"Know Before You Owe" is a new initiative from federal regulator the Consumer Financial Protection Bureau (CFPB). Since October 3, 2015, it's been obligatory for mortgage lenders to comply with the program's requirements, but you, as a borrower, have to do nothing – except enjoy its benefits.
Those benefits are two-fold:
- The loan estimate (offer) you receive is standardized, making it simple to compare different lenders' offers on an apples-to-apples basis.
- The closing disclosure, which confirms closing costs and loan details, must be given to you three working days before closing so you can query any unexpected items. Its key information is provided in a very similar way to that shown in your loan estimate, meaning you can make a side-by-side comparison very easily and spot any issues quickly.
"Know Before You Owe" Could Save You Thousands
When the CFPB was designing its new initiative, it commissioned a consumer survey that unveiled an incredible fact: Nearly one in two mortgage borrowers (47 percent) don't shop around for the best deal, instead taking the first offer a single lender or broker gives them. That likely sees the same people who would scour the Internet for the cheapest smartphone, or stand in line on Black Friday to save a couple of hundred bucks on a new designer outfit or TV, wasting literally thousands on their home loans.
The CFPB gives an example. Suppose you want a $200,000, 30-year, fixed-rate mortgage (FRM). If you take the first offer, which has a 4.5 percent interest rate, you stand to pay $60 a month more than if you shop around and find a 4.0 percent deal. In the first five years, you'll have thrown away $3,600 by paying too much. And the balance you still owe on that fifth anniversary should be $1,400 higher. Worse, those losses don't end after five years: They keep racking up at the same rate for as long as the loan lasts, potentially three decades.
Before "Know Before You Owe," you can see why some were shy about shopping around. Loan offers may have contained similar information, but it could be difficult to find and may have been expressed in different ways, making comparing deals hard. Now, it couldn't be easier to make comparisons, so you should definitely follow the government's advice and shop around for the best mortgage deal. And that applies to refinances, too.
Avoiding Nasty Surprises Come Closing
It's been illegal for some time for lenders to deliberately underestimate the closing costs provided in a mortgage estimate. And, as you can see on the CFPB's website, there are strict rules about the costs that can be changed and the ones that can't. In brief:
- Those over which the lender has no control (including the rate charged until you decide to lock it) can be changed.
- Those over which the lender has limited control can, absent a change in circumstances, rise by no more than 10 percent.
- Those over which the lender has total control (many fees, including those charged by third parties if you weren't allowed to appoint your own) can't change.
"Know Before You Owe" means you now receive your final closing disclosure at least three working days before you're scheduled to close, giving you plenty of time to raise with your lender any queries you have. And that disclosure now mirrors the layout of the original mortgage estimate (see picture), meaning you can put the two documents side by side and immediately see any discrepancies.
A Possible Flaw
Back in July, the Forbes website (not a noted fan of government regulation) wrote in glowing terms about "Know Before You Owe." It said the CFPB "did a great job revising, simplifying, designing and organizing material information in a way that can be readily deciphered." But it went on to make a single objection.
That three-day period during which you can raise queries on the closing disclosure is great in theory. But, if you succeed in getting yours changed, the clock is restarted when the replacement document is issued.
For example, suppose you're due to close on a Friday, and you receive your closing disclosure on the Tuesday before. You call your lender to complain about an issue on the following day (Wednesday), the error is acknowledged and the new disclosure document arrives on the Thursday. You can no longer close on the Friday because you have to wait a further three working days in case you spot another discrepancy. Oops. You've already booked the removal truck and arranged to have utilities connected. And your seller may well be relying on your closing to be able to close on his or her own purchase. The knock-on effects could be felt down a whole chain of home sales and purchases.
It could be that, by the time you read this, the three-day glitch has been resolved. Maybe the CFPB will have changed the rules, or lenders might have taken to delivering closing disclosures six days ahead – or some other work-around has been put in place. But, if that's not the case, you might find it a whole lot cheaper and easier just to swallow any small mistakes in your disclosure.
None of this detracts from the program's main benefit, namely your new ability to compare mortgage offers easily. There's no excuse now to be among the 47 percent who risk losing thousands.