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CONSUMER INFORMATION ON HOME LOANS This page has consumer information and resources to help you get a home loan that is right for you. This information is specific to homes and loans in Washington state. The sole intent of this page is to pass along consumer information so you can make choices. My statements are not advice - they are my personal opinions based on my experience only. Please do your own research and/or consult your accountant, portfolio advisor, or other professional regarding which strategies and decisions are best for you. As a notary, I have seen thousands of home loan refinance packages. When interest rates were low, lenders and borrowers alike usually enjoyed smooth business dealings. But now that interest rates are higher and expected to rise further, more of our nation's loan officers are using bait and switch tactics on the borrowers. These tactics have become so prevalent I no longer take work from title companies and lenders. I do accept notary assignments for HUD-backed Reverse Mortgages but only from loan originators I know are honest. Information on Reverse Mortgages is on another page of this website. See the column to the left. I give low-cost seminars in Bellingham, WA, on home loan consumer information. Seminars are informational only - nothing is sold or solicited. The next seminar will be on September 15, 2007. Email me for more information. ProfessionalNotary@yahoo.com CONSUMER RESOURCE Clark Howard is one of our nation's foremost consumer advocates. He has a weekday radio show broadcast nationwide. His website has so much information it is hard to navigate. Be persistent - your patience will pay off. Much of what I have learned and publish in this article has been learned from Clark Howard. Clark is so honest he will not take payment for recommending a product or company. He sees this as "conflict of interest." Clark is the source of some of the information below. Visit his website for consumer tips and to learn when his weekday radio program can be heard in your region. www.ClarkHoward.com RESEARCH BEFORE CALLING LENDERS Lenders usually have far more flexibility than they like us to think. Learn what your options are and which choices are best for you before calling any lender. Below is some basic information regarding interest rate, pre-payment penalties, lender fees, title insurance, length of loan, Power of Attorney closings, interest-only loans, loans with negative amortization, and tax and insurance escrow accounts. YOUR HOME'S VALUE Your home's approximate current value can be researched at www.Zillow.com Enter your home's address and see an aerial map of your immediate neighborhood with home values. The home value numbers you see are ballpark only. Your house may need a new roof. A neighbor may have remodeled their kitchen or added a swimming pool that you don't know about. But information from Zillow could be helpful as you negotiate the terms/costs of your loan. OPT OUT PRESCREEN Almost anyone who knows your social security number and a bit more information can check your credit score and report. (This is largely why you get so many pre-approved credit card offers in the mail.) To prevent unwanted checks, register with Opt Out Prescreen for free. This will tell the credit reporting agencies to not allow anyone to view your information without your permission. You can register by calling (888) 567-8688 or online at www.OptOutPrescreen.com When you speak with a lender, they will immediately check your credit report. This causes automatic trigger leads to be generated to lenders who pay the credit reporting agencies for them. Being registered with OptOutPrescreen will help prevent lenders you are not working with from checking your credit and soliciting you for a competing loan. When you give your information to websites with multiple lenders - such as LendingTree.com - you are giving all their lender clients permission to check your credit report. INTEREST RATES There are ways to research the lowest interest rates you can obtain. A good first step is to know your credit score. Equifax provides the relevant one for home loans. To get a free copy of your credit report visit www.AnnualCreditReport.com Other sites offer free credit reports but they usually want something else, like a paid subscription. Once you have your Equifax credit score, go to www.MyFico.com Scroll down a bit to the area with the light green border. This section is free. Choose your state. Enter the amount to be financed. Hit recalculate. You will see the interest rates people in your state are getting for a 30-year fixed rate loan categorized by credit score range. Click on the 15-year tab to see those rates. This information can give you a strong negotiating position. FIXED VS ADJUSTABLE INTEREST RATE Most people think a fixed rate is currently the only smart choice. This is true for many people since our interest rates are currently low. But there are some circumstances where an adjustable rate might be the better choice. Example of a combination fixed and adjustable rate loan: One couple I met had secured a loan with a low fixed rate for the first 5 years. Then the interest leaped to an adjustable rate of index (popularly known as prime) plus 5%. This was the right loan for them because they had raised 3 children in that large house. Their youngest would graduate from high school in 1.5 years. After the big graduation party, they planned to retire, sell their house, and buy a small condo. The condo would be their launching pad for long-desired nationwide travels in their RV. Even if their child's graduation was delayed a year, they would still have the initial rate. The low initial rate was better than any rate they could have gotten for a fixed-rate loan. LENGTH OF LOAN If you have access to Quicken or Quickbooks, you can use their handy calculators to see what your loan payments will be when you vary the number of years of the loan. Go to Planning, Financial Calculators, Loan. Enter the same loan amount and interest rate but vary the number of years. You will see that the monthly payments for a 15 year loan are not double what you would pay for a 30 year loan. LOANS WITH INTEREST-ONLY PAYMENTS With these loans, your monthly payments only cover the interest for a set period of months. After the period is over, your monthly payments usually include principal plus interest. LOANS WITH NEGATIVE AMORTIZATION With these loans, your monthly payments cover no principal and only a portion of the interest. These payment conditions are usually limited to a stated number of months or years. The amount of interest that is unpaid each month is added to the principal of the loan. There may or may not be a balloon payment at the end of the loan. Example: Mr. Apple has a loan requiring interest-only payments for the first 5 years. He pays $1,500 a month. At the end of 5 years, his payments rise to include both interest and principal. The principal has remained the same. Mr. Orange has a negative amortization loan. If he were to make payments that covered the interest but no principal, he would pay $1,500 a month. But only pays $500 a month for the first 4 years according to his loan's terms. That means $1,000 is added to his loan principal every month. At the end of 4 years, his loan principal would have increased by $48,000 (plus a little more due to compounding). PREPAYMENT PENALTIES Prepayment penalties are clauses that state if you pay off the loan (via a refi or sale of house) within a specific number of months, you will have to pay the lender a fine. I have seen fines as low as $300 and as high as $24,000. If a prepayment penalty (PPP) is part of your loan, it must be disclosed on the Truth In Lending statement. On most of the TILs I have seen, the prepayment penalty information is in the bottom third of the page. The TIL will only show whether or not there is a penalty. You must look elsewhere in the loan package to the see the specific terms of the PPP. It can be anywhere. It can be a separate document. It can be the text within another document. Lots of people dismiss the importance of a 2- or 3-year PPP because they have no intention of selling their house for many years. But medical emergencies or job loss might mean that the owners need to access their home's equity via a refinance. LENDER FEES Many lenders break down their fee into many categories including origination fee, administration fee, rate buy-down fee, broker fee, processing fee, and more. When you speak with a lender about fees, you may wish to ask for their total fee including all subcategories. The fees will be listed on the HUD aka Settlement Statement aka Closing Costs statement. ESCROW ACCOUNTS FOR PROPERTY TAX AND INSURANCE Some people like to run their property tax and home insurance payments through their loan payments. They send monthly payments to the lender that includes the loan payment plus extra to cover the property and tax bills when they are due. Some lenders require this to get a home loan from them. When you take out a loan, the lender likes to seed an escrow (or cushion) account upfront so that if your rates rise or the post office delays delivery of your monthly payment, there is still enough money in the cushion account to make your tax or insurance payment on time. In past years, I routinely saw 2-3 months worth of tax and insurance contributions as the amount used to seed the new escrow account. Now it is common to see 6 to 11 months. Like lender fees and title insurance, your total loan amount covers these expenses. That means you are borrowing and paying interest on the money that sits in the escrow/cushion account. The lender often places that cushion money in an interest-bearing bank account, so they are earning interest that way as well. TITLE INSURANCE The title insurance fee listed on your Settlement Statement may or may not cover your the title on your home. It may cover the lender for this loan only. It may cover you for this loan only. It may cover something else. The only way to know is to ask. POWER OF ATTORNEY CLOSINGS A new trend among lenders is to have you sign a Power of Attorney form in front of a notary which allows the lender's employee or agent to sign your loan closing papers for you. You will probably never meet this person. You do not sign the final loan papers. This practice is highly controversial so I suggest you research the pros and cons thoroughly before deciding whether to sign the Power of Attorney form allowing this. CHECKLIST You may wish to create a checklist to use when talking to lenders. This list might include: *Amount you want to borrow *Amount of down payment, if any *Interest rate you expect *Length of loan: number of years *Type of rate want: fixed, adjustable, or mixed *Total lender fees you are willing to pay including points, origination, processing, etc *Your wishes regarding a Prepayment Penalty *Which title company you prefer *Broker fee amount, if any *How often you want to make payments (once a month? every other week?) *Where you want to sign final papers (title company, your home or office, lender's office, etc) *Whether you will sign final papers or allow the lender's agent to do so *Whether you want the final papers sent to you via FedEx or UPS so you have them day before signing appointment You may wish to tell the lender you are calling other lenders and which ones. Sometimes lenders think people are fraudulently trying to get multiple loans on one property because of numerous checks on your credit report. WHERE TO FIND LENDERS If you are/were in the military, call USAA and Navy Federal Credit Union for current rates. Your local credit unions may have great rates. Your friends might know of resources. www.BankRate.com is a good website for finding lenders with competitive rates. But finding unbiased answers (instead of paid advertisement information) is a bit tricky. Here's how: Click on the Mortgage tab in the upper left area of the home page. Scroll down to the map. Click on your state. Choose a city and click Next. Enter how much you want to borrow and the down payment percentage. Choose your mortgage option and click Next. Select the points you are willing to pay and click Next. You will see a list of lenders and their current rates. Click on the APR button. The list will be reorganized according the interest rate. Not all lenders are on the list. They must pay BankRate to be included. Citibank, Countrywide, and Chase often have competitive rates. Call them. FINAL CLOSING DOCUMENTS I like to view these documents first: >Truth in Lending - TIL. This federally-mandated form shows a lot of information including: Your loan's annual percentage rate (this is different from the Note rate), whether or not there is a Prepayment Penalty, and the number of payments and the amounts. (If the interest rate is adjustable the payment amounts are estimates only.) A large final payment indicates a balloon payment due. >HUD aka Settlement Statement aka Closing Costs statement The HUD lists all the costs associated with your loan not including any potential future fees, like a Prepayment Penalty. >Note This document spells out the terms of your loan. >Prepayment Penalty If your loan has a PPP, the wording may appear in a separate document or the PPP statements may be inserted into another document. Some PPP clauses do not state the amount of the fine or how it would be calculated. >Right to Cancel - RTC Some home loans qualify for a multiple-day waiting period. Some home loans do not. If not, your loan papers are final as soon as you sign them. If you are given a RTC form, you have a few days to cancel the loan if you wish. Ask the person providing the RTC to answer any questions you have about it. > You may or may not be rushed through the reading and signing of your final loan papers. It is your choice whether or not to allow this. WHEN THE LOAN IS NOT AS PROMISED I have spoken with many borrowers who said they told their loan officer exactly what was needed. Friends referred them to the LO stating that all communications were 100% honest. But when the final loan papers appeared there were many errors and extra fees. Sometimes the loan officers submitted the papers exactly as the borrowers wished. But the management officers added horrific stipulations without telling the officer communicating with the borrowers. So the loan officer you have been speaking with may or may not be person who changed the terms/costs of the loan. Changed terms/costs is one reason why you may wish to see your final loan documents the day before your closing/signing appointment. RECOMMENDED BOOK The Complete Guide to Your Real Estate Closing by Sandy Gadow. Click on graphic below to be taken to this book's page on Amazon.