FDIC Consumer News
Winter 2015
Buying or Refinancing a Home?
Seven do-it-yourself tips for choosing and managing a mortgage
Do you have a mortgage loan or are you in the market for one? With new disclosures and other consumer protection rules, and fluctuations in interest rates, it’s good to review some key strategies to keep costs down for your home loan.
“Since a mortgage may be the largest and most complex financial obligation you will ever enter into, be sure to do your homework before and after you commit to a loan,” said Jonathan Miller, a Deputy Director in the FDIC’s Division of Depositor and Consumer Protection.
Here are tips on keeping borrowing costs low and thinking ahead about issues that might arise.
For Anyone Looking for a Mortgage
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Remember that loan programs can change and lenders’ policies may vary, so research new opportunities before applying for a mortgage. For example, more lenders are beginning to offer borrowers the chance to obtain a mortgage with a smaller down payment. Why is that happening?
Fannie Mae and Freddie Mac will now buy mortgages from lenders that have down payments as low as 3 percent. This change could lead to more lenders lowering their down payment requirements for borrowers. But be careful. Making a smaller down payment typically means you will pay higher monthly mortgage payments and have greater borrowing costs over the long run.
Also, in January 2015, the U.S. Department of Housing and Urban Development (HUD) announced a cut in Federal Housing Administration insurance premiums on mortgages with low down payments. This change will make the FHA’s low down payment loans more affordable.
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Don’t be shy about shopping around for a home loan. The Consumer Financial Protection Bureau (CFPB) and the Federal Housing Finance Agency recently released the results of a survey showing that nearly half of the consumers who took out a mortgage to buy a home in 2013 did not shop around before applying. “Failing to shop means money lost for consumers,” the CFPB said. “Consumers who consider the product offerings of multiple lenders or brokers may save substantial sums.”
As part of the announcement, the CFPB launched an online toolkit called “Owning a Home” (www.consumerfinance.gov/owning-a-home) to help consumers as they shop for a mortgage and make smarter decisions on home loans.
It’s best to compare offers from several different lenders before making a final decision. And keep in mind that you do not have to use a lender suggested by your real estate agent or anyone else involved in your home purchase.
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Understand the pros and cons of adjustable-rate mortgages. Also known as ARMs, these mortgage loans generally start out with low introductory rates for a certain time period. A low rate may be appealing, but be sure you know how much that rate could rise, when, and under what circumstances. By law, the lender must disclose this information to you. When the lender considers your ability to repay the loan, it must take into account possible rate hikes during the first five years of the loan.
“You also shouldn’t assume that you will have the option to refinance an ARM or sell your home to escape higher payments later on,” said Elizabeth Khalil, a Senior Policy Analyst at the FDIC. “Mortgage interest rates have been low over the past few years, but they may be higher in the future, meaning that refinancing your ARM may not significantly lower your payments. This is also a reason to think seriously about a fixed-rate loan, which may be somewhat more expensive but has predictable payments.”
Whether it’s a fixed or adjustable rate, be sure you understand all the terms of any loan you are considering before you decide whether to take it. If you have questions, consider consulting with a HUD-approved housing counseling agency (see contact information at the end of this article) or an attorney.
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Watch for new mortgage disclosures. The CFPB has developed new disclosures that, by law, lenders will be required to use beginning on August 1, 2015. For most new mortgages and refinancings, four previously required disclosures of settlement costs and key loan terms (including the “Good Faith Estimate” provided within three days of applying for a mortgage and the “HUD-1 Settlement Statement” of actual costs at closing) will be replaced by two new forms intended to provide clearer and more useful information to consumers. The CFPB has detailed information about the new disclosures at www.consumerfinance.gov/knowbeforeyouowe.
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Consider how a mortgage could affect you in retirement. Carrying significant mortgage debt can create payment problems for retirees living on a fixed income. Some consumers may even delay retirement due to mortgage debt. “Even if you’re many years from retirement, consider now how long you intend to carry a mortgage, have a plan for paying it off, and be sure that timeframe lines up with your goals for career and retirement,” said Kathleen Keest, also an FDIC Senior Policy Analyst.
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Keep an eye on the servicing of your loan. The entity that collects your payments and performs other duties for your mortgage lender, perhaps including responding to inquiries and initiating foreclosure actions against delinquent borrowers, is referred to as the loan servicer. It may or may not be the same company from which you got your loan, and it may be replaced by another servicer over the life of the loan, perhaps multiple times. By law, you must receive advance notice when the servicing of your loan is transferred to a different company. And under new rules, you cannot be charged a late fee if an overdue payment to the new servicer is received within 60 days after the transfer of duties.
“If your loan servicer changes, carefully review your account to confirm that your payments are being accurately credited,” suggested Senior Policy Analyst Glenn Gimble. “Also by law, prior to closing on your loan you must receive a disclosure about how often the lender transfers servicing. The answer may influence your decision to accept a loan from this lender or to choose a different lender, maybe one that services its own loans.”
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Research the potential risks and benefits of home equity products. A loan secured by a homeowner’s “equity” in a home can be an economical way to borrow money because the interest rate is typically low and, for many people, the interest paid will be tax deductible. Generally, the equity is the current appraised value of a home minus what is owed on the mortgage. “As home values rise in a number of areas, home equity products are again becoming more popular, but it’s important to keep in mind that, just like with a mortgage, your home is at risk of loss if you fail to pay the loan,” cautioned Gimble.
There are two basic types of home equity products. One is a one-time loan for a lump sum, typically with a fixed monthly payment. The other is a home equity line of credit (HELOC), which allows homeowners to borrow money one or more times up to an approved credit limit, usually at a variable interest rate.
Also, some HELOCs have low introductory interest rates that can reset at a higher rate. The federal banking agencies have issued guidance to financial institutions on the importance of early notice to borrowers about impending rate resets and making help available to those facing rate increases that could be difficult to pay. See the Winter 2013-2014 edition of FDIC Consumer News (www.fdic.gov/consumers/consumer/news/cnwin1314/heloc.html) for more on HELOCs and rate resets.
For Current Homeowners
For further information on the issues addressed here and other topics related to mortgages, search for previous articles by topic in FDIC Consumer News at www.fdic.gov/consumernews. Also visit www.mymoney.gov and consumerfinance.gov/mortgage.
If you think you need one-on-one assistance from an independent, reliable source on topics such as buying a home, getting a loan or avoiding foreclosure, consider contacting a HUD-approved housing counseling agency (start at 1-800-569-4287 or www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm) or an attorney.