When you borrow money to buy a house, you take on a very large amount of debt. For most people, their mortgage is the single biggest debt they have, it takes 30 years or more to pay off, and it totals in the hundreds-of-thousands of dollars. With such a big, long-term and important debt, it is very important to know exactly what you are getting into before you agree to a loan.
The law, in order to protect consumers, helps you to know what you are agreeing to by mandating that lenders provide certain disclosures. For example, lenders are required to provide a good faith estimate (GFE). There are a lot of details on the good faith estimate, and there are a few areas that you should be sure to scrutinize carefully as they give you the most essential info about your future mortgage.
Focus On These Numbers On Your Good Faith Estimate
Your good faith estimate will include a lot of information including details on:
- The interest rate and points that must be paid
- The term/length of the loan
- The anticipated fees that you will be charged for originating the loan (the lender’s fees).
- The title charges and the transfer charges
- Any prepaid interest required (the interest on the loan for the period that occurs before the first date when payment is due)
- The estimated funds/money that you will need in order to close on the loan (or the amount of funds you get back at closing)
- The proposed monthly payment that you will need to pay on your loan
Some of these fees and costs listed on the good faith estimate are pretty standard and cannot change. For example, the title fees and transfer charges are not going to be alterable in most cases since they are determined by the government. You’ll need to know what they are in order to pay them but you can’t do much about them. Certain other information, like the total estimated funds needed to close, are determined by all of the other costs and fees.
The three most important things to focus on, therefore, are:
- The interest rate. The interest rate lets you know how much it costs to borrow money. You need to know what your interest rate is, whether the interest rate is fixed or adjustable and what your maximum interest rate is. The interest directly determines how much your monthly payment is and it should be in line with the normal mortgage interest rates for your area (you can comparison shop for lenders by comparing interest rates and discount points).
- The lender fees. This is very important because you need to make sure that the lender is not ripping you off or charging you unreasonable and unnecessary fees.
- The proposed monthly payment on your loan. You must now what your proposed monthly payment is (both currently and the maximum monthly payment in case your loan is a variable rate loan). You need to focus on this number to make sure that the mortgage is affordable to you.
By focusing on these three things, you can make sure that you are getting a good deal from your lender and that you are not taking on more debt than you can actually afford to pay.