Paper Power
Don't get lost in a sea of black and white. Be sure you read - and understand - your loan documents
CTW Features: Barbara Ballinger
It sounds pretty simple. You apply for a loan, read the fine print, and when the loan's approved you become a happy homeowner. Unfortunately, many new owners forget in their haste to ignore some very big details. They don't know what type of loan they have, what the terms are and if there are any do's and don'ts.
Time for a wake-up call and a quick lesson in what to look for as you read and study your loan paperwork. When you take those steps, you're empowering yourself and helping to ensure your financial future. Because mortgages vary from institution to institution, yours and the rules governing it may be slightly different in your area, but here are some of terms and situations to keep your eyes out for when reviewing your documents.
Right to Cancel
After you sign your loan application, you can adjust the terms and type of loan you take 10 to 14 days or so prior to closing, says Tony Foglio, senior loan adviser at Kastle Mortgage Corp. in Freehold, N.J. Perhaps, you decided you didn't like the terms, maybe you don't want to go forward with your purchase or something may have been changed from what you put on your application, even inadvertently, such as your account numbers, says David Reed, president of CD Reed Mortgage Bankers in Austin, Texas. But in some states, such as New Jersey, when it comes to refinancing your house, you have a three-day right to rescission, which states that even after you've closed on your refinance, you have 72 hours to nullify the deal, Foglio explains.
Good-faith estimate of settlement or closing costs
This document explains the costs to close the loan, which the lender is required to provide if taking your application in person or required to mail or fax to you within three business days. Be prepared that there's a long list of upcoming charges. First, an application fee, and second, an appraisal fee, both of which may be a few hundred dollars, says Foglio. In the best-case scenarios, you shouldn't be charged for both processes, but sometimes you may be, Foglio says. Then, there's title insurance, which acts as protection when you take ownership of the house. This insurance protects you from any liens that might have been overlooked. On a $300,000 house, the insurance might run $1,200 or so, says Foglio.
You may also incur an attorney's fee, which offers another safety net to guarantee that everything is done correct legally. In Foglio's northern New Jersey area, that fee often ranges between $700 and $900. And you're still not done yet writing checks. There's probably a recording fee to document the sale, which may be $200; a fee for the license closing agent to disperse funds, which may run several hundred dollars; and a commitment fee that a bank charges the broker to secure the loan, which could run between $600 and $800, says Foglio. Lastly, there may be a small charge for a credit report, adds Reed.
Payment Coupon
You may think you remember your loan officer telling you you had a 30-year fixed loan at 5 percent, but instead it may be a 30-year loan that leaves open the distinct possibility the rate could be raised, says Foglio. To protect yourself, be sure it's written in big, bold black letters and numbers in your documents and on the payment coupon you mail monthly, says Lisa Alley, managing partner with Five Star Capital in Huntington Beach, Calif.
Truth in Lending
Once your mortgage is approved, you'll receive a truth in lending document that spells out the annual percentage rate you'll pay, which reflects the annual cost of your loan. What's key is the difference between this number and the interest rate you pay, since it reflects your closing costs. The narrower the difference between the numbers the lower your closing costs; similarly, the greater the difference the higher your closing costs, says Foglio.
Mortgage Insurance
If you don't put down at least 20 percent to purchase or refinance your house, you're required to pay for mortgage insurance. The amount of mortgage insurance depends on the cost of your home and down payment.
Prepayment Penalty
Some loans don't permit you to pay off your loan without incurring a fee, even if you suddenly have the funds. In fact, the cost can be quite significant. "It could be up to 3 percent of the loan on the first year's amount, and if you have a $400,000 loan that could mean a charge of $12, 000," says Foglio.
Absence of any discriminatory language
You also want to be sure that your documents contain nothing that could be used to discriminate against you because of your race, religion, age, etc., says Alley.
Owner-occupied vs. investment
Your mortgage documents will spell out whether you bought your house to live in or use as an investment, and the reason this is important is that your interest rate will reflect your decision. "An owner-occupied home carries a lower rate because you're there to care for the house, so it's a less risky loan," says Alley.
Finally, even once you've read all the documents, be sure you understand them. "If anything appears to be too good to be true, it often is. If every lender offers a 6-percent interest rate, except for one who says here's a better 5-percent rate, beware. You'll pay the difference somewhere - and maybe more," says Foglio.