Kristin Abouelata – Home Loans asked:


There’s a bunch of important points to review when considering a mortgage. And a ton of paperwork to look over. So much so at times it can be quite overwhelming. A Good Faith Estimate is one document to consider, and many people focus solely on it. But, in 1968, our lawmakers wanted to make sure lenders made it clear to the consumers just exactly what they were paying and that this information was consistently disclosed lender by lender. And for that, we have the Truth in Lending document, created by the Truth In Lending Act and outlined by Regulation Z.

The Truth in Lending document, or TIL as it’s affectionately known in the Biz, tells the consumer a lot about what he/she is getting into. It tells so much so that it can confuse a person, too. Thus, it is important to know and understand what it tells you. It allows one to make an informed decision. A TIL should be part of the beginning of the loan process and the end. When it’s all said and done, a mortgage customer should have reviewed an estimated TIL before closing, and then have also signed his/her final TIL at loan closing. The information found on the estimated TIL shouldn’t be too far off from the final TIL. If it is and you don’t understand the explanation for it, it’s time to put on the brakes.

A TIL will reflect your loan amount, interest rate and the amortization of your loan. A TIL comes in a standard layout, and most TILs will look the same from a distance, though there may be a few variations, like a payment reflection, lender’s logo, etc. But the nuts and the bolts should be identical in format.

The main thing you notice about TILs is they all have four boxes containing numbers stretched across their horizon. These boxes don’t mean much to you until they’re explained. But these are important numbers, which is why they are so blatantly highlighted in these little boxes. They shouldn’t be brushed off. If the TIL is an estimated or intial TIL, you’ll see a little “e” by the numbers in the boxes. Pretty straight forward – “e” means estimate. The final TIL you sign at closing should reflect all the numbers on your HUD-1 settlement papers and the “e” should be gone. That means you’re signing the final, real McCoy that is calculated by your final numbers.

The first box on the TIL reflects the Annual Percentage Rate (APR) or cost of your credit expressed as a yearly rate. Don’t panic, this rate is not your interest rate. It is the rate that the closing costs are actually costing you annualized over a year, and generally it is higher than your interest rate. However, if your mortgage is locked at a 5% interest rate, but your APR rate is 10%, you should reconsider the deal or get a second opinion. You’re paying too much.

The second box is the Finance Charge or the dollar amount the credit will cost you. It is the total amount of interest calculated at the interest rate over the life of the loan, plus Prepaid Finance Charges and the total amount of any required mortgage insurance charged over the life of the loan. The third box reflects the Amount Financed or the total amount credited to you on your behalf, minus Prepaid Finance Charges.

The fourth box is the one that gets most people’s attention – the Total of Payments. It’s the amount that a customer will actually pay back in principal, interest (and mortgage insurance, if applicable) if they keep the loan for the full term and stick to the outlined amortization schedule. Ouch. People find this number a little incredulous. I guess it really sends it home that mortgage lending is a business, and some company is going to make some money from it.

There are three other things on a TIL I like to point out to a customer. One is the late payment penalty. People need to know what it will cost them if their check gets to the Servicer late. It’s usually 4% or 5% of the monthly principal and interest payment, depending on the loan type. Another VERY important feature a lender should point out to a customer is if there is a PRE-PAYMENT penalty on the loan. A pre-payment penalty means that if you pay the loan off before a pre-determined time, you pay for the luxury of doing so. Make sure you know the terms of the pre-payment penalty if you should have one, and that you are certain you can live with it. They can be quite costly. Finally, the TIL tells you that should you pay off your loan early, you won’t be entitled to any of your closing costs or interest being refunded. In other words, don’t expect to get any of the money you have already paid back.

Simple enough, right? To tell you the truth, it is confusing, even for a mortgage lender. Take time to understand this document and ask all the questions you have regarding it. Don’t be shy.



DUNCAN

Kristin Abouelata – Home Loans asked:


Buying a home is a confusing process, and one of the most confusing prospects is settling on an interest rate.  Even when you decide what type of loan you want, you find you still have options as to what rate to lock.  Some of these options stem from whether or not you buy down the rate by paying a point.  A point is a fee that equals 1% of the loan amount.  For instance, if you are buying a $100,000 home, and your note amount is $97,000 (because you’re putting $3000 down), a point would cost you $970.

 

You can see the points you are being charged on line and 802 of your Good Faith Estimate, and later, on the same line on your HUD-1.  This line item reflects fees known as  “discount points”, but they truly aren’t interchangeable with origination fees (line 801) even if they sometimes serve the same purpose.  If you choose to pay a discount point, you should  expect a lower rate than if you didn’t.  So, if you’re quoted a rate of 6% 0 + 1, you are paying 1 discount point. If the quote is 6% 1+0, you’re paying an origination fee.  And 6% 0+0?  You’re paying no fees in either form.

 

What’s the difference between an origination fee and a discount point?  Well a few things.  Technically, an origination fee is what you pay the lender or the organization that takes the initial application and processes the loan.  A discount point is specifically paid to the lender to buy down or permanently lower the interest rate, and it’s usually a percentage of the loan amount.  You can also pay additional points to buy down your rate, not just a flat 1%.  You can pay a .5% or 2%.  It just has to make good economical sense for you.  And it shouldn’t be robbing you blind.

 

From a tax standpoint, there isn’t much difference.  An origination fee is generally tax deductible as long as it’s charged in the form of a “point” or percentage of the loan amount. However, you may ask your lender to charge you a discount point versus an origination fee to keep things neat and simple. Sometimes mortgage lenders charge you an origination fee when technically they should be charging you a discount point.  But they’re collecting all the fees anyway and happen to be giving you a lower rate.  It really matters most if you are working with a mortgage broker. Mortgage brokers can’t be paid discount points, only origination fees or broker fees. They can collect discount points to lower your rate, but  the discount point has to be paid to the mortgage lender with whom they’re doing business. And, this information should be disclosed properly on your Good Faith Estimate

 

 

A typical trade off is that a 1% discount point equals about .25% reduction in interest rate.  You should be able to easily decipher whether or not it’s worth it to buy your rate down.  How long do you plan to be in the home?  If not that long, then maybe you should think about a 0+0 quote.  If it’s your forever home, then dipping into your wallet and footing higher closing costs might be worth it in the long run.

 

However, if you look at your Good Faith Estimate and it seems you’re paying too much in origination fees and/or discount points, then you probably are.  Say something to your lender.  And if he doesn’t budge, you may want to look elsewhere.  Go with your gut instinct or call another reputable lender and get a second opinion.



YOUNG