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Today’s mortgage market condition has produced one of the best opportunities to purchase or refinance a home. Low rates, lower values, and tax credits for first time homebuyers will tempt many physicians to take advantage, but how can you make sure that you wouldn’t make a mistake and overpay for your mortgage transaction. The process, regardless if you are shopping with a credit union, bank or mortgage broker can be confusing and costly, so understanding some basic concepts can save you thousands of dollars over the life of the mortgage.
Paying Points to Lower your Interest Rate
The interest rate would typically be dictated by your qualification and the product you choose. On occasion, the loan originator or mortgage broker might offer you a lower rate but at a cost. In this situation you must consider the possibility of how long you might maintain that mortgage open. The longer the mortgage remains open the better the possibility is to recoup your cost or points. Requesting a mortgage comparison with both options and asking for the breakeven analysis is important. For example;
Loan option A: Consider a $100,000 mortgage at 5.5% for 30 years. No Points.
Payments equal $567.79 per month.
Loan option B: Consider a $100,000 mortgage at 5.0% for 30 years. 2% in points or $2,000 up front.
Payments equal $536.82 per month.
Result: The difference of the payments is $30.97 per month. Dividing the difference of the payments with the cost or points ($2,000 / $30.97 = 64.58) would provide you the number of approximate months for recouping the points. So, it will take approximately 65 months or 5 years and 5 months for you to “breakeven”. In the above example, if you were to maintaining the mortgage for more than 65 months you would benefit from paying the points.
Reviewing the Cost of the Mortgage
Once you’ve decided on the type of mortgage program, fixed or adjustable, conforming or jumbo, conventional, FHA or VA and assuming you receive the same interest rate from the various sources, you should bypass the often offered good faith estimate and request a preliminary HUD-1 settlement statement.
This document is a standard form approved by the Housing and Urban Development and used by all lenders to document fees and costs associated with all types of mortgages. The HUD-1 settlement statement is a two page document which divides all the fees in sections in a numbered format for easy reference. Final copy is typically provided to you within 24 hours of the time of closing your mortgage.
Requesting this form upfront will allow you to compare (by line item) all fees associated with your mortgage which allows you to question specific fees and charges. The broker or loan officer should be able to accommodate this request.
Five Minute Review of the HUD-1 Settlement Statement
Go to Page 2 of the HUD-1:
Section 800: (Items payable in connection with loan) These charges should be your first priority to review. Here, many brokers and lenders hide fees. Negotiate or eliminate as many fees as possible in this section.
Section 900: (Items required by lender to be paid in advance) This section is standard. Your insurance, if not paid before closing, should be reflected here. Typically these fees are necessary and cannot be eliminated
Section 1000: (Escrow account deposit) If escrowing your taxes and insurance this section will be complete. All lenders use a formula provided by the government to calculate these costs. This is standard for all lenders. (Bypass this section)
Section 1100: (Title charges) These fees can be negotiated regardless if you (or your lender) selected the attorney or closing agent. Ask for discounts on all fees in this section, although most will not be eliminated completely. If you are doing a refinance, provide your title agent with your prior title policy and ask for a discount.
Section 1200: (Government recording and transfer charges) These fees are typically standard. Depending on the county or state in which you reside in, a calculation is provided to the lenders for this section from the appropriate agency. All residents in that county or state would pay the same amount of fees. (Bypass)
Sections 1300: (Additional settlement charges) Review for any unusual charges, items like survey, pest ECT, all fees here can be negotiated. Raise a question if these fees or services are required by the lender.
Go to Page 1 of the HUD-1, this should summarize the cost of your mortgage from page two in addition to your loan amount and any credits provided to you at closing.
Final Steps…
Your approach to financing a mortgage should be similar to that of buying a car. Seek out at least three lenders for Good Faith Estimates/Preliminary HUD prior to your commitment. This will allow you to compare the various costs being charged by different lenders, but most importantly… give you “Leverage”. By leveraging one HUD versus another, it makes it much easier to negotiate the removal of a particular fee if one mortgage lender’s competition is not charging that same fee or charge.
Once you finalize reviewing your preliminary HUD-1 settlement statement don’t forget to ask for another prior to closing. Bring it to the closing and compare the charges with final HUD-1 settlement statement. This will help you avoid last minute surprises and keep your mortgage broker or loan originator honest. |
