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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