September 25, 2017
September 25, 2017
Buying a home is a big deal. You probably need a mortgage to cover the cost of such a large purchase. Because of the nature of the transaction, there’s also a lot of paperwork involved. When you’re not used to making home purchases, you can be at a disadvantage because of all the jargon and fine print. You think you know what to expect from your loan, but are you really sure of what you’re getting?
This is where the new loan estimate form comes in. Starting in the fall of 2015, lenders are required to use a three-page loan estimate that allows you to see exactly what is happening with your mortgage. If something doesn’t match what you thought you were told by your lender, you should ask about it. The loan estimate is fairly straightforward and can give you an idea of what to expect. Here are six things to look at when reading your loan estimate:
This is how much you are borrowing. Your loan amount is likely going to be lower than the total purchase price of your house. If you make a down payment, that is deducted from the purchase price to get the actual amount that you are borrowing.
Next, look at the interest rate. Your interest rate will determine how much you repay over time. Pay attention to whether the interest rate is fixed or variable, since that can change your payment amount. Also, look to see if there is a rate lock on your loan estimate. A lender might guarantee a rate through a certain date, protecting you against higher market rates.
There are two places you will see your payment information. Your lender discloses your principal and interest payment so you can get an idea of your loan payment. However, most home buying transactions include other payments, such as mortgage insurance (if you don’t put 20% down), home insurance, and taxes. There is a projected payments section that can help you plan your monthly cash flow based on estimated payments related to other costs.
These projected payments can increase over time, though, if taxes rise or if there are other changes to the situation. Also, because the numbers used are estimates, your actual payment may be different. But it still gives you a good idea of where you stand.
When you close on the loan, there are costs that are paid, including fees for appraisals, credit reporting, your application, and more. If you are paying points, that will be included in closing costs as well. Your loan estimate includes a section showing your closing costs, including the amount of cash you need to bring to close on the transaction. When you turn to page two of the loan estimate, you’ll see an itemized list of closing costs. Go through this list to make sure that it makes sense. If your lender told you there are no origination fees, and you see a charge for origination, bring that up. Understanding closing costs, and seeing how much cash you need to close are important aspects of taking care of your loan.
One of the great things about the mortgage loan estimate is that it allows you to compare your loan terms to other possibilities. The third page of the loan estimate offers total numbers what you pay in five years, as well as your actual APR, and the percentage of your total interest as a percentage of your loan amount. You can get a loan estimate from another lender and use the comparison to see which is really your best deal.
Finally, there is a section of plain language that lets you know what other considerations there are with your loan. This includes information related to your appraisal, whether or not you can transfer the property to someone else for the same terms (assumption), and what you can expect in terms of refinancing and servicing.
The loan estimate is not a long document. It may not be completely accurate, but it can provide you with a good idea of what to expect if you decide to go through with the loan. It offers a good way to plan for your payments and the amount of cash you need to close, as well as a way for you to quickly and easily compare loan terms so you can choose what works best for you.
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