Buying Your Home:
Settlement Costs and Information
II. Buying and Financing a Home
Shopping for a Loan
Your choice
of lender and type of loan will influence not only your settlement costs,
but also the monthly cost of your mortgage loan. There are many types of
lenders and types of loans you can choose. You may be familiar with banks,
savings associations, mortgage companies and credit unions, many of which
provide home mortgage loans. You may find a listing of some mortgage lenders
in the yellow pages or a listing of rates in your local newspaper.
Mortgage Brokers. Some companies, known as "mortgage
brokers" offer to find you a mortgage lender willing to make you a loan. A
mortgage broker may operate as an independent business and may not be operating
as your "agent" or representative. Your mortgage broker may be paid
by the lender, you as the borrower, or both. You may wish to ask about
the fees that the mortgage broker will receive for its services.
Government Programs. You may be eligible for a
loan insured through the Federal Housing Administration ("FHA") or guaranteed
by the Department of Veterans Affairs or similar programs operated by cities
or states. These programs usually require a smaller downpayment. Ask lenders
about these programs. You can get more information about these programs
from the agencies that run them. (See Appendix to this Booklet.)
CLOs. Computer loan origination systems, or CLOs, are
computer terminals sometimes available in real estate offices or other
locations to help you sort through the various types of loans offered by
different lenders. The CLO operator may charge a fee for the services the
CLO offers. This fee may be paid by you or by the lender that you select.
Types of Loans. Loans can have a fixed
interest rate or a variable interest rate. Fixed rate loans have the same
principal and interest payments during the loan term. Variable rate loans
can have any one of a number of "indexes" and "margins" which determine
how and when the rate and payment amount change. If you apply for a variable
rate loan, also known as an adjustable rate mortgage ("ARM"), a disclosure
and booklet required by the Truth in Lending Act will further describe
the ARM. Most loans can be repaid over a term of 30 years or less. Most
loans have equal monthly payments. The amounts can change from time to
time on an ARM depending on changes in the interest rate. Some loans have
short terms and a large final payment called a "balloon." You should shop
for the type of home mortgage loan terms that best suit your needs.
Interest Rate, "Points" & Other Fees. Often the price
of a home mortgage loan is stated in terms of an interest rate, points,
and other fees. A "point" is a fee that equals 1 percent of the loan amount.
Points are usually paid to the lender, mortgage broker, or both, at the
settlement or upon the completion of the escrow. Often, you can pay fewer
points in exchange for a higher interest rate or more points for a lower
rate. Ask your lender or mortgage broker about points and other fees.
A document
called the Truth in Lending Disclosure Statement will show you the "Annual
Percentage Rate" ("APR") and other payment information for the loan you
have applied for. The APR takes into account not only the interest rate,
but also the points, mortgage broker fees and certain other fees that you
have to pay. Ask for the APR before you apply to help you shop for the
loan that is best for you. Also ask if your loan will have a charge or
a fee for paying all or part of the loan before payment is due ("prepayment
penalty"). You may be able to negotiate the terms of the prepayment penalty.
Lender-Required Settlement Costs. Your lender
may require you to obtain certain settlement services, such as a new survey,
mortgage insurance or title insurance. It may also order and charge you
for other settlement-related services, such as the appraisal or credit
report. A lender may also charge other fees, such as fees for loan processing,
document preparation, underwriting, flood certification or an application
fee. You may wish to ask for an estimate of fees and settlement costs before
choosing a lender. Some lenders offer "no cost" or "no point" loans but
normally cover these fees or costs by charging a higher interest rate.
Comparing Loan Costs. Comparing APRs may be an
effective way to shop for a loan. However, you must compare similar loan
products for the same loan amount. For example, compare two 30-year fixed
rate loans for $100,000. Loan A with an APR of 8.35% is less costly than
Loan B with an APR of 8.65% over the loan term. However, before you decide
on a loan, you should consider the up-front cash you will be required to
pay for each of the two loans as well.
Another
effective shopping technique is to compare identical loans with different
up-front points and other fees. For example, if you are offered two 30-year
fixed rate loans for $100,000 and at 8%, the monthly payments are the same,
but the up-front costs are different:
Loan A
- 2 points ($2,000) and lender required costs of $1800 = $3800 in costs.
Loan B
- 2 1/4 points ($2250) and lender required costs of $1200 = $3450 in costs.
A comparison
of the up-front costs shows Loan B requires $350 less in up-front cash
than Loan A. However, your individual situation (how long you plan to stay
in your house) and your tax situation (points can usually be deducted for
the tax year that you purchase a house) may affect your choice of loans.
Lock-ins. "Locking in" your rate or points at the time
of application or during the processing of your loan will keep the rate
and/or points from changing until settlement or closing of the escrow process.
Ask your lender if there is a fee to lock-in the rate and whether the fee
reduces the amount you have to pay for points. Find out how long the lock-in
is good, what happens if it expires, and whether the lock-in fee is refundable
if your application is rejected.
Tax
and Insurance Payments. Your monthly mortgage payment will be
used to repay the money you borrowed plus interest. Part of your monthly
payment may be deposited into an "escrow account" (also known as a "reserve" or "impound" account)
so your lender or servicer can pay your real estate taxes, property insurance,
mortgage insurance and/or flood insurance. Ask your lender or mortgage
broker if you will be required to set up an escrow or impound account
for taxes and insurance payments.
Transfer of Your Loan. While you may start
the loan process with a lender or mortgage broker, you could find that
after settlement another company may be collecting the payments on your
loan. Collecting loan payments is often known as "servicing" the loan.
Your lender or broker will disclose whether it expects to service your
loan or to transfer the servicing to someone else.
Mortgage Insurance. Private mortgage insurance and government
mortgage insurance protect the lender against default and enable the lender
to make a loan which the lender considers a higher risk. Lenders often
require mortgage insurance for loans where the downpayment is less than
20% of the sales price. You may be billed monthly, annually, by an initial
lump sum, or some combination of these practices for your mortgage insurance
premium. Ask your lender if mortgage insurance is required and how much
it will cost. Mortgage insurance should not be confused with mortgage life,
credit life or disability insurance, which are designed to pay off a mortgage
in the event of the borrower's death or disability.
You may
also be offered "lender paid" mortgage insurance ("LPMI"). Under LPMI plans,
the lender purchases the mortgage insurance and pays the premiums to the
insurer. The lender will increase your interest rate to pay for the premiums
-- but LPMI may reduce your settlement costs. You cannot cancel LPMI or
government mortgage insurance during the life of your loan. However, it
may be possible to cancel private mortgage insurance at some point, such
as when your loan balance is reduced to a certain amount. Before you commit
to paying for mortgage insurance, find out the specific requirements for
cancellation.
Flood Hazard Areas. Most lenders will not lend
you money to buy a home in a flood hazard area unless you pay for flood
insurance. Some government loan programs will not allow you to purchase
a home that is located in a flood hazard area. Your lender may charge you
a fee to check for flood hazards. You should be notified if flood insurance
is required. If a change in flood insurance maps brings your home within
a flood hazard area after your loan is made, your lender or servicer may
require you to buy flood insurance at that time.
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