The good-faith estimate is the most important document you'll receive when applying for a mortgage.
It summarizes all of the key terms, from interest rates to closing costs, and lenders must provide one within three days of receiving your application.
The federal government currently requires lenders to use a three-page standardized good-faith form that's much easier to use than those that banks and mortgage companies created.
You may have heard that the Consumer Financial Protection Bureau has proposed two new know-before-you-owe forms that could replace the good-faith form, making it even easier to evaluate the costs and risks of a new mortgage.
But the standardized good-faith estimate is what borrowers must depend on for the foreseeable future.
If it includes terms that are different from what you expected, if the fees are surprisingly high or if you can't locate the information you need, take those issues to your bank or broker.
This is the point to get things right and avoid any nasty -- and expensive -- surprises.
To make sure you know what you're getting into, find the answers to these eight critical questions that a good-faith estimate should answer.
1. How much am I borrowing?
Find the section called "Summary of your loan" on the first page of the form. The very first box is titled "Your initial loan amount is."
It should be what you expected. If it's more than the purchase price of your home (or the outstanding balance on your current mortgage in a refinancing), the lender has probably rolled some of your closing costs into the amount you're borrowing.
That's OK if you don't have enough cash to pay for all of your fees. But you need to know exactly what charges are being added to your balance.
2. What's my interest rate?
You'll find this in the next box, which says, "Your initial interest rate is."
This should be the rate your lender has discussed with you.
3. What's my monthly payment?
Look at the next box down.
This should be the amount you've been promised. It covers principal and interest payments as well as the monthly premium for mortgage insurance if you're putting less than 20 percent down and are required to carry that coverage.
It does not include property taxes and homeowners insurance if you're required to make payments to an escrow account.
Is this a fixed-rate or adjustable-rate loan?
An astonishing number of home buyers who took out adjustable-rate mortgages in the early 2000s thought they were getting a fixed rate. They were shocked when their payments began to rise -- often beyond what they could afford.
If the box called "Can your interest rate rise?" is checked "No," then you have a fixed-rate loan.
If it's checked "Yes," then you have an adjustable-rate mortgage. It will tell you the maximum rate you could pay and when the first change could occur.
Is an escrow account required?
Some lenders collect your property taxes and homeowners insurance premiums in advance and then make those payments on your behalf.
If the good-faith estimate box that says "Yes" is checked in the section of the form called escrow account information, you'll have those costs added to your monthly payment, and you should find an estimate here of how much that will be.
If the "Yes" box is checked and there's no estimate of how much you'll have to put into your escrow account each month, ask your lender.
What's the cost of taking out this mortgage?
Lenders charge origination fees for processing your mortgage.
Look for them at the box that says Our origination charge at the top of the second page of the standardized good-faith estimate
These fees typically run between 0.5 percent and 2 percent ($1,000 to $4,000 on a $200,000 loan). The best deals charge a fixed fee of $1,000 or less.
Am I being charged points?
Discount points are interest you prepay at closing in exchange for a lower rate. That's why paying points is sometimes called "buying down the rate."
One discount point (1 percent of the loan amount) typically decreases the interest rate by 0.25 percent on a 30-year mortgage.
If your lender never mentioned points when quoting your rate, there shouldn't be any points on the good-faith estimate.
Right below the origination fee is a box that says, "Your credit or charge (points) for the specific interest rate chosen."
If you aren't paying points, the first box will be checked.
If you are being charged points, the third box will be checked and the amount you're being charged will be filled in.
How much am I paying for an appraisal?
You'll find the answer on the second page, in the box that says, "Required services that we select."
This is important because you'll have to pay for the appraisal before it's performed -- and before you know whether you'll be approved for the loan.
Although new regulations intended to ensure a realistic value is placed on your home have made appraisals more costly, it still shouldn't cost more than $300 to $600.