Understanding The Loan Estimate Mortgage Document
WHAT IS A LOAN ESTIMATE MORTGAGE DOCUMENT?
A loan estimate is a three-page document that you receive after applying for a mortgage. It provides important details about the requested loan. Use this as a tool to ensure the information reflects what you discussed with the lender. If something looks off, be sure to ask why.
RUNNING YOUR CREDIT:
Mortgage interest rates are very low right now which is a big enticement to either refinance a mortgage or purchase a home. Either way, I suggest you reach out to 2-3 different mortgage loan lenders and compare their offers, which can be reviewed as part of the loan estimate document. Keep in mind that every time you run your credit, there is a hard inquiry on your credit report. Too many of these inquiries can negatively impact your credit score, which is why I recommend keeping your search to 2-3 lenders.
ESTIMATED OR LOCKED INTEREST RATE:
Receiving a loan estimate does not mean that your loan is approved, but it does provide a lot of important details. One of the things you’ll find on here is a good faith estimate of the interest rate being quoted. This doesn’t necessarily mean that the rate is guaranteed. Look for the section that states whether or not the rate is locked. If it’s not, then the quoted interest rate is just an estimate based on the current environment. At some point the lender will ask if you are ready to lock in the rate. This can be done at the beginning of the process, or you can opt for a float rate initially. Some people do this if they believe interest rates will continue to drop. So essentially everything else is completed with the mortgage process, and you wait until the end to lock in what you hope will be the lowest interest rate possible. There are expiration dates for the rate locks, so keep in mind that if the closing does not happen by the expiration date, fees may be incurred.
The loan estimate will provide additional details including monthly payment, principal amount, mortgage insurance rate, and escrow. If your mortgage has a pre-payment feature or a balloon payment, this will also be reflected in the loan estimate. There are instances where large fees can be incurred for paying off the mortgage loan early. This will be indicated on the loan estimate document, so make sure you understand this before making a decision. Mortgage insurance is required if you have put down less than 20% for the down payment. An escrow account is setup by your mortgage lender to pay certain property-related expenses. The money in escrow comes from a portion of your monthly mortgage payment.
UNDERSTANDING THE TERMS:
The 2008 housing crash was due in part to some deceptive language in the mortgage documents, which buyers did not fully understand. For example, some people thought that their mortgage loan had a fixed rate for the entire length of the loan. However, after closer review, they realized that the rate was fixed for only the first 2 years and then it jumped up resulting in a significantly higher payment. Since the 2008 housing crash, the documentation has been adjusted to provide a clearer picture to the buyer, but be sure to review everything thoroughly. Understanding all of the mortgage loan terms in their entirely is critical. If something doesn’t make sense or is not in line with what was agreed upon, speak up and ask as many questions as you need to.
LOWER INTEREST RATE OR CASH OUT?
If you are looking to refinance, you can choose between a lower interest rate which will decrease your payments, and/or choose a cash out option. Let’s say you’re interested in making some home improvements, but can’t afford all of the costs. Opting for the cash out choice will provide you with a lump sum of money that you can use towards the home improvements. Keep in mind that the closing costs will be deducted from this lump sum. So if the closing costs are $12,000 and you need $30,000 for your home improvements, you will need a total cash out of $42,000. The closing costs include several different fees, and this is an area you really need to focus on. Closing costs can include origination charges, application fees, and underwriting fees.
WHEN SHOULD YOU SPEAK WITH A CERTIFIED FINANCIAL PLANNER™ PROFESSIONAL?
Now! Some people are under the assumption that you have to be rich to have a financial planner. There are others who believe they only need to speak with a financial planner if they’re having a serious financial issue. Neither is true. Regardless of your economic situation, a financial planner can help you in truly significant ways. Whether you have a lot of money, a little bit of money, a lot of debt, no debt, unsure about your employer’s 401K options, or any other money related issue, a financial planner can help you navigate through all of these things and put you on the road to achieving your financial goals. Even if you feel very stable with your finances, a financial planner can help you sustain the progress you’ve already made.
WHERE TO GO FROM HERE?
Listen to the On My Way To Wealth Podcast for additional information and specific examples. Want to receive my e-book with free money tips for Gen Xers? Click this link: www.buildabetterfinancialfuture.com Consult with a Certified Financial Planner™ professional as he/she can provide you with the knowledge and expertise critical to help you Build A Better Financial Future!
As always, thank you for checking out my podcast and blog post! If there are any topics you would like to learn more about, or if you would like to schedule a free financial consultation with me, please email me at Luis@onmywaytowealth.com! All of my podcast episodes can be found at www.onmywaytowealth.com and on all major podcasting platforms. For my business site, please be sure to check out www.buildabetterfinancialfuture.com. I look forward to helping you Build A Better Financial Future!