Mortgage Loan Tips
1. Shop around! There are more than 1,000 companies who have notified the department that they are doing mortgage lending or brokering in Utah. By spending some time comparing rates, fees and services, you may be able to save yourself thousands of dollars by avoiding loans with high-rates, high-fees, or both.
2. As you shop, compare interest rates (fixed rate or variable), fees, and find out if they charge prepayment penalties (most do not). The market rate for borrowers with good credit varies from time to time. If you think that rates will increase, you may want to consider “locking in” an interest rate. If you do, we suggest you obtain written confirmation of that lock and pay attention to when the lock expires. Origination fees seem to be about 1% of the loan amount. Some unsuspecting and uninformed consumers have paid as high as 17% for origination/broker fees. For a $100,000 loan, that means paying $17,000 when $1,000 to another company would have provided a loan with terms at least as favorable. If you have poor credit, you will likely have to pay higher rates and fees, but by shopping around you may still be able to find a loan with reasonable fees and rates.
3. Avoid companies which encourage you to commit fraud by claiming a business purpose for a loan which is actually for personal, family or household uses. This seems to be done by some companies to avoid a rescission period (a 3-day “cooling off” period in which a borrower may cancel a loan secured by his/her primary residence) and/or to circumvent the requirement to provide important disclosures. If you have a financial emergency (such as imminent foreclosure), you may waive your right of rescission to speed up the process without any need for deceit.
4. Beware of statements such as “No cost to you”. Some mortgage companies use that expression to mean no out of pocket costs at closing — that is, they will add closing costs to your loan balance rather than require you to provide cash at closing. Make sure you understand all the fees you are paying, whether added to the loan or not, you are the one to make sure you are getting a fair deal.
5. Avoid churning your mortgage loan. Usually, each time you refinance you incur closing costs and non-refundable fees. Don’t allow a mortgage company to talk you into rewriting your mortgage loan just to get a little cash out. Many people find that they have added $5,000 or more to their debt in order to obtain $2,000 in cash.
6. Avoid so-called quicksand loans. They contain combinations of the following attributes: short-term, high up-front-fees, high rates, balloon payments, excessively high late fees, prepayment penalties. Just as quicksand can swallow up your body, quicksand loans can swallow up any equity you may have and ruin your financial position.
7. Once you’ve applied for a mortgage loan, make sure you get a Good Faith Estimate of costs (the company you apply with is required by federal law to provide you one). Make sure you understand and are willing to pay all of the fees listed. Take it with you to the loan closing and compare it with the Settlement Statement — item by item — to make sure that the actual fees as shown on the Settlement Statement are in line with the estimates shown on the Good Faith Estimate. If there are any significant differences, get them resolved before you sign the papers. If the mortgage company will not change the terms as you desire and you wish to cancel the transaction, you should consider some options: If your loan is a refinance or a second mortgage on your primary residence, find the Notice of Cancellation, sign the essential loan documents, then cancel the transaction using the Notice of Cancellation. If it is not a refinance or second mortgage on your primary residence, don’t sign the documents.
8. Review in detail the terms of the note before you sign it. Know what every paragraph means.
9. Beware of prepayment penalties. If you have good credit, there is no need to sign a loan which contains any significant prepayment penalty. Often they are disclosed on the 2nd page of the note in a paragraph starting “You may prepay this loan anytime….” Later in the paragraph, some documents obligate you to pay the lender 6 months worth of interest just to pay the loan off early. On a $100,000 loan, at current rates, such a fee would be approximately $4,000.
10. Be skeptical of promises a mortgage company may give as to how quickly you may be able to obtain a loan. Many borrowers have been told that their loans would close within a particular time. In anticipation of the new loan they have not made payments on pre-existing debts. After several delays, borrowers have delinquent existing loans with no funds from the new loan. Some mortgage companies have then pulled new credit reports and charged the borrowers higher fees and a higher rate because of the delinquent loans which resulted from delays caused by the mortgage company.
11. At closing, pay special attention to the Settlement Statement, the Note, and the Truth-in-Lending Disclosure Statement. Make sure you understand each paragraph of those documents. Each of the many pages of those documents and others are given for specific reasons, usually to comply with specific laws requiring them to provide you with important information. Understand what those documents are trying to tell you, and why you are signing them.
The following is a comparison of two loans.
Example #1 shows fees which were actually charged a borrower.
Example #2 is a composite of typical fees available from numerous mortgage companies. Notice that the net difference in cost to the borrowers is $10,147. Had the borrowers shopped and compared not only rates, but fees, they could have obtained the same loan with $10,147 less in closing costs.
|Amount loaned: $60,000||#1
|Origination Fees (usually 1%)||682||600||82|
|Homeowners Insurance Premium||209||209|
|Interest from 8/1 to 9/1
|Settlement of Closing fee||450||100||350|
|Appraisal Review Fee||250||250|
|Appraisal Fee to Broker||100||100|
|Mortgage Broker Fee||7,000||7,000|
|Tax Service Fee||90||60||30|
|Interest from 7/1 to 9/1
(Duplication of above)
|Handling Loan Payoffs||25||25|
|Title Company Sub-Escrow Fee||150||150|
It should be obvious, given a choice, consumers would select #2 and save $10,047. The people who obtained loan #1 trusted the loan officer who assured them on several occasions that this was a good deal. Good deal for whom?