In mortgage shopping, it’s easy to compare interest rates and points, but then things get tricky, as each mortgages also entail a battery of charges for origination, title insurance, transfer taxes, lawyers fees... the list goes on and on.
Now, under a federal regulation that took effect Jan. 1, it’s easier to make an apples-to-apples comparison that takes all charges into account. Lenders must now use a standardized form called the Good Faith Estimate, issued by the U.S. Department of Housing and Urban Development.
HUD hopes that making expenses clearer and encouraging comparison shopping will save the average borrower $700.
The form leaves a few things out, such as how high your payments could go if you get an adjustable-rate loan. (The Adjustable-Rate Mortgage Calculator can help with that.) But it does alert the borrower to features that need more research, such as the possibility that your loan balance will increase, rather than decrease, if you make only the minimum payments on an option-style loan.
By obtaining completed forms from several lenders, you stand a better chance of getting the most suitable loan. Certain parts of the form should get special scrutiny.
First is a section labeled “Important dates” on page 1, telling you how long the lender promises you can get the terms described in the loan offer.
The next section, “Summary of your loan,” reveals some of the most important danger signs, such as whether your interest rate or loan balance can rise after you get the loan, and whether there is a prepayment penalty or balloon payment. If any of the “yes” boxes are checked, be sure you completely understand the conditions it describes.
If your interest rate could rise, for example, find out how much it could go up in any one year, how much over the life of the loan, what “index” the loan is tied to and what the “margin” is, or the number of percentage points added to the index to figure the new loan rate.
A prepayment penalty is a charge for paying off the loan early, which happens when you refinance or sell. These penalties are sometimes on a sliding scale, charging more if you pay the loan off within two years than if you wait for five, for instance.
A balloon payment is a big payment of principal after a given period, such as five or 10 years. Many borrowers assume they’ll sell by then or else take out a new loan to cover the balloon. They can run into problems if they cannot qualify or if interest rates are too high.
Page 2 lists a variety of charges, some of which provide an opportunity to save. Title services are selected by the buyer in some states, the seller in others. The homeowner’s insurance policy is selected by the buyer, who should shop around.
Others charges on page 2 are fixed, such as government recording fees and transfer taxes, which are a kind of sales tax on real estate. In some places the buyer pays the tax, in others the seller does, and in some it is split. Your real estate agent can tell you the common practice, and whether this is something you can negotiate with the seller. It’s worth finding out, as transfer tax can be thousands of dollars.
Page 3 is used for comparing various loans. Even with all the figures filled in, this isn’t such an easy process. One loan may have a slightly lower rate but charge more in points. Use the Mortgage Points Calculator to study that tradeoff.
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