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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