your payments also decrease as you near the end of the term.
6. How often can I pay my amortization?
You get the choice of how often you pay your amortization. Typically, it’s monthly or twice a month. But also ask if the bank will let you pay quarterly or fortnightly. If you want to time it with your payroll dates, monthly or twice a month sounds good. But if you don’t have a regular monthly income, quarterly might make more sense. If you want to speed up your payments, fortnightly is best.
Fortnightly, or every two weeks, is not the same as twice a month. With the latter, you end up paying 24 times a year. Not so with fortnightly, where you pay 26 times a year. So you’re like paying an extra month in a year. You end up paying your loan faster, shaving off about two years for a 20-year loan.
7. What are your other fees?
Often ignored, other mortgage-related fees add up to your cash out. Ask for a list of all fees. These are the additional fees you have to pay the bank upfront when you apply for a loan and get approved, called settlement fees. You can try to negotiate with the bank and ask to waive or lower some of them. If you’re buying a property from one of the bank’s accredited developer, the appraisal fee is waived. Banks charge a non-refundable application fee just to process your application, a processing fee to process your approved loan, an appraisal fee to estimate the market value of your property, and a notarial fee for legal services. So if the bank already set the appraised value equivalent to the selling price of the property, it shouldn’t charge you an appraisal fee.
The government also takes a piece of the action. You need to pay the local government for registering your mortgage. And every year, you have to pay city hall property tax. You have to pay documentary stamps tax for documents like your real estate mortgage. In case you’re buying the property directly from a seller, you pay transfer tax on it.
There are premiums you have to pay the bank’s accredited insurance companies every year, such as home insurance to cover against fire, earthquake, typhoon, or some other event. Usually, it’s just fire insurance. There’s also mortgage redemption insurance (MRI), which is term life insurance that will pay off your loan balance in case you die before the end of the term. Ask if you can get your own insurance instead of coursing it through the bank, which earns a commission on the premium.
8. What happens if I don’t pay in time or if I pay ahead of time?
You get charged both a penalty and interest if you fail to pay your amortization on time. There are some banks that are more lenient and will let you off the hook if you’re late a few times. In case you do get slapped a fee but you’ve been otherwise a good borrower, ask to have it waived.
Now, during the duration of your loan, you may decide to make changes to your mortgage. Ask the bank what are the policies and fees if you want to pre-pay, pre-terminate, or refinance. If you pay off part of the loan before the end of the term to save on interest, your bank might slap a pre-payment fee, particularly if you do so on a day other than the repricing date. If you pay off part the entire loan before the end of the term, your bank will charge a pre-termination fee. And if you decide to transfer your mortgage to another bank, you will have to shell out a refinancing fee.
9. Do you have an existing or upcoming promo I need to know about?
Some banks dangle freebies or a chance to join raffles and win big prizes. Others offer discounts or cash backs as a limited promo. Some waive application and appraisal fees. Many throw in a pre-approved credit card or bundle a pre-qualified appliance loan at a preferred rate and longer terms. There are even promos that will return your entire principal after the end of the loan term. Nowadays, some banks will lower your rate the higher your deposit balance is with them. Always ask what else you can get. But don’t make this your main basis. Bobby Disini, vice president and head of PSBank’s Mortgage Banking Division, cautions, “Avoid falling for propositions without intrinsic value like immediate freebies that try to mask what really counts for a loan borrower like low interest rates, fast processing, and more affordable loan terms.”
10. Why should I borrow from you?
Okay, don’t ask this bluntly, but you have to understand this is a borrower’s market, what with so many competing lenders fighting over your business. So any competitive advantage will work in your favor.
It’s particularly important to know if your loan application is approved or disapproved if you’ve already made a down payment to a property developer or you don’t want to lose a hot property. Ask how quick they are in processing your application. Some banks guarantee as little as five days to give you a decision. Often, it takes a week. And the guarantee applies only if all your documents have been submitted to the bank’s satisfaction. “Be wary of fast processing claims that will actually take weeks rather than days,” says Bobby.
What you want is to have enough time to apply with another bank in case your application gets disapproved. To be on the safe, Alex says that ideally, you should apply for the loan first and secure approval from the bank before paying any money because “no one can assure you of how long it will take a bank to process your loan or if it will even get approved at all. Some banks take longer than usual to approve a loan because some problems with the title of the collateral property.”
You also want to make sure it’s easy and convenient for you to pay your amortization. Ask how and where you can pay. Some banks emphasize their wide branch network, so you can pay at any of their branches. However, most banks let you pay using post-dated checks or use their automatic debit arrangement.
The entire process of applying for a loan can really be a stressful experience. You may want to work with a bank that will hand-hold you or stay with one that doesn’t hound you if you’re sometimes late with payments. Loan officers who are courteous, patient, and accommodating can convince you even if you can find a lower rate somewhere else. Some banks deliver and pick up documents from your house or office. You also want to track your loan balance and payments by phone and online. Unfortunately, you don’t get to ask how their customer service is. Sure, you can ask other people. But it’s something you can only experience.