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The mortgage process has a lot of steps and there’s no doubt that every borrower has plenty of questions along the way. Every situation is different, but there are a few questions about mortgage loans that many borrowers seem to ask.

The first question is about two mortgage terms that are easy to get mixed up. Prequalification and preapproval. What are they and what is the difference between them? Our Honesdale Branch Manager, Dawn Lehutsky, recently answered this question in our Loan Q&A Video Series.

“Prequalification is something you do early in the home buying process. It’s a lender’s estimate on how much you might be able to borrow. It’s based on information you provide about your finances. A preapproval, on the other hand, is more of a guarantee from your lender. You complete the mortgage application and they verify your income, check your credit, and provide a preapproval letter, which is typically good for 90 days. It is an offer (but not a commitment) from the lender to lend you a specific amount.”

So, a prequalification is a determination of how much you might be approved to borrow, based on information you provide to your bank. A preapproval is a formal document that guarantees your bank will lend you a specific amount of money. It is based on an in-depth assessment of your income, debt, and credit conducted by your bank.

Prequalification and preapproval are both helpful to borrowers because they can help show a seller you are a serious buyer and you have the funds available to make the purchase. The prequalification process is also a great time to sit down with your lender and review all of the different loan options available to you. This ensures you’ll find the right loan for your situation.

The second question we hear commonly is about loan estimates. What is a loan estimate, and why would a borrower want or need one?

A Loan Estimate is a three-page document that you will receive when applying for a mortgage. It explains the details about the mortgage loan you have requested such as the interest rate, loan term, loan type, closing costs, and monthly payment. It is an estimate of the total cost of the loan over time. It includes all items so there are no surprises and you can review all details of the loan you’re applying for.

The borrower can use it as a guide to shop around and compare to get the best deal possible. Also, just by understanding the key costs associated with the loan you can make a better-informed decision which will ultimately save you money. A loan estimate is something you should request from every bank you apply for a mortgage with, this way you can compare all of your options in detail.

A loan estimate is not a guarantee from your lender. Your lender is legally required to provide you with a loan estimate before you commit to a mortgage. It’s important to understand that a loan estimate can change. Although a lender can’t change certain elements of a loan estimate, but certain things may change over time. Rising and falling interest rates, changes in closing costs, and the appraisal value are things that can change and can affect you loan estimate. Once you have received your loan estimate (or multiple loan estimates) and reviewed the information you will notify your lender when you’re ready to move forward and they will begin with running a credit check, etc. If anything has changed since the estimate was provided there will be adjustments made to your loan estimate. Be sure to review the final loan estimate before committing.

Our last question is about mortgage rates. Fixed rate mortgages are definitely the most common, because most borrowers prefer to know their rate and lock it in for the length of their loan. However, adjustable rate mortgages can still benefit borrowers in certain situations. So, which one is better?

A seasoned lending professional can help you determine which type of loan is best for your situation, but there are a few circumstances where an ARM might actually be a better fit than a fixed rate mortgage.

One example of this is if someone wants to purchase a home that they know they will only be living in for a few years. ARMs typically carry a lower interest rate than fixed rate mortgages, and the initial interest rate on an ARM is normally below the market rate. Although it will reset in a few years and most likely increase, borrowers can save some serious money each month over the first few years of an ARM. For someone looking to live in a home for a short time may be able to get a rate below market rate if they opt for an ARM.

Another situation where an ARM might be a great option is if someone is buying a home to flip. You can purchase a home at a low rate and sell it before the rate is adjusted. If you have questions about a mortgage loan or any kind of loan, call us today! We’re always here to answer your questions and help you find the right mortgage loan to fit your needs.

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Citizens Savings Bank has multiple locations throughout Lackawanna, Wayne, and Monroe Counties. For branch locations and hours, visit our website. We also have a Customer Support Team ready to answer any questions you may have. Call us today at 1-800-692-6279 or email [email protected]. Member FDIC. Equal Housing Lender.