Homebuyers

The Mortgage Fine Print Every Homebuyer Should Read Carefully

A mortgage is what allows millions of people to own homes every year. It makes the goal of owning a property a reality, whether you’re buying your first condo or a house with a backyard.

Still, for all the good a mortgage can do, it comes with paperwork. A lot of it. And somewhere in that thick stack of disclosures and agreements are details that could shape your monthly budget for years. 

“A lot of folks get really focused on the mortgage rate or the monthly payment that they barely glance at the actual paperwork,” said Jordan Blake, director of communications and operations at Shoreline Public Adjusters based in Naples, Fla. “I can completely understand that. But that fine print? It matters.”

So, before you sign anything, here are a few key things to look for in the fine print when it comes to a mortgage.

Mortgage interest rate structure

Not all mortgage loans are the same. Fixed-rate loans lock in your mortgage interest rate for the life of the loan, which makes budgeting easier. 

Adjustable-rate mortgages (ARMs), on the other hand, usually start low and then reset after a set period of years to the current market rate— which sometimes means sharp increases. If you’re taking on an ARM, read the section that says how often the rate changes, the maximum change per period, and the lifetime limit. 

Those details are often in the fine print and can add hundreds to your monthly payment down the road.

Mortgage prepayment penalties

You might assume you can pay off your mortgage early and save money on interest. But some loans include a prepayment penalty, which is a fee for paying off the loan ahead of schedule. 

While less common than they once were, prepayment penalties still show up in some loans.

“The biggest blind spot is prepayment penalties that kick in if you sell or refinance early,” said Sean Zavary, the founder and CEO of Greenlight Offer, a real estate investment company in Houston, Texas.

Lenders charge these to recoup the money they would have made in interest if you refinance, sell, or pay off your loan within the first few years. The penalty might be a flat fee or a percentage of the loan balance. 

If you plan to refinance or move in the near future, make sure you understand your loan.

Escrow account terms

Your monthly mortgage payment often includes more than just principal, which is the amount you borrowed, and the interest you pay for the loan. Most lenders ask you to set up an escrow account. This account will hold part of your payment for property taxes and homeowners insurance.

This full payment is sometimes called PITI—short for principal, interest, taxes, and insurance. Some lenders will ask you to pay a big amount if your taxes go up. Or your monthly mortgage payments could rise. This could happen after your first property valuation.

Also, not all loans require an escrow account. If you’re managing taxes and insurance on your own, understand the risks. It may lower your monthly payment slightly, but it also means a higher risk of missing key deadlines and potential penalties if you do.

Mortgage insurance triggers

If your down payment is less than 20%, you’ll likely be required to pay for mortgage insurance. This protects the lender if you stop paying off your loan.  The type of insurance depends on your loan.

Private mortgage insurance (PMI) is for Conventional loans and mortgage insurance premiums (MIP) are for Federal Housing Administration (FHA) loans.

Check the section in your loan document that explains how long you’ll be paying for this. If you make a down payment of less than 10% with an FHA loan, mortgage insurance lasts for the entire term, no matter how much equity you build. 

On Conventional loans, you may be able to cancel PMI once you reach 20% equity. But there are generally conditions you must meet first. The PMI cancellation process can be complicated, and some lenders don’t automatically remove it.

Late-payment penalties and grace periods

Everyone aims to make their mortgage payments on time, but life happens. What counts as “late” might surprise you.

Most lenders offer a 15-day grace period, but some charge a fee if you’re even a day late. Others wait until the grace period expires before applying a penalty. However, that fee can be steep, typically ranging from 4% to 5% of your monthly payment. 

Consistent late payments can ding your credit or push your loan into default, which can eventually lead to foreclosure.

Read the section outlining when your payment is considered late and how penalties are calculated. You’ll also want to know how payments are applied. Some lenders apply funds to interest before principal or tack late fees onto the balance if not paid upfront.

“Many of these clauses buyers overlook could trigger both acceleration of the mortgage balance or defaults,” said Jacqueline Salcines, a real estate attorney at Salcines Law based in Coral Gables, Fla. “If they sign on the dotted line and are not aware, the law does not allow that as an excuse.”