Mortgages can be complicated transactions. If you’re buying a house, you get wrapped up in negotiating a purchase price and determining the home’s actual value. If you’re refinancing, you are very focused on the interest rate.
Looking at only a few factors in a mortgage can result in some ugly surprises when you get to the closing table.
That’s why it’s important to review all potential mortgage costs and documents as you proceed through the application process. Fortunately, there is one document that will help you with an estimate of the costs you can expect. It’s called the Loan Estimate.
What is a Loan Estimate?
The Loan Estimate document is intended to help homeowners understand the complete cost of taking out a mortgage.
The Loan Estimate is a form that includes:
- your estimated interest rate
- monthly payments
- closing costs
- estimated escrow of taxes and insurance
- fees or penalties that may apply
All lenders are required to provide the Loan Estimate prior to your mortgage closing. This form makes it easier for borrowers to compare different loan options among different lenders.
Reviewing the Loan Estimate document is very important.
- Start by reviewing your personal information and make sure it has been entered correctly. Simple errors can cause delays in your closing and you don’t want something like a spelling error on your street name to hold you up.
- Review the loan terms, as well as the purpose and loan type. If you applied for a fixed rate mortgage, it is important the Loan Estimate reflects the fixed rate product you were interested in.
- Review other terms like the rate lock, loan amount, monthly payment, closing cost and prepaid items to make sure they match up to your expectations.
While all of your potential costs are listed on the Loan Estimate, they can still be confusing to many. Let’s take a look at the two general categories of charges.
What are Closing Costs?
Closing costs are fees associated with your home loan. Closing costs vary depending on the property and the type of loan that you choose. This list includes fees that could be part of your closing costs and what they really mean.
- Origination Fee: The cost for the lender to process your application.
- Loan Level Price Adjustments: Loan-level pricing adjustments (LLPAs) are the government's Secondary Market’s way of raising prices for "riskier" borrowers without putting a penalty to "safer" ones. Similar to an auto insurance policy, a person loaded with risk will pay a higher premium.Every lender starts out with a base rate and then additional risk factors get priced into your rate or fees. These costs vary based on credit scores, loan purpose and term of your loan. The more risk factors, the higher the charges. Borrowers pay LLPAs in the form of higher mortgage rates.
- Credit Report Fee: A credit report is pulled to get your credit history and score. Your credit score plays a big role in determining the interest rate on the loan and fees you will need to pay.
- Flood Determination Fee: This fee is paid to a third party to determine if the property is located in a flood zone. If the property is located in a flood zone, the lender will require the homeowner to carry flood insurance.
- Tax Monitoring Fee: This third party fee is to verify that mortgagors pay their property taxes timely. This fee is paid to a tax monitoring service agency.
- Lender Title Policy: This is insurance that assures the lender that you own the home and indicates any liens that may appear on the property.
- Settlement Fee: This item is paid to a third party. This is the fee the title company will charge for preparing the closing documents and sending a representative to the closing appointment.
- Recording Fee: A fee charged by your local recording office, usually city or county, for the recording of public land records.
Some of these fees are quite small while others can run in the hundreds or more. Be sure you know and understand all fees that are being charged.
What are Prepaid Costs?
Pre-paids are not fees, but rather costs associated with your home that need to be paid in advance when getting a loan.
These costs are related to the home itself rather than the real estate transaction. Depending on the loan, you will probably continue to pay at least some of these charges for the life of the loan or as long as you own the home. Here is a list of items that are included in prepaid costs.
Mortgage Interest: The amount will vary depending on what time of the month you close your loan. For instance, if you close on the 15th of the month, you will have to pay interest in advance for the remaining days (15th to the end of the month). This is a one-time charge.
Property Taxes: The amount to be pre-paid is based on the previous year’s tax bill..
Tax Prorations: If you are purchasing a home, you will be required to pay back to the seller the taxes they have paid in advance. The amount due back to the seller is based on the date of closing. This line item helps divide the property tax expenses fairly.
Hazard Insurance Premiums: The amount needed to be set aside in an escrow account for your homeowner’s insurance. If you are purchasing a home and need a new policy, the lender may require the premium to be paid in full for the first year prior to closing.
Mortgage Insurance Premiums: If your down payment is less than 20 percent, a pre-paid item that may be required is a premium for private mortgage insurance (PMI) . This insurance protects the lender in case you cannot make the mortgage payments.
We are here to help.
Understanding the mortgage process can be daunting, especially if it is your first time through it. Genisys Credit Union offers a variety of free mortgage seminars to help homeowners navigate and understand the process a little bit better. Watch our website for information on upcoming seminars.