Mortgages: Know before you owe

Americans currently owe more than 8 trillion dollars to mortgage lenders. That’s a lot of money, and yet many people still don’t understand how it all works. Now there have been some big changes in lending rules recent to make it easier to digest and help the home purchasing process go more smoothly.

The foreclosure crisis of a few years ago rattled the entire country. It became clear that many people did not even understand the terms and rules of their mortgages, and homeowners claimed that by the time they found out about many of the fees and costs... It was too late.

We’ve all heard of Fannie Mae and Freddie Mac, but many people still don’t know what they are.

Fannie Mae is the Federal National Mortgage Association. Freddie Mac is the Federal Home Loan Mortgage Corporation. Fannie and Freddie were created by congress to buy mortgages from lenders and either hold them or package them together to sell to investors.

This keeps the mortgage market stable and affordable, buy ensuring that the banks and mortgage lenders have access to cash when needed, so the lenders can come back and loan money again to prospective homeowners.

The Federal Housing Administration (FHA) insures about 30% of residential mortgages.

FHA insured loans were designed many years ago for first-time homebuyers. They are supposed to be a little bit more relaxed on the guidelines. They have recently made it possible for more “underwater” homeowners to re-finance, and made some other changes to guidelines. Borrowers who use FHA loans will now likely save thousands at closing. But those monthly mortgage payments will be a little higher. Borrowers with credit scores of less than 580 will have to put 10 percent down, instead of 3.5 percent.

A Home Equity Loan or Home Equity Line of Credit is basically a second mortgage. It is a loan taken out against the equity you have built up in your home.

Big Changes to Simplify the Process

The Consumer Financial Protection Bureau has been working to simplify the lending process and make it easier for borrowers to know what they are getting into and how much it will cost.

In October of 2015, some big changes took effect.

The fancy title for it is TILA-RESPA Integrated Disclosure but essentially, it's new legislation that has actually given borrowers a lot more transparency and giving them more time to decide on the lender that they're using, as well as giving them some time to review their final closing disclosures.

Two new “Know Before You Owe” disclosure forms replace four old ones.

Remember the “Good Faith Estimate”, HUD-1 statement and Truth In Lending disclosures? Gone.

They have simplified and combined the information into a “Loan Estimate” and “Closing Disclosure” form.

Every mortgage transaction will be summed up with these two forms so that buyers can clearly see what they are getting into. This should also make it easier to shop around and compare different loans against each other.

The Loan Estimate shows you your interest rate, the lender fees along with appraisal fees, title insurance, closing costs, and details such as if your interest rate is fixed or if it can change.

The Closing Discolsure spells out all of the final costs-- taxes and insurance, closing costs, all fees, how much each Realtor is getting, and who is paying what-- the buyer or the seller.

As Richard Romano from explained, “When you're looking at your Loan Estimate, you really want to look at the type of loan. Is it a fixed rate? Is it an adjustable rate? The L.E. will spell out directly if it's an adjustable rate, and it'll tell you what that rate can adjust to in a worst-case scenario. You also want to know if there's a pre-payment penalty”

The Loan Estimate is designed so that you can shop around and know everything up front which makes it a lot easier to compare different potential mortgages with each other.

Lenders must ensure that the forms match as much as possible—meaning what you were told you would pay up front is the same as what you end up paying at closing. 

Once your loan is cleared to close, you'll then receive your Closing Disclosure at least 3 days in advance, so nobody is surprised at the closing table.

If anything changes, like the interest rate or any fee charged you must be given an additional 3 days to review it all prior to closing.

This gives you an opportunity to sort of take a deep breath and understand the commitment you're making without feeling rushed, because as I say all the time-- other than marriage, your mortgage is probably the longest contract you’ll sign in your life. It's usually a 30-year commitment.

Before you take that plunge, take a few minutes to review all of the important info on the “Know Before You Owe” website. You can also download a “Home Loan Toolkit” by clicking  here.