Buying a Home in MichiganD. Shopping For a Loan Your choice of lender and type of
loan will influence not only your settlement costs, but also the monthly cost of
your mortgage loan. There are many types of lenders and types of loans you can
choose. You may be familiar with banks, savings associations, mortgage companies
and credit unions, many of which provide home mortgage loans. You may find a
listing of some mortgage lenders in the yellow pages or a listing of rates in
your local newspaper. Mortgage Brokers
Some companies, known as “mortgage brokers” offer to find you a mortgage lender
willing to make you a loan. A mortgage broker may operate as an independent
business and may not be operating as your “agent” or representative. Your
mortgage broker may be paid by the lender, you as the borrower, or both. You may
wish to ask about the fees that the mortgage broker will receive for its
services. Government Programs
You may be eligible for a loan insured through the Federal Housing
Administration (“FHA”) or guaranteed by the Department of Veterans Affairs or
similar programs operated by cities or states. These programs usually require a
smaller down payment. Ask lenders about these programs. You can get more
information about these programs from the agencies that run them. (See Appendix
to this Booklet.) CLOs
Computer loan origination systems, or CLOs, are computer
terminals sometimes available in real estate offices or other locations to help
you sort through the various types of loans offered by different lenders. The CLO operator may charge a fee for the services the CLO offers. This fee may be
paid by you or by the lender that you select. Types of Loans
Loans can have a fixed interest rate
or a variable interest rate. Fixed rate loans have the same principal and
interest payments during the loan term. Variable rate loans can have any one of
a number of “indexes” and “margins” which determine how and when the rate and
payment amount change. If you apply for a variable rate loan, also known as an
adjustable rate mortgage (“ARM”), a disclosure and booklet required by the Truth
in Lending Act will further describe the ARM. Most loans can be repaid over a
term of 30 years or less. Most loans have equal monthly payments. The amounts
can change from time to time on an ARM depending on changes in the interest rate. Some loans have short
terms and a large final payment called a “balloon.” You should shop for the type
of home mortgage loan terms that best suit your needs. Interest Rate, “Points” & Other Fees
Often the price of a home mortgage loan is stated in terms of an interest rate,
points, and other fees. A “point” is a fee that equals 1 percent of the loan
amount. Points are usually paid to the lender, mortgage broker, or both, at the
settlement or upon the completion of the escrow. Often, you can pay fewer points
in exchange for a higher interest rate or more points for a lower rate. Ask your
lender or mortgage broker about points and other fees. A document called the Truth in Lending Disclosure Statement will show you the “Annual Percentage Rate” (“APR”)
and other payment information for the loan you have applied for. The APR takes into account not only the interest rate, but also the points, mortgage broker fees and certain other fees that you have to pay. Ask
for the APR before you apply to help you shop for the loan that is best for you. Also ask if your loan will
have a charge or a fee for paying all or part of the loan before payment is due (“prepayment penalty”). You may be able to negotiate the terms of the prepayment
penalty. Lender-Required Settlement Costs
Your lender may require you to obtain certain settlement
services, such as a new survey, mortgage insurance or title insurance. It may
also order and charge you for other settlement-related services, such as the
appraisal or credit report. A lender may also charge other fees, such as fees
for loan processing, document preparation, underwriting, flood certification or
an application fee. You may wish to ask for an estimate of fees and settlement
costs before choosing a lender. Some lenders offer “no cost” or “no point” loans
but normally cover these fees or costs by charging a higher interest rate. Comparing Loan Costs
Comparing APRs may be an effective way to shop for a loan.
However, you must compare similar loan products for the same loan amount. For
example, compare two 30- year fixed rate loans for $100,000. Loan A with an
APR of 8.35% is less costly than Loan B with an APR of 8.65% over the loan term. However, before you decide
on a loan, you should consider the up-front cash you will be required to pay for
each of the two loans as well. Another effective shopping technique is to compare identical loans with different up-front points and other fees. For
example, if you are offered two 30-year fixed rate loans for $100,000 and at 8%, the monthly payments are the same, but the up-front costs are different: Loan A - 2 points ($2,000) and lender required costs of $1800 = $3800 in costs. Loan B - 2 1/4 points ($2250) and lender required costs of $1200 = $3450 in costs. A comparison of the up-front costs shows Loan B requires $350 less in up-front cash than Loan A. However, your
individual situation (how long you plan to stay in your house) and your tax situation (points can usually be deducted for the tax year that you purchase a
house) may affect your choice of loans. Lock-ins
“Locking in” your rate or points at the time of application or during the
processing of your loan will keep the rate and/or points from changing until
settlement or closing of the escrow process. Ask your lender if there is a fee
to lock-in the rate and whether the fee reduces the amount you have to pay for
points. Find out how long the lock-in is good, what happens if it expires, and
whether the lock-in fee is refundable if your application is rejected. Tax and Insurance Payments
Your monthly mortgage payment will be used to repay the money you borrowed plus
interest. Part of your monthly payment may be deposited into an “escrow account”
(also known as a “reserve” or “impound” account) so your lender or servicer can
pay your real estate taxes, property insurance, mortgage insurance and/or flood
insurance. Ask your lender or mortgage broker if you will be required to set
up an escrow or impound account for taxes and insurance payments. Transfer of Your Loan
While you may start the loan process with a lender or mortgage broker, you could find that after
settlement another company may be collecting the payments on your loan.
Collecting loan payments is often known as “servicing” the loan. Your lender or
broker will disclose whether it expects to service your loan or to transfer the
servicing to someone else. Mortgage Insurance
Private mortgage insurance and government mortgage insurance protect the lender
against default and enable the lender to make a loan which the lender considers
a higher risk. Lenders often require mortgage insurance for loans where the down
payment is less than 20% of the sales price. You may be billed monthly,
annually, by an initial lump sum, or some combination of these practices for
your mortgage insurance premium. Ask your lender if mortgage insurance is
required and how much it will cost. Mortgage insurance should not be confused
with mortgage life, credit life or disability insurance, which are designed to
pay off a mortgage in the event of the borrower’s death or disability. You may also be offered “lender paid” mortgage insurance (“LPMI”). Under LPMI plans, the lender purchases the
mortgage insurance and pays the premiums to the insurer. The lender will increase your interest rate to pay for the premiums -- but LPMI may reduce your
settlement costs. You cannot cancel LPMI or government mortgage insurance during the life of your loan. However, it may be possible to cancel private mortgage
insurance at some point, such as when your loan balance is reduced to a certain amount. Before you commit to paying for mortgage insurance, find out the
specific requirements for cancellation. Flood Hazard Areas
Most lenders will not lend you money to buy a home in a flood hazard area unless you pay for flood insurance. Some
government loan programs will not allow you to purchase a home that is located
in a flood hazard area. Your lender may charge you a fee to check for flood
hazards. You should be notified if flood insurance is required. If a change in
flood insurance maps brings your home within a flood hazard area after your loan
is made, your lender or servicer may require you to buy flood insurance at that
time. |
