Closing costs calculator: understanding fees

October 20th, 2010

Closing cost calculators are great for helping you determine how much money you need to have available for your new home loan. What they cannot do is decipher the confusing disclosures you get as part of your mortgage application. In January new disclosures were mandated for the Good Faith Estimate, on top of the Truth-In-Lending Disclosure and other required disclosures. With all of the paperwork, how do you know what is what and who gets what?

Good Faith Estimate 2010

Referred to by many in the industry as the “Goofy 2010″, the Good Faith Estimate, or GFE, is required on all mortgages effective January 1, 2010. When a lender has your name, the address of the property, enough information to obtain a credit report, the property value and the proposed loan amount, he or she is required to provide you with a GFE. The form is a bit confusing and out of sync with other disclosures you will receive.

The GFE has three pages: the first two are completed by the lender and the third page is for you to complete if you wish to compare mortgage offerings from different lenders. Page one of the form informs you how long the quoted interest rate and settlement charges are available to you. At the bottom of page one is Box A which totals the “Adjusted Origination Charges.” These charges must be valid for ten days from the date the GFE is provided to you.

“Origination Charges” are fees paid in conjunction with the loan, with the exception of the appraisal. Points, origination fee, discount points, processing, underwriting, documents etc. are all added up and included in this Box A. Once your loan application is submitted and the rate locked, these fees are locked as well unless there is a material change in the loan.

Below the Origination Charges is Box B which includes “All Other Settlement Services” — a catchall that includes not only settlement services but pro-rated interest, taxes, insurance, fees the seller may or must pay and any money required at closing that is not paid to the lender. This is where you can become very confused. Regardless of whether the seller is paying the fee or you are paying the fee it is included in your total charges, which can be misleading as to what you are being charged for your mortgage.

Initial Fee Worksheet and Uniform Residential Loan Application

Ideally your lender will provide you in conjunction with your GFE an Initial Fee Worksheet that breaks down line by line the charges for your mortgage and transaction and who is paid what. At the bottom of this sheet is a summation of prepaid charges for items such as interest, taxes and insurance and also closing costs, which is everything else. Included in the closing costs are the charges paid by the seller, therefore the disclosure should have a deduction showing closing costs paid by seller as disclosed on the GFE.

The totals on the Initial Fee Worksheet should match the fees on page four of your mortgage application, the Uniform Residential Loan Application, or URLA. Both of these forms, the Initial Fee Worksheet and the URLA will show you the total cash you need to close. Ideally this amount is close to the figures you have been seeing when you use the closing cost calculator in preparation for your new home purchase.

Truth-In-Lending disclosure

Not content to confuse you with the new Good Faith Estimate, the government also requires that you be provided with a Truth-In-Lending, or TIL, disclosure. This form presents you with the Annual Percentage Rate, or APR, for the mortgage for which you are applying. The APR is not the rate your lender quoted you: if you have a no point-no fee loan the APR should match your interest rate, otherwise the APR will be higher.

APR is calculated by deducting transaction charges from the applied-for mortgage amount, not just loan charges but fees for settlement agents, escrow and other fees. Thus if you are applying for a $200,000 mortgage and your fees required to be used for APR calculation total $3,000 then $197,000 is used to calculate your APR. The purpose of this is to allow you to compare the APR between lenders.

Clear as mud?

Confused? Don’t feel bad. Most people have a hard time at first with the numerous and seemingly contradictory disclosures that are required to be provided to you when you apply for a mortgage. If you are shopping for a mortgage lender, do not just shop for the “cheapest” or “best deal” mortgage. Include in your shopping how fees and regulations and disclosures are explained to you. Often times what seems like a “deal” when you are being sold on services may not be such a deal when you sit down at your settlement.

Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years’ experience in the mortgage industry.

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