How much is this new loan going to cost me?
That's a question most people naturally ask when they borrow money to buy a house or refinance their existing mortgage.
An approximation of the final figure can be found on the Good Faith Estimate, or GFE, a three-page government-mandated form mortgage brokers and lenders are required to give prospective borrowers within three days of a loan application. You can download the U.S. Department of Housing and Urban Development form online, including at Bankrate.com. (http://www.bankrate.com/finance/real-estate/good-faith-estimate-form.aspx)
Here's a section-by-section dissection of the form:
The top two sections on Page 1 explain why the form is important. First, it's a summary of the loan terms and estimated settlement charges, and second, it can be used to shop and compare the terms and charges offered by multiple lenders or mortgage brokers. It's that simple.
This section discloses when the GFE expires and whether the interest rate is locked or floating, according to Vicki Bott, a former official at HUD.
"If the interest rate is floating, the terms of the GFE may only be available for a short period of time. If your interest rate is locked, you still must close your loan on or before that date for that interest rate to be effective," Bott explains in a HUD-produced video about the GFE.
The payment includes principal, interest and mortgage insurance, if any, but not property taxes or homeowners insurance.
The series of yes-or-no checkboxes spell out whether the rate can rise, whether the loan balance or payment can increase, and whether the loan has a prepayment penalty or balloon payment. If any of the Yes boxes are checked, further details should be disclosed.
"It's very cut and dried, so there are no surprises," Green says.
This section discloses whether the lender will collect a portion of the annual property taxes and homeowner's insurance premium each month in addition to the loan payment. If so, those amounts will be held in an escrow (or impound) account and used to pay those expenses when they're due.
The "A," "B" and "A+B" lines at the bottom of Page 1 show the totals of costs that are explained in detail on Page 2. "A" is the total of the lender's loan origination charges. "B" is the total of fees for other settlement service. The key word here is "estimated." The costs could change before the loan closes.
The first two parts of this section disclose more information about the loan origination charges and interest rate. If the first box in Part 2 is checked, Part 1 includes all the origination charges. If the second box is checked, the loan features a credit that reduces the charges and raises the rate. If the third box is checked, the loan includes points, which increase the charges and reduce the interest rate.
Parts 3 through 11 summarize the other closing costs, including lender-required services (an appraisal, for example), lender's title insurance, owner's title insurance, recording fees, transfer taxes, escrow account deposit (if any), prepaid interest and homeowner's insurance. Some of these charges can't change, others can increase no more than 10 percent, and still others are unrestricted, allowing the borrower to select companies he or she prefers.
"Certain fees are held to a zero percent tolerance. If it increases by a penny, we have to cover that as a lender," Green explains. "If it's a client-chosen fee that ends up being higher, the lender is not responsible for curing or covering that amount."
The chart at the top of Page 3 explains, in another format, which charges have zero tolerance, which have 10 percent tolerance and which can change to an unlimited amount.
The table at the top of Page 3 helps borrowers weigh whether to pay higher closing costs to obtain a lower interest rate or pay lower costs and accept a higher rate, Bott explains in the HUD video. The choice, she says, is essentially one of paying higher closing costs now or paying more interest later.
The second table on Page 3 allows borrowers to compare the terms and total estimated settlement charges of four loans side-by-side. The chart includes only the highlights, not all the details of each loan.