To be fully prepared for closing when buying or refinancing a home, it is crucial to understand the numbers that make up loan. A home is typically a consumer’s largest investment so knowing the numbers associated with a mortgage contract is fundamental. The costs along with the loan terms associated with a mortgage transaction should be explained to the client during the pre-approval process of the loan, so that the customer has a clear representation of what is entailed with a mortgage prior to getting a property under contract or going forward with a refinance.
The new regulation known as the TILA-RESPA Integrated Disclosure Rule (TRID) allows homebuyers to obtain their final loan terms and conditions at least three days prior to closing. The buyer can review information well before closing to make sure they understand all of the loan’s details. This document is called the Closing Disclosure (CD) and addresses information such as rate, payment closing costs and other essential information related to the loan. This form should be very similar in nature to that of the Loan Estimate (LE) that the client is provided at the time of the initial loan application. The CD allows the client to see what changes occurred from the initial loan application to closing. The CD specifically notes any changes in relationship to the terms of the loan in comparison to the LE.
The numbers, including rate, loan amount, insurance, taxes, mortgage insurance, downpayment, closing costs, terms and total payment are important to thoroughly understand. Downpayment is a critical figure. However, in many cases, buyers may think it is the only upfront money needed. Many consumers do not take closing costs into account when estimating how much cash is needed for a home purchase or refinance. Closing costs may be required in addition to the downpayment to close a loan. For a refinance, closing costs are often built into the loan, so knowing the total loan amount is even more necessary.
Other expenses such as taxes, insurance and mortgage insurance can also have a major impact on payments. Consumers must be sure these items are explained wholly and that all information is presented. This will provide clear insight into what the final loan payment will be. In most cases, homeowners association (HOA) dues are not included in the mortgage payment, so this is another factor to consider as it affects outgoing monthly cash flow.
Furthermore, there are additional expenditures associated with purchasing a home, such as appraisal, inspection, sewer scope and radon testing. These costs typically occur prior to the property closing, so they should be budgeted before starting a home search or going under contract. These costs are typically required to be paid for soon after getting a property under contract. The customer should be prepared to pay for these items within a week after acceptance of the contract.
While buying a home can sometimes feel like a puzzle, knowing what information is needed can help. Understanding the numbers that go into a loan is a huge first step. This sets the stage for future decision-making and exciting home buying milestones to come.
David Hosterman (NMLS#: 220562) is branch manager of Castle & Cooke Mortgage’s Denver office. He can be reached by phone at (303) 501-1401 or email [email protected].
This article originally appeared in the December 2015 print edition of National Mortgage Professional Magazine.
