Your home is likely the most expensive purchase you will ever make - and the largest amount you will ever borrow. Yet, the mortgage loan documents have always been shrouded in mysterious legal language and complicated financial percentages. Now, that's a thing of the past.
Starting October 3rd, lenders must present borrowers with two streamlined, easy-to-read documents that allow them to understand costs and compare mortgage products. For a quick tour of those documents go to Bankrate.com. Here's what homebuyers (and realtors) need to know about the two new consumer friendly mortgage documents:
1. The Loan Estimate. The new Loan Estimate form allows you to easily see the facts of your loan - including the amount of the total loan borrowing, the monthly payment, all of the closing costs, individually broken out. It also clearly shows any unusual features of the loan --such as if it has an adjustable interest rate (with disclosure of how much the payment can rise over the life of the loan) or any prepayment penalty. And, it clearly displays the total amount of interest you will pay as a percent of the loan amount over the life of the loan.
2. Five Year Comparison. One of the most interesting new features of the Loan Estimate is the simple comparison of costs and payments over the next five years, and how much those payments have reduced the principal of the loan. That is the easiest way to compare loans side by side. Your goal is to pay out the least total amount over those five years - and reduce the loan principal by the greatest amount.
3. Interest Rate Lock. One of the least understood aspects of a mortgage deal is the "lock" on interest rates. The new loan estimate form clearly shows whether you are "locked in" to the rate (and points, and any lender credits) being offered - and exactly when, down to the hour and minute, that lock expires.
4. The Closing Disclosure. This is the second new document, and it replaces several confusing older forms. For starters, it lets the borrowers know exactly what cash they will have to bring to the table at closing, including all costs for appraisals, title search, etc. The form clearly shows what your monthly payment will be - and the component parts that go into escrow each month, including payments for homeowner's insurance, mortgage insurance, property taxes, and interest.
5. Three Day Rule In addition to the simple disclosures both of these forms provide, there is one other aspect of the new mortgage forms that benefits consumers. These documents must be delivered in writing to the consumer three days before the closing! Any last-minute changes in rates or terms trigger another three day delay. So the borrower gets time to read and understand all the terms and costs.
Some mortgage companies will be scrambling to make the new 3-day deadlines, so maybe you should request a longer "lock-in" period. But online firms such as GuaranteedRate.com say they are so streamlined that the three day advance notification will not be a problem.
The CFPB deserves credit for getting this new consumer-friendly mortgage process put into place relatively quickly. The documents tell consumers exactly what they are paying, and what they are getting. But the one thing it cannot tell them is whether they can really afford those payments. For that, home buyers should do some soul-searching and perhaps some credit counseling. And that's The Savage Truth.