In mortgage shopping, it’s easy to compare interest rates and points, but then things get tricky, as each mortgages also entail a battery of charges for origination, title insurance, transfer taxes, lawyers fees... the list goes on and on.
Now, under a federal regulation that took effect Jan. 1, it’s easier to make an apples-to-apples comparison that takes all charges into account. Lenders must now use a standardized form called the Good Faith Estimate, issued by the U.S. Department of Housing and Urban Development.
HUD hopes that making expenses clearer and encouraging comparison shopping will save the average borrower $700.
The form leaves a few things out, such as how high your payments could go if you get an adjustable-rate loan. (The Adjustable-Rate Mortgage Calculator can help with that.) But it does alert the borrower to features that need more research, such as the possibility that your loan balance will increase, rather than decrease, if you make only the minimum payments on an option-style loan.
By obtaining completed forms from several lenders, you stand a better chance of getting the most suitable loan. Certain parts of the form should get special scrutiny.
First is a section labeled “Important dates” on page 1, telling you how long the lender promises you can get the terms described in the loan offer.
The next section, “Summary of your loan,” reveals some of the most important danger signs, such as whether your interest rate or loan balance can rise after you get the loan, and whether there is a prepayment penalty or balloon payment. If any of the “yes” boxes are checked, be sure you completely understand the conditions it describes.
If your interest rate could rise, for example, find out how much it could go up in any one year, how much over the life of the loan, what “index” the loan is tied to and what the “margin” is, or the number of percentage points added to the index to figure the new loan rate.