Your offer has been accepted and you’ve been approved for a mortgage. But along with knowing the purchase price of a home and the size of your down payment, there are a lot of numbers to consider before you arrive at the closing on that home for sale in Athens, GA.
On October 3, 2015, the Consumer Finance Protection Bureau (CFPB) made it easier for homebuyers to find and digest the numbers related to their mortgage payment. The revised loan estimate form explains the terms and costs of a mortgage you’re considering and details a number of numerical nuggets you need to know. Here’s the rundown.
The loan terms
These amounts, which include the loan amount, interest rate, and monthly principal and interest payment, are locked in and cannot increase after closing. However, your monthly payment could still vary because of homeowners’ association fees or escrow amounts for taxes and/or insurance.
This section of the new form also details any applicable prepayment penalties, says Roland Narofsky, regional vice president of Maine Savings FCU in Bangor, ME, and a 17-year industry veteran. “This is a fee charged to the borrower if they pay off the loan early, and is typically charged if the loan is paid off within the first five years.”
Your estimated total payment
It’s important to know what size nut you’ll have to crack each month. And along with the principal and interest already listed, you’ll want to know your estimated escrow payment for property taxes and insurance, along with any other assessments such as homeowners’ association fees that can drive up your monthly costs.
Closing costs include a lot of line items and fees. One biggie? Origination fees. “Most banks charge a fee of approximately $1,000 to originate a loan,” says Narofsky. That covers the application and underwriting costs incurred by the bank.
Mortgage points, which equal a percentage of the loan, are also usually included and will be spelled out. “Points are negotiable by most banks, and many lenders often charge three to four points,” says Narofsky.
“This is one of the charges you need to watch out for, as it can get pretty expensive,” cautions Narofsky. “Some lenders may allow you to bundle this in with the loan, so ask before closing.” You can also lower your mortgage payments by offering to pay more points at closing.
You may be able to shop around for values when it comes to some of your closing costs, such as survey and title fees. Others, such as appraisal fees, title services, and tax services, are probably non-negotiable. Closing costs also include prepaid interest (for the number of days you’ll have the loan until the first payment is due) and property taxes from the day you close on the property until the time the next tax bill is due.
Cash to close
To calculate the amount of cash you’ll need to bring to closing, subtract the earnest money you’ve already paid from the total of all closing costs.
The last number you’ll find on the loan estimate is the annual percentage rate (APR). This is not the interest rate. Instead, it is your cost over the loan term expressed as a rate. “When the difference between the interest rate and the APR is greater than 0.5%, you may be paying high fees,” says Narofsky.
Even though the new loan estimate statement packs a lot of detail into a few pages, Narofsky says there are a few other numbers you need to know.
“New regulations will make it almost impossible to close a loan in 30 days,” says Narofsky. If your rate lock expires before closing, or before funding in case of a refi, the lock is worthless — so you need to make sure the expiration date extends beyond the closing date. Keep in mind, closings don’t always occur on time.
Total cost of borrowing
This is how much it actually costs you to borrow the money over the length of the term.
Ask for a detailed schedule that breaks down how much of each payment is going to principal and interest.
Prepayment option amount
Generally around 15% to 20%, this, says Narofsky, is how much of a lump sum you can put down on principal every year without getting charged a penalty.
If you’re putting down less than 20% of the purchase price of the home, you may be charged a mortgage insurance premium until the principal is 80% or less of the cost of the home.
Despite having to crunch a lot of numbers, Narofsky says, the process shouldn’t be overwhelming. “Your attorney and/or lender representative should be equipped to walk you through each of these numbers,” he says.
And if at any time something seems out of whack or confusing, don’t be afraid to speak up. “It’s much easier to correct a mistake, negotiate, or discuss options before you’re sitting at closing,” he adds.
What has your home-buying process been like? Share in the comments!