Good Faith Estimates

      Several years ago the U.S. Congress tried to protect consumers from a few unscrupulous lenders by requiring all lenders to calculate and disclose the annual percentage rate (APR) you pay on your mortgage loan. Do yourself a favor. Forget about APR and instead direct your attention to the Good Faith Estimate of Settlement Costs (GFE).
      Though Congress meant well, in practice the APR is not helpful and is confusing. If you are looking for a good way to understand your costs of borrowing and/or to compare one lender's costs to another, the GFE is your best bet. Get your lender(s) to provide a written GFE before you commit your mortgage business.
      When reviewing a GFE, keep in mind that the lender actually controls only a handful of the disclosed costs. Other parties typically control costs of appraisal, settlement, title insurance, recording fees and taxes, survey, and the "prepaid" expenses of homeowner's insurance, mortgage insurance, real estate taxes, etc. Your lender controls most of the remaining costs. Review these origination fees, discount points, etc. and you will have the ability to understand the full costs of your proposed mortgage loan.

Puzzling Points

      Question: Which offers you the best deal, a low interest rate mortgage with "points" or a higher interest rate loan with no "points"?
      Answer: It depends. Consider a 30-year, fixed-rate mortgage for $100,000 at 8 3/4% interest and no points. Monthly principal and interest payments would $787. To qualify for an 8 1/4% loan, you have to pay three points, or $3,000. Payments on this loan would be $751, a savings of $36 per month. How can you determine which loan is best?
      First, calculate how long you will have to live in the home in order to recoup the $3,000 that you paid in points. Divide $3,000 by your monthly "savings" of $36, then divide that answer (approximately 83) by 12 months per year for the number of years it will take to recoup the points (approximately 7).
      If you are fairly certain you will live in your new home for seven years or more, then the loan with points is the better value. Other factors may influence your decision, however, such as how much cash you have for closing and your monthly budget. Such calculations will give you the data you need to make a decision.

Title Insurance

      When you finance a home through a lender, you will be required to purchase title insurance to cover the amount of your mortgage loan. At the closing you will be given the option to buy additional coverage to protect your investment.
      Before the closing, the title company will order a title report to make sure the sellers actually own the home and that no one else has a legal interest in the property. This process will identify the potential title problems or liens. Title insurance covers you against any future claims that did not appear on the title report. It is a one-time charge that you pay at the closing, and it covers your future equity up to a stated maximum amount as your property increases in value. Title insurance is one of those things you will probably never need, but if you do, you will really be glad you have it! It's a small price to pay to protect such a major investment.