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.)
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.
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.
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.
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.
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.
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
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.
content of this article has been prepared, prescribed and approved by the
U.S. Department of Housing and Urban
Development, as required by Section 5 of the Real Estate Settlement
Procedures Act of 1974 (Public Law 93-533), effective on June 30, 1976.
article is reproduced with permission. However, in no case may any change,
deletion, or addition be made in its content.