Buying a Home in Michigan
D. Shopping For a Loan
Your choice of lender and type of loan will influence not only your settlement
costs, but also the monthly cost of your mortgage loan. There are many types of
lenders and types of loans you can choose. You may be familiar with banks,
savings associations, mortgage companies and credit unions, many of which
provide home mortgage loans. You may find a listing of some mortgage lenders in
the yellow pages or a listing of rates in your local newspaper.
Mortgage Brokers
Some companies, known as “mortgage brokers” offer to
find you a mortgage lender willing to make you a loan. A mortgage broker may
operate as an independent business and may not be operating as your “agent” or
representative. Your mortgage broker may be paid by the lender, you as the
borrower, or both. You may wish to ask about the fees that the mortgage broker
will receive for its services. Government Programs
You may be
eligible for a loan insured through the Federal Housing Administration (“FHA”)
or guaranteed by the Department of Veterans Affairs or similar programs operated
by cities or states. These programs usually require a smaller down payment. Ask
lenders about these programs. You can get more information about these programs
from the agencies that run them. (See Appendix to this Booklet.) CLOs
Computer loan origination systems, or CLOs, are computer terminals sometimes
available in real estate offices or other locations to help you sort through the
various types of loans offered by different lenders. The CLO operator may charge
a fee for the services the CLO offers. This fee may be paid by you or by the
lender that you select. Types of Loans
Loans can have a fixed
interest rate or a variable interest rate. Fixed rate loans have the same
principal and interest payments during the loan term. Variable rate loans can
have any one of a number of “indexes” and “margins” which determine how and when
the rate and payment amount change. If you apply for a variable rate loan, also
known as an adjustable rate mortgage (“ARM”), a disclosure and booklet required
by the Truth in Lending Act will further describe the ARM. Most loans can be
repaid over a term of 30 years or less. Most loans have equal monthly payments.
The amounts can change from time to time on an ARM depending on changes in the
interest rate. Some loans have short terms and a large final payment called a
“balloon.” You should shop for the type of home mortgage loan terms that best
suit your needs. Interest Rate, “Points” & Other Fees
Often the
price of a home mortgage loan is stated in terms of an interest rate, points,
and other fees. A “point” is a fee that equals 1 percent of the loan amount.
Points are usually paid to the lender, mortgage broker, or both, at the
settlement or upon the completion of the escrow. Often, you can pay fewer points
in exchange for a higher interest rate or more points for a lower rate. Ask your
lender or mortgage broker about points and other fees. A document called
the Truth in Lending Disclosure Statement will show you the “Annual Percentage
Rate” (“APR”) and other payment information for the loan you have applied for.
The APR takes into account not only the interest rate, but also the points,
mortgage broker fees and certain other fees that you have to pay. Ask for the
APR before you apply to help you shop for the loan that is best for you. Also
ask if your loan will have a charge or a fee for paying all or part of the loan
before payment is due (“prepayment penalty”). You may be able to negotiate the
terms of the prepayment penalty. Lender-Required Settlement Costs
Your lender may require you to obtain certain settlement services, such as a new
survey, mortgage insurance or title insurance. It may also order and charge you
for other settlement-related services, such as the appraisal or credit report. A
lender may also charge other fees, such as fees for loan processing, document
preparation, underwriting, flood certification or an application fee. You may
wish to ask for an estimate of fees and settlement costs before choosing a
lender. Some lenders offer “no cost” or “no point” loans but normally cover
these fees or costs by charging a higher interest rate. Comparing Loan
Costs
Comparing APRs may be an effective way to shop for a loan.
However, you must compare similar loan products for the same loan amount. For
example, compare two 30- year fixed rate loans for $100,000. Loan A with an APR
of 8.35% is less costly than Loan B with an APR of 8.65% over the loan term.
However, before you decide on a loan, you should consider the up-front cash you
will be required to pay for each of the two loans as well. Another
effective shopping technique is to compare identical loans with different
up-front points and other fees. For example, if you are offered two 30-year
fixed rate loans for $100,000 and at 8%, the monthly payments are the same, but
the up-front costs are different:
- Loan A - 2 points ($2,000) and lender
required costs of $1800 = $3800 in costs.
- Loan B - 2 1/4 points ($2250)
and lender required costs of $1200 = $3450 in costs.
A comparison of the
up-front costs shows Loan B requires $350 less in up-front cash than Loan A.
However, your individual situation (how long you plan to stay in your house) and
your tax situation (points can usually be deducted for the tax year that you
purchase a house) may affect your choice of loans. Lock-ins
“Locking in” your rate or points at the time of application or during the
processing of your loan will keep the rate and/or points from changing until
settlement or closing of the escrow process. Ask your lender if there is a fee
to lock-in the rate and whether the fee reduces the amount you have to pay for
points. Find out how long the lock-in is good, what happens if it expires, and
whether the lock-in fee is refundable if your application is rejected.
Tax and Insurance Payments
Your monthly mortgage payment will be used to
repay the money you borrowed plus interest. Part of your monthly payment may be
deposited into an “escrow account” (also known as a “reserve” or “impound”
account) so your lender or servicer can pay your real estate taxes, property
insurance, mortgage insurance and/or flood insurance. Ask your lender or
mortgage broker if you will be required to set up an escrow or impound account
for taxes and insurance payments. Transfer of Your Loan
While you may start the loan process with a lender or mortgage broker, you could
find that after settlement another company may be collecting the payments on
your loan. Collecting loan payments is often known as “servicing” the loan. Your
lender or broker will disclose whether it expects to service your loan or to
transfer the servicing to someone else. Mortgage Insurance
Private mortgage insurance and government mortgage insurance protect the lender
against default and enable the lender to make a loan which the lender considers
a higher risk. Lenders often require mortgage insurance for loans where the down
payment is less than 20% of the sales price. You may be billed monthly,
annually, by an initial lump sum, or some combination of these practices for
your mortgage insurance premium. Ask your lender if mortgage insurance is
required and how much it will cost. Mortgage insurance should not be confused
with mortgage life, credit life or disability insurance, which are designed to
pay off a mortgage in the event of the borrower’s death or disability. You
may also be offered “lender paid” mortgage insurance (“LPMI”). Under LPMI plans,
the lender purchases the mortgage insurance and pays the premiums to the
insurer. The lender will increase your interest rate to pay for the premiums --
but LPMI may reduce your settlement costs. You cannot cancel LPMI or government
mortgage insurance during the life of your loan. However, it may be possible to
cancel private mortgage insurance at some point, such as when your loan balance
is reduced to a certain amount. Before you commit to paying for mortgage
insurance, find out the specific requirements for cancellation. Flood
Hazard Areas
Most lenders will not lend you money to buy a home in a
flood hazard area unless you pay for flood insurance. Some government loan
programs will not allow you to purchase a home that is located in a flood hazard
area. Your lender may charge you a fee to check for flood hazards. You should be
notified if flood insurance is required. If a change in flood insurance maps
brings your home within a flood hazard area after your loan is made, your lender
or servicer may require you to buy flood insurance at that time.
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