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Disclaimer
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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