December 5th, 2011 2:56 PM by Lehel S.
Shoppers, I bet many of you scoured the Sunday ads and bounced to several stores for deals over Thanksgiving weekend.
What if you applied that same effort and vigilance to shopping for a new home loan or refinance? That same attention to detail could translate into hundreds to thousands of dollars in savings over time.
"People think nothing about going to many different stores to buy a toaster or oven or dishwasher," said Norma Garcia, attorney at Consumers Union, publisher of Consumer Reports magazine. "They just don’t shop for (home) loans the same way they shop for other products, but they ought to."
Consumers likely are more comfortable comparison-shopping for microwaves than mortgages because the home-loan process can be cumbersome, with reams of paperwork, unfamiliar jargon, and of course, the rush to close and move to a new place.
The U.S. government is working to make the process easier. Since May, officials have been trying to simplify and combine two required forms that show would-be borrowers their final loan terms and costs before closing. The "Know Before You Owe" campaign, spurred by sweeping financial reforms in 2010, has produced two drafts of the merged documents that are still in testing phase.
"Anything that will make it simpler and easier for borrowers is a step forward,' said Polyana da Costa, a mortgage reporter at bankrate.com. “They’re trying to get rid of the legal and technical jargon that many borrowers don’t understand."
Appraisers also have shown their support for borrowers. Appraisal Institute, a 25,000-member professional group, opposes one of the revamped forms because it continues to lump together fees paid to the home appraiser and the appraisal management company, a third party sometimes used by lenders to assign, manage and deliver finished appraisals. The average amount paid, $400 to $500, is usually split between both parties but is routinely shown as one line item.
“We believe that consumers deserve to know who is providing services relative to their loan and how much was paid,” says a Nov. 16 letter from the group to the Consumer Financial Protection Bureau, the agency leading the mortgage-paperwork makeover.
The group added: “This is the spirit of transparency and the core presumption with development of a consumer disclosure form.”
This gives you an approximation of what you may owe at closing. It lists the basics including loan amount, interest rate and potential penalty costs. The form also shows you different loan scenarios to illustrate whether it would make sense, for instance, to buy points upfront to reduce your interest rate. (One point typically equals 1 percent of the loan’s value, or $1,000 for each $100,000 borrowed.) Click here to see the whole form.
Tip: Even though this form provides an estimate, it should not be too far from what you’re presented at closing. Federal rules say the difference cannot exceed 10 percent. If it does go beyond 10 percent, then challenge it. “Your lender must reimburse you if a closing cost tolerance was violated,” says a booklet from the U.S. Department of Housing and Urban Development, widely known as HUD.
You get this at the closing table. The form lists every single expense and credit involved in the transaction. Click here to see the whole form.
Tip: Compare the HUD-1 to the Good Faith Estimate, sometimes called the GFE, and ask about any differences. Pay special attention to increases. Again, if something seems astray, challenge it. “Some promise things up front and they don’t deliver,” said Faith Espejo, education and counseling manager with the Housing Opportunities Collaborative in downtown San Diego. “They can sneak things in or increase it.”
You also get this at closing. The document breaks down how much you will owe in a different way. Perhaps the most important detail is the annual percentage rate, which rolls in all of your costs and is defined by HUD as the “true cost” of a loan. Click here to see the whole form.
Tip: The annual percentage rate, widely known as APR, always will be higher than the actual interest rate because it includes the interest rate and fees.
Espejo, whose background is in banking and lending, gave this example: Borrower A wants to take out a $1,000 loan, and to get it, she must pay $50 up front. The interest rate is 10 percent. So the annual percentage rate should be 10 percent, right? Wrong. It’s actually 15 percent because you must add the $50 upfront fee into the $100 that will be owed from interest ($1,000 x 0.1 = $100) equaling $150 in out-of-pocket costs.
Another tip: Pay attention to your terms, especially if you’re about to secure a loan with an adjustable rate. Will your interest rate go up or down? Can your balance rise? Is there a penalty for paying off the principal early? Knowing the answers to those questions can help you avert financial disaster in the future.
•?If there’s a line item you don’t understand in any of the forms, ask about it.
•?Scan for hidden costs. Third parties get proceeds from loans in the form of fees and commissions, said Norma Garcia, attorney at Consumers Union, publisher of Consumer Reports magazine.
•?Know who’s going to service your loan. The holder of your loan can sell the loan to anyone, but they have to disclose the percentage of loans that are sold. “If you choose to go with that lender, just know that may not be the person you’re dealing with down the line,” Garcia said.
•?If you sense your lender isn’t being upfront or answering your questions, find someone else. It may take interviewing two to three people to find the right lender.
•?Get a second opinion on your loan documents from HUD-approved counselors at little or no charge. But be sure to do this before closing. For San Diego, you can call the Housing Opportunities Collaborative at (619) 283-2200 or (800) 462-0503. Someone will direct you to the right agency.
•?Don’t sign anything unless you understand it.