The Good Faith Estimate (GFE)
When you apply for a mortgage, the government requires your lender to give you a “Good Faith Estimate” (GFE) within three days of your application. This document sets out all the costs associated with the mortgage, and most experts recommend against committing to a loan before seeing it.
A GFE is also helpful because it allows you to compare the real costs of competing mortgage offers. However, it can be tricky to understand -- especially if different lenders don’t list the same costs in the same way, or if the costs are incomplete or inaccurate. So, it pays to take a close look at your Good Faith Estimate when it arrives. Here are some of the things to look out for.
Interest rate and points
A GFE shows your interest rate and any discount points you can pay at closing. Make sure you understand that paying discount points will buy you a lower interest rate and lower payments, but it will take many months before the savings make up for the fee.
The long list includes the appraisal fee, credit report fee, application fee, mortgage broker’s fee, and interest rate lock-in fee, if any. Watch for big differences between lenders -- no fees should vary widely. Also, watch for extra fees applied only by certain lenders, or missing fees that may not have been included but are sure to appear later. Ask a lender about any fee that seems out of line.
Title and transfer charges
The closing or escrow fee, title search and title insurance fees, and government taxes are pretty much standard. However, you might get a better rate (called a reissue rate) on the title insurance if it has been less than five years since the previous owner took out a policy on the property. And you don’t have to accept the lender’s title insurance company or attorney; you may try to find one who offers a lower price. Some states set the price of title insurance.
One item paid in advance is the interest on the loan for the period before the first payment date. Putting your closing date close to the end of the month can minimize this charge.
A GFE may specify a figure for home or hazard insurance but it may be less expensive to arrange your own. Also, if you are being charged for mortgage insurance or flood insurance make sure you know why.
Fees may rise
It’s important to remember that a GFE is only an estimate. The figures quoted could rise by 10 percent to 15 percent, or even more, by closing day. This may happen because a lender has simply applied the standard rates of the service companies it deals with, and then had to adjust them later. But some lenders could also be understating their fees. Unfortunately, the government doesn’t impose any penalties on lenders who issue an inaccurate GFE.
You can protect yourself from nasty surprises by asking your lender to quote you the exact final costs, or to “lock in” its fees. Or you can look for one of the “bundled” fee packages now offered by some lenders -- these might offer a cheaper overall price.
Truth in Lending Statement
Along with the Good Faith Estimate, a lender will also give you a Truth in Lending (TIL) disclosure form. This gives you the Annual Percentage Rate (APR) on your mortgage, which takes into account discount points, mortgage insurance, and other fees on top of the basic interest rate.
The Truth in Lending form also lists the total finance fees, the amount financed, the total amount you’ll pay over the life of the loan, the total number and amount of your payments, and when they’re due each month. And it contains other important details, such as whether the mortgage is assumable if you sell the home, and whether there is a penalty for prepaying the mortgage; if the form says you “may” have to pay a penalty, it means you probably will.
Most important, understand that the figures in the TIL form can also change. If your interest rate or any of the fees go up by closing day, so will your APR and the overall cost of your loan.
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