Understand Closing Costs: Use the Good Faith Estimate
Many people are on the verge of freaking when they are about to sign their mortgage loan documents. This is not surprising considering that a home loan is often the biggest debt we personally assume in our lives. Yet it is not so much the act of signing for this obligation, but the writing of the check for the closing costs that seems to make people choke.
You Can Only Be a Little Surprised for a Little While
After all, when you buy a house, you know in advance how much money you need to bring to the closing. Lenders are required by the government to deliver within three days of a loan application a Good Faith Estimate of your expected closing costs. If you are like many people, when you get your Good Faith Estimate, you will scrutinize it, swallow hard, check your bank account, and do your best not to stress. Yet this is exactly the time to get busy.
Parsing Good Faith and Estimate
A Good Faith Estimate is, as its title states, an estimate. While the "good faith" part of the name implies that your closing costs will be near what is estimated, it is your responsibility to understand what you are being charged and what amounts could change between the time you receive your estimate and the time you accept the loan. While lenders, escrow officers, attorneys, your realtor, and everyone else involved with your deal are all working to be sure that nothing does change, one potential use of the Good Faith Estimate is as a guide for comparing deals.
Use the Good Faith Estimate to Your Advantage
Without other written offers, you do not have much, if any, leverage to negotiate. But with other written offers you certainly do. You just have to know what is negotiable and what is not so negotiable. Take a look at a sample Truth in Lending Statement and Good Faith Estimate here. Notice that the Good Faith Estimate items have numbers from 800 through 1302 that correspond to particular types of expenses. The items in the 800 series are those which are most negotiable.
How to Find and Compare Loans Quickly
You can ask for a Good Faith Estimate at any time--the law requires that you get one within three days of application but you can ask for one even while you're still deciding between lenders. And you don't need a property address, just a loan amount and down payment you plan to make. Your Realtor may recommend a lender that he or she prefers to work with. However, it's your deal and your money, not theirs. The bank or credit union where you have your checking and savings accounts are obvious choices as well. But don't be shy about shopping online--it's the most efficient way to get lenders competing to earn your business. The whole point is to be an informed consumer and save yourself as much as possible.
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How to Know that You Are Getting the Best Deal
The best way to really compare offers is to use online mortgage calculators. They are already set up with the fields and formulas you need to arrive at meaning information. For example, you can run your Good Faith Estimate through a closing cost calculator to be sure the numbers are sound or use it to see what negotiating points might do for you.
And you can take the numbers and percentages from the Truth in Lending statement, and run them through a loan comparison calculator to compare the real cost of the loans your are considering. The zero closing cost loan may or may not be the best deal; likewise the lowest interest rate may or may not be the best deal. The simplest way to know for sure is to run the numbers. Then you are in a great position to negotiate, and that includes negotiating closing costs. Which brings us back to the question of why the document signing can be tough.
Closing the Deal
Writing that closing check signifies the finality of committing to the mortgage and often leaves people so (temporarily) broke they wonder if they'll ever be able to afford a dinner out again. But the people who are really worried are those who have not shopped hard for their loan because they wonder if they have left money on the table, money that they are now signing away. Don't be one of them.
Get lenders to compete for your business, use the mortgage calculators, and negotiate. Even if you end up with numbers you began with, you will at least have the peace of mind of knowing you did your due diligence. And you may save yourself a bundle. Or at least enough to celebrate that new house with a dinner out.
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