|
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 down payment. 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 down payment 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.
| 
