What good is the Good Faith Estimate you received from your potential lender? Let’s see…

At first sight, the information provided seems gold - origination fees, appraisal fees, credit report… you name it! And then you get several Estimates from different lenders, and compare, and think that you have made a fair choice until… well, actually, the closing. To many people it came as a shock - the actual cash charges happened to be a lot higher than any GFE had ever told them. The problem was, and still is for the old forms, that the document bore no clear indication of the possible changes in the prices. People relied too much on numbers that were just estimates, sometimes highly inaccurate ones. Moreover, no penalty was imposed on lenders, who intentionally provided inaccurate numbers. Originally intended to help a homebuyer compare mortgage offers and select a program best suited for his particular situation, the document ended up in being confusing and, what is worse, misleading. For years, the prices and charges quoted in too many GFEs had little to do with the real charges that borrowers had to face at closings. Tempers rose, and finally the government paid attention - the new Real Estate Settlement Procedures Act (RESPA) guidelines went into effect on January 16, 2009. The new Good Faith Estimate (GFE) and Housing & Urban Development Settlement Statement (HUD-1) can already be used, but become mandatory only on January 1, 2010. Read the rest of this article »

The Annual Percentage Rate (APR) was created with good intentions to make complicated things if not simple, then at least simpler. It even works in many cases! Unfortunately, it also fails in just as many other cases, which sort of devaluates it as a universally reliable tool.

The APR looks a lot like an interest rate, because it is also a percentage. However, it is quite a different parameter. The APR is the sum of the interest rate and a theoretical percentage rate derived from other then the interest, fees associated with a mortgage: points, pre-paid interest, origination fees, attorney and notary fees, closing agent’s document preparation fees, PMI. Third party services, such as appraisals or credit reports, are not included. The purpose of this rate is to summarize all the costs of a mortgage into one number and help a potential borrower make a more informed choice. The borrower should be able to compare mortgages by comparing their APRs. Ideally, a mortgage with the APR of, say, 6.25% should be a better deal than a mortgage with a 7% APR, implying that the latter’s closing costs are higher. The APR is usually higher than the quoted interest rate, but it does not influence your real monthly payments. The monthly payments are dependent on the interest rate; the APR is a purely technical theoretical parameter developed to assist the choice of a potential borrower. It immediately gives one the overall idea of the costs involved. Read the rest of this article »

The concept of mortgage brokers disclosing the real wholesale mortgage prices to their customers has caught my eye again recently, as it is being promoted by some most respectful mortgage experts and advisors. Some of them sound very enthusiastic about it; some see the panacea for predatory lending in it. Well, there seems to be quite some good common sense in it, but somehow certain aspects of the deal keep me puzzled and wondering.

When one wants to borrow some money to, say, buy a home, he can either shop for a retail lender with the best offer himself or hire a broker to find the best deal on the market. The advantages of having a broker are obvious – a broker being constantly in the business has a far better knowledge and understanding of the mortgage market and procedures, he can provide his customer with a better deal. Well, at least in theory. The disadvantages are also obvious – the costs of the service. Moreover, a conventional broker tends to work for a commission, which s/he does not tell the customer in advance, which, in its turn, leaves a lot of room for tricks and speculations. Read the rest of this article »