Ken Mascia, the mortgage guru from Oxford Financial, is back today with the lowdown on Good Faith Estimates.
Getting a mortgage loan can be very confusing and a lot of Lenders like it that way. They get you lost in the numbers and make you believe that youâ€™re getting a better deal when they are the one whoâ€™s benefiting from making more money on the loan. The Good Faith Estimate (GFE) is the document the lender gives you and it spells out the closing costs, monthly payment and type of loan & interest rate they are offering you.
Letâ€™s take a look at 2 crucial areas of the Good Faith Estimate (GFE) that you should know about and they are Closing Costs, Junk Fees & Points, and Pre-Paid Items & cash to close.
1) Closing Costs, Junk Fees and Points
Closing costs consist of appraisal fee, credit report, underwriting, and flood certification, land survey, closing fee, title insurance, recording and courier fees. These are all charges that are being paid directly to a 3rd party for work they have done to help get the loan to closing – otherwise known as being necessary to the deal. Junk fees are things like application fees, origination fees, mortgage broker fees, processing fees and these are not necessary to the deal but are charges by the lender to increase fee income. Points are paid to obtain a lower interest rate. Paying 1 Point generally lowers the interest rate on your loan by Â¼% (1 point is 1% of the loan amount – $1,000 on a $100,000 loan).
Watch out for Junk Fees. Some lenders will offer you a slightly lower rate than everyone else but they are charging hundreds of dollars more in junk fees. What you have to compare is the amount of the extra fees compared to the difference in the monthly house payment. If youâ€™re paying $900 extra in fees and your house payment is going to be $25 lower itâ€™s going to take you 36 months to break even (900 divided by 25). You donâ€™t save a nickel until after the third year. Considering the average life of a mortgage is only about 5 years your lender is more likely to benefit from this arrangement than you are.
Paying points amounts to the same thing. You pay higher closing costs to obtain a lower rate. The best thing to do is to calculate the break even period by dividing the difference in the house payment into the amount of the extra fees. As an example, if you borrow $100,000 @ 6.25% your payment is $616. Paying 1 point reduces the rate to 6.0% and your payment is $600. The 1 point cost you $1,000 at closing. Dividing the reduction in payment of $16 into the cost of $1,000 leaves you with a break even at 62 months. Thatâ€™s an awful long time to wait just to get the thousand dollars back!! It generally does not make sense to pay a lot of extra fees or points to get a slightly lower rate. Look for the best rate combined with lower fees.
2) Prepaid Items and Cash to Close
Prepaid items consist of property taxes, home insurance and prorated interest. Sometimes lenders will underestimate prepaid items because it will make it seem like you need less money to close. This will result in a surprise at closing time when the real numbers are released. When you purchase a home in Michigan and your mortgage has an escrow account for taxes then you will pay a full year of property taxes at closing. You will also be required to pay the first year of homeowners insurance and interest will be calculated for the days remaining in the month of closing. The GFE should include all three of these items or it is understating the true amount of cash needed to close.
The Good Faith Estimate can be a great tool to compare costs of different lenders but itâ€™s very important to compare apples to apples and to be sure that both GFEâ€™s include all of the costs associated with closing the deal! Donâ€™t be fooled into paying a bunch of extra money at closing to get a rate that only reduces your house payment by a few bucks a month. Keep that money and use it to do something worthwhile!
[tags]good faith estimate, cash to close, mortgage, home purchase, costs for a mortgage, costs buying a home, ken mascia[/tags]