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.
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.
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.)
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
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.
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.
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.
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.
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.
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:
A - 2 points ($2,000) and lender required costs of $1800 = $3800
B - 2 1/4 points ($2250) and lender required costs of $1200 = $3450
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.
"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.
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.
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.
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.
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
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