Beginner's Information: March 2007 Archives

Everybody knows that you want the lowest rate, and everybody knows that you don't want to pay any money you don't have to, in order to get it. However, not everybody makes the connection that it is always a tradeoff between the two. At any given point in time, each home lender has it's own set of tradeoffs in place.



There are two components to the costs of a loan: Closing costs and points. Points have to do with the cost of the money. Closing costs relate to the work that has to be performed in order to get the loan done. These are not junk fees, although junk fees do happen.



Let us consider for a moment the home loan. You want to buy a home for your family, but don't have enough cash. Without somebody willing to loan you the difference, you cannot buy. You check with your family, your friends, your neighbors and they're all tapped out (or say they are). But there's a bank over there willing to loan it if you meet their terms.



The banks are not being altruists, of course. They're making a good chunk of change for doing so. But you would not believe the amount of complaints I hear out sympathetically about how this evil horrible bank is charging all this money and making people jump through all these hoops to get this money ("They want a pay stub! Actually they want two pay stubs! What is the problem with these nazis?"). Fact is that this bank is doing you a favor, risking hundreds of thousands of dollars on you so that you can own a home for your family. They are doing something for you that all of your friends and family were unwilling or unable to do: loan you the money to buy a home. I'd say that puts them pretty high on my "nifty list", not "Nazis", but it's your life. When you think about it, they're doing you a favor by making certain you can afford the payments on the loan (It's more than many agents and many loan officers will do), as well as insuring that if something goes wrong and you can't afford the loan, they'll get most of their money back. Real Estate is not sold on a whim. Quite recently, another agent in my office had a listing of an $800,000 home. The family involved makes about $60,000 a year. Their interest alone was 76% of their gross pay, never mind property taxes and insurance. An unscrupulous agent sold them the house based upon the ability to flip it whenever they wanted, and found them a similar loan agent to get them a negative amortization loan so they've got about fifteen hundred dollars a month being added to their mortgage and they still can't make the payment. But real estate is not like stock; you can't sell it at will. The market cooled just a little bit. They lost their entire investment before they even came to us, and they came to our office to get it sold before worse things happened, and we did everything that could be done, and still nobody wanted to buy it until the price was reduced.



There's a lot of this out there. You would likely be amazed at the loans a competent loan officer can qualify you for (and that if you understood what you were getting into, you'd drag them into the sunlight and run a wooden stake through their hearts before running away, instead of believing them to be your friend). I'd get an extra client a week, at least, if I didn't sit down with the people to find out what they can really afford before I showed them the $800,000 house that's going to get me paid a Huge Pile Of Money, when I really should be telling them about 2 or 3 bedroom condominiums, or even telling them to continue renting. It's hard to get a client enthusiastic about a 900 square foot 2 bedroom condo when someone else is showing them a 5 bedroom 2800 square foot House! With It's Own Yard! No Shared Walls! and telling them they Know Someone Who Can Get The Loan! Well, I can get them the loan, too, if they really want it, but it really doesn't help them if they can't make the payments. The world will catch up to those other agents and loan officers, and I put a certain value on staying in business.



Getting back to the issue of closing costs, there is work that has to be done before you get your loan. The people who do that work are entitled to be paid. You don't work for free. They're not going to work for free. As I have covered elsewhere, realistic closing costs without junk fees are about $3400, and can easily be higher. The bank is not just going to absorb the cost because they're going to make money off the loan.



Each home loan, whether the lender intends to sell it or not, has a value on the secondary market. They also cost the lender a certain amount (they have to pay for all money they lend, whether by borrowing or by opportunity cost). Based upon these two facts, the lender sets a level of discount points or rebate for each rate for each type of loan. When you pay discount points, you are actually paying the lender money in order to buy a rate that you would not otherwise be able to get. When there is a rebate, it means that the lender will pay out money for a loan done on those terms. A rebate can be thought of as a negative discount, and vice versa. Whatever the level it is set at by the lender, there's going to be an additional margin so that the broker or loan officer can get paid, even if the loan officer is an employee of that lender. This margin is not necessarily smaller by going direct to a lender - actually a broker usually has a better margin than that lender's own loan officers. As I say elsewhere, the supermarket banks often have their best rates posted, and I'm usually getting someone a better loan (lower cost/rate tradeoff) with the same lender.



But within a given type of loan, the lender always sets the loan discount higher for the lowest rate. The lower the rate, the higher the discount and the higher the rate the lower the discount. Choose the lowest rate, and pay not only closing costs but the highest discount as well. Whether it's coming out of your checkbook or being added to your mortgage, you are still paying it. Choose a somewhat higher rate, and there will be no discount points, just closing costs. There's a name for this rate where there's no points but no rebate; it's called par. Rates below par involve discount points, rates above par will get you some or all of your closing costs paid by the bank or broker.



Many people will want the lowest rate; after all that has the lowest payment. But it is (or should be) the client's choice, not a choice made for them by the loan officer. It's actually easier to qualify for lower rates, because the payment is lower. However these lower rates can be costly, because the fact is that the median mortgage in this country is about two years, and fewer than 5% of all loans are less than 5 years old. This means there's a 50% chance you've refinanced (or sold and bought a new home) within two years, and over 95% within 5 years. I see no reason for these consumer habits to change. Furthermore, I'm a consumer, and so are you. There are people who bought a place and paid off their 30 year loan and now own the property free and clear, but they are rare these days. Much more common is the person who bought their house in the 1970s, has refinanced ten or twelve or fourteen times, and now owes ten times the original purchase price. More common yet is the person who's on the third, fourth, or fifth house since then. You might be one of the first group, or you might not be, pretend you are, and be hurting only yourself. It's likely to be a costly illusion.



Let's look at three different 30-year fixed rate loans. All of them start from needing $270,000 in loan money. Loan 1 gets a 5.5% rate, but has to pay two points to get it, so his loan balance starts at $270,000 plus $3400 plus two points, or $278,980. He paid $8980 to get his loan. Loan 2 gets a 6% rate at par, and his loan balance starts at $273,400, because he only had to pay $3400 to get the loan. Finally, Loan 3 chooses a 6.5% loan where all closing costs are paid for him by the bank or broker. His loan balance starts at $270,000.



Your first month interest with Loan 1 is $1278.66, and principal paid is 305.36, on a payment of $1584.02. Loan 2 pays $1367.00 interest and $272.17 principal with a loan payment of $1639.17. Loan 3 is going to pay interest of $1462.50, principal of $244.08, and have a total payment of $1706.58. So far, it's looking like Loan 1 is the best of all possible loans, right? But look two years down the line when 50 percent of these people have refinanced or sold:

Loan Interest paid Principal Paid Balance Interest difference Balance difference Net $

Loan 1 $30288.21 $7728.21 $271251.79 $-2130.05 $+4773.36 $-2643.31

Loan 2 $32418.26 $6921.84 $266478.16 $0 $0 $0

Loan 3 $34720.18 $6237.83 $263762.17 $2301.92 $-2715.99 $+414.07

Remember, the original balance was $270,000. Loan 1 has paid $2130 less in interest the Loan 2, while Loan 3 has paid $2301.92 more. Furthermore, Loan 1 has paid down $7728 in principal, while Loan 2 has only paid down $6921 and Loan 3 still less at $6237. It's really looking like Loan 1 was the best choice.



But remember, 50% of all loans have refinanced or sold within two years. When you refinance or sell, the benefits you paid money to get stop. But the costs to get those benefits are sunk on the front end, and you're not getting them back. Look at the balance of Loan 1. The person who chose this still owes $271,251 - $1251 than they did before they chose the loan in the first place. Furthermore, his balance is $4773 higher than loan 2, and even though he paid $2130 less in interest, he's still $2643 worse off. Furthermore, whether he refinances or sells and rolls the proceeds over into a new property, the new loan is going to be for $4773 more money than Loan 2's new loan. Assume everybody got a really fantastic new loan at 5%. Loan 1 is going to have to pay $238 more per year to start with in interest expense for his new loan, simply because his remaining balance on the old loan was higher. Loan 3 is in even better shape than Loan 2. He's paid $2301.92 more in interest, but his balance is $2715.99 lower, for a net benefit over loan 2 of $414, not to mention that his interest costs on his new loan will be almost $136 lower simply because his starting balance is lower.



Now let's look 5 years out, when over 95% of the people will have sold or refinanced.

Loan Interest paid Principal Paid Balance Interest difference balance difference net $

Loan 1 $74007.65 $21033.41 $257946.59 $-5353.23 $+3535.98 $+1817.25

Loan 2 $79360.88 $18989.39 $254410.61 $0 $0 $0

Loan 3 $85144.66 $17250.36 $252749.63 $+5783.79 $-1600.98 $-4122.80

At this point, Loan 1 has saved $5353 in interest relative to Loan 2, while Loan 3 has spent $5783 more. Loan 1 has cut his balance difference to $3535 more than Loan 2, so he looks like he's ahead! Furthermore, Loan 3 is really lagging, having paid $5783 more in interest although the difference in balance is only $1660 to his good.



Well, loan 2 is ahead of loan 3 pretty much permanently at this point. Assuming all three refinance or sell and buy a new property with a 5% loan right now, Loan 3 is only going to get back $83 per year of the $4122.80 he's down relative to Loan 2. Especially considered on a time value of money, that's permanent. But despite Loan 1 being ahead of Loan 2 right now, Loan 2 will get back almost $177 per year. Ten years on, assuming a ver low 5% rate, loan 2 is back to even, and most of us are going to be property holders the rest of our lives. Consider also that 95% of the people who chose loan 1 NEVER got this far - they never broke even in the first place.



The point I'm trying to get across is that money you roll into your balance hangs around a very long time. And you're sinking potentially many thousands of dollars into a bet that most people lose. Yes, if you keep the loan long enough, the lower rates (at least for thirty year fixed rate loans) will pretty much always pay for themselves, several times over in many cases. The other point I'm trying to make is that most people don't keep their loan long enough for the benefits to pay for their costs to get those benefits.



As a final consideration, consider what happens if one year later interest rates are one-half percent lower. I can get Loan 3 the same loan that Loan 2 has for zero cost. He's got the same interest rate as Loan 2, whom I can't help right now, but a lower balance - neither one of his loans cost him anything. And it has happened that the rates dropped down to where I could get someone 5.5% on a thirty year fixed rate loan for zero - lender pays me enough to pay all the closing costs. Net to them, zip. Suppose rates do this again. I call Loan 2 and Loan 3, and now they've both got 5.5 %, but this doesn't help Loan 1. Now Loan 2 has the same as Loan 1, while only adding $3400 to his balance to get it, as opposed to Loan 1 adding nearly $9000, and Loan 3 has the same loan without adding a dime to his balance. Who's in the best position?



Caveat Emptor



mortgage real estate consumer education

I keep talking with people who don't understand that a higher interest rate on a refinance can result in a lower payment. In fact, they don't understand why refinancing tends to lower the payment at all.



Before I go any further, I need to reiterate my standard warning that you should Never Choose A Loan (or a House) Based Upon Payment. There are all kinds of games lenders and loan officers can play to manipulate your apparent payment.



Now, as to why refinancing tends to lower the payment: It's actually very simple: Because you are extending the period of the loan.



Let's say you took out a home loan five years ago for $300,000 at 6% on a thirty year fixed rate basis. Your payment has been $1798.66, and assuming you've just been going along and making minimum payments, you have paid your principal down to $279,163. Even adding $3500 in closing costs into your loan balance, if you refinance again at exactly the same rate, your payment will drop to $1611.72. If you divide the cost by the payment savings, it looks like you break even in less than two years!



However, that isn't a valid calculation. What you're doing is taking a loan with a remaining period of 25 years, adding $3500, and swapping it for a brand new 30 year loan, serving no purpose except to extend the period for which you have borrowed the money by 5 years. Your monthly cost of interest actually goes up, because you owe $3500 more on the new loan at the same rate, not to mention that $3500 in costs! Your total of remaining payments goes up by over $40,000! Even if you keep making the same payments ($1798.66), you have added nine months to your loan! This also leaves aside all kinds of games that can be played with payment in the short term.



Never choose a loan based upon payment. If you will remember this one rule, you will save yourself from more than fifty percent of the traps out there. Loan officers and real estate agents and everything else tend to sell by payment. You do need to be able to afford the payment, and I mean not just now but what it's going to go to in five years. With that said, however, remember the fact that payment can be extended out practically indefinitely. Used to be with credit cards taking 26 years to pay off by minimum payments, you could be paying off a restaurant meal 25 years after the crop it was processed into fertilizer for was harvested, costing you five to ten times the original cost of the meal. The same principle applies for real estate loans. Unless it's a cash out loan, or a higher interest rate, you're likely to cut the payment just based upon the fact that you are extending the term.



I have said this before, but just because they quote you a lower payment to get you to sign up for the loan doesn't mean it'll be that low when you actually go to sign documents. In a case like this, it is very possible for them to conveniently "forget" to tell you about prepaid interest, impound accounts, third party and junk fees, and origination points, all of which will add to the balance on your loan and have the effect of raising the payment reflected upon the final documents. So you sign up expecting your payment to drop by $180 plus, and at final signing, you've paid $10,000 more than they told you about and you are only lowering your payment by $80, but it's all done and it would be wasted effort if you don't sign these final documents, so you do - blissfully unaware that you have actually done something worse than wasting that $13,000 you added to your balance to get your loan done. In fact, you've just added about $75,000 to the actual costs of paying off your property! And the loan company got paid to talk you into this!



If you're not sure if you should refinance, ask yourself "What would happen if I keep making the same payments as now? Would I be done sooner, or would it take longer?" It's hardly a foolproof question, but taking a financial calculator to closing, and plugging the new balance and interest rate reflected on the new loan documents together with your old payment, and seeing whether it results in a quicker payoff, is certainly one good check upon the ability of slick operators to sell you a bill of goods. This doesn't work for cash out or consolidation loan refinances, obviously, but for "rate/term", where the attraction is is simply a lower payment or lower interest rate, it's certainly one question worthy of asking. An answer that's less than your current total doesn't mean it's a smart loan to be doing, but a longer payoff is a pretty universal indicator that it's not.



Refinancing to lower your rate can certainly be a major benefit to you, as I've said before, but you need to crank the numbers to see if it actually helps your situation, as opposed to stretching out your loan term to make it seem like your costs have gone down, when in fact they have done no such thing. With thousands and tens of thousands of dollars on the line, it might even be smart to pay a disinterested expert to run the calculations. Let's say you pay $200 for an hour of their time, which saves you from making that $75,000 mistake I describe above. The downside is you wrote a check for $200. The upside is that you don't end up writing checks for $75,000 more than you needed to. If you understand finance yourself, the computations aren't difficult, and that $40 financial calculator will save you as often as you ask it questions, although you might have to feed it a $2 battery occasionally. If you aren't certain how to do the calculations, or what calculations you need to do, by all means give your accountant a call.



Caveat Emptor

One of the things that always seems to be aiming to confuse mortgage consumers is advertising based upon whether the loan is fixed rate, and for how long.



First, I need to acquaint you with two concepts: amortization and term. The term of the loan is nothing more than how long the loan lasts. How many months or years from the time the documents are signed until it is done. At the end of the term, the loan is over. In some cases, the payoff schedule (or amortization) will not pay the loan off in this amount of time, leaving you with a balance which you must pay off at that time. When this happens, it is known as a "balloon payment."



Amortization is the payoff schedule. In other words, if the term was long enough (it isn't always) how long would it take you to pay the loan off with these payments?



There are four basic types of loan rate determination out there. The first is the "true" fixed rate loan, the second is the "true" ARM, or Adjustable Rate Mortgage, the third is the hybrid, which starts out fixed but switches to adjustable, and finally, the Balloon.



"True" Fixed rate loans have the interest rate fixed for the entire life of the loan. Loan term of a true fixed rate loan is always the same as amortization period. Until you pay it off or refinance, the rate never changes. They are most commonly fixed for thirty years, but are fairly common in fifteen year variety, and widely available in 25, 20, and even 10 year variants, and the 40 year loan appears to be making a comeback. The shorter the period, the lower the rate will be at the same time, but the higher the payment, as you have to get the entire principal paid off in a much shorter period of time. I seem to always use a $270,000 loan amount, so let us consider that. Making and holding a few background constraints constant, a few days ago from a random lender a thirty year fixed rate loan was 6.25% at par (no points, no rebate). The 20 was 6.125, the 15 year 5.75. The 15 sounds like a better deal, right? But where the payment on the 30 year fixed rate loan is $1662.43, the payment on the 20 year fixed rate loan is $1953.88, and the payment on the 15 year loan is $2242.11 So you may not be able to afford the payment on the 15 year loan. (This particular lender doesn't have 25 or 10 year loans.)



Some thirty year fixed rate loans are available with interest only for a certain period, usually five years, and then they amortize over the last 25 years of the period. Some people do this because they expect a raise in their income over the next few years, and some just do it for cash flow reasons, planning to sell or refinance before the end of the fifth year. Using the example in the preceding paragraph, this would have you making a monthly payment of $1406.25 for the first five years, then $1781.11 for the last twenty-five.



If there is a pre-payment penalty on a thirty year fixed rate loan, it is typically in effect for five years. Considering that over 50% of everybody will refinance or sell within two years, and over 95 percent within five, this is an awfully long time for a pre-payment penalty to be in effect. Practically everyone with a five year pre-payment penalty is going to end up paying it.



"True" Adjustable Rate Mortgages, or ARM loans, are adjustable from day one. The interest rate is, from the time the loan starts, always based upon an underlying rate or index, plus a specified margin. There is no fixed period whatsoever on a "true" ARM. This makes them in general hard to sell, because people cannot plan their mortgage payments, and except for the Negative Amortization loan (also known as "Option ARM" or "Pick a Pay") these loans are very rare.



(If someone offers you a rate that appears way below market rates, like 1%, they are offering you a Negative Amortization loan. The 1% is a "nominal" or "in name only" rate, the real rate on these is month to month variable from the start based upon an underlying index, making this a "true" ARM.)



If there is a prepayment penalty on a "true" ARM, it must therefore be for a longer period than the fixed period, which is zero. You are taking a risk that you will have to pay a pre-payment penalty because the rate did something that you did not anticipate, and you may not be able to afford the payments if the rates change but the penalty is still in effect.



Rate adjustments on ARMs can be monthly, quarterly, biannually, or annually, with monthly being most common, including for every Negative Amortization loan I've ever seen.



The third category is the hybrid loan. Hybrids are often called Adjustable Rate Mortgages, and most loan officers are really talking about hybrids when they discuss ARMs. You should ask if uncertain, but in general, everybody from the lender on down calls them ARMs (I myself almost always call them ARMs), but when you get down to the technical details, they are a hybrid. Hybrids start out fixed rate for a given period, then become adjustable. The overall term of the loan is usually thirty years, but the forty is becoming more common again for subprime. Unlike Balloons, if you like what they adjust to, you are welcome to keep hybrids for as long as they fit your needs. There is no requirement to refinance a hybrid after the fixed period.



Hybrids are widely available with 2, 3, 5, 7 and 10 year initial fixed rate periods, and they may also be available "interest only" for the period of fixed rate at a slightly higher interest rate. Two years fixed is typically a subprime loan, and while five and seven and ten year fixed periods are available from some subprime lenders, they are more commonly "A paper" loans. Three is common both subprime and "A paper". Once they begin adjusting, "A paper" typically (not always!) adjusts once per year, while every hybrid subprime I've ever seen adjusts every six months.



WARNING: I often see hybrid loans advertised and quoted as "fixed" rate loans, and you find the fact that they are hybrid ARMs buried in the fine print somewhere. Yes, they are "fixed rate" for X number of years. But this is fundamentally dishonest advertising. This is one of the reasons I keep saying that any time you see the words "Fixed rate," you should immediately ask the question "How long is the rate fixed for?" Please go ahead and ask, for your own protection. Ethical loan officers know that people get sold a bill of goods on this point every day, and so they're not offended. And you don't want to do business with the unethical ones, right?



Now, I am a huge fan of hybrid loans myself. I will go so far as to say that I will never have a thirty year fixed rate loan on my own home (unless the rates do something economically unprecedented, anyway). You get a lower interest rate because you're not paying for an insurance policy that the rate won't change for thirty years, without jacking up the minimum payment to something you may not be able to afford. Most people voluntarily abandon their thirty year interest rate insurance policy (also known as "Thirty year fixed rate loan") within about two years anyway. So why would I want to spend the money for that policy in the first place, when I'm likely to only use two or three or five of those years?



Nonetheless, particularly with subprime loans, you need to be careful. I have seen precisely one subprime loan in my life without a pre-payment penalty, and I've seen a lot of loans (at least thousands, maybe tens of thousands - I wasn't counting at the time - where your average real estate agent has seen maybe a few dozen, and your average bank loan officer maybe a few hundred). Many loan providers, even "A Paper" loan providers will stick you with a three or five year pre-payment penalty on a two year fixed rate loan. Why? Because it increases their commission. So if you take one of these loans, you will have a period of time when you don't know what the rate will be doing, but if you refinance or sell during that period, you will have to pay your lender several thousand extra dollars. This puts many people on the horns of a dilemma - whether to keep making payments they can't afford, or pay the pre-payment penalty. The bank wins either way.



One final point about hybrid loans. Once they adjust, they all adjust to the same rate plus the same margin. Unless you need the lower payment to qualify for the loan, it makes no sense to pay three points to buy the rate down on a five year hybrid ARM (or anything else) when it takes eight to ten years to recover the cost of your points. Why? Because you'll never get the money back! When the rate adjusts on the loan you paid three points for (IF you keep it that long), it goes to the same rate as the loan where they paid all of your closing costs. Judging by the evidence, most people don't understand this.



The final category of loan that I'm going to discuss here is the Balloon. This is a loan where the amortization is longer than the term. So if the amortization is thirty years, you make payments "as if" it were a thirty year loan, but since the actual term of the loan is shorter, you will have to sell, refinance, or somehow make extra payments before the loan term expires. The thing I don't understand is that Balloon rates are typically higher than the comparable hybrid ARM, despite the fact that you either have to come up with a large chunk of cash at the end or sell or refinance prior to that. This makes them a less attractive loan. Furthermore, pre-payment penalties are every bit as common. Balloons are widely available in five and seven year terms with thirty year amortization, and I've seen three and ten, as well. Probably the most common "balloon" loan, though, is for those who do a second fixed rate mortgage, where the best loan available is usually a thirty year amortization with a fifteen year balloon. Since over half of everybody has refinanced within two years anyway, and 95 percent within five, the fact that it's got a fifteen year balloon payment just doesn't affect a whole lot of people.



WARNING!: I have seen Balloon Loans mis-advertised in the same way as I talked about with hybrid ARMS a few paragraphs ago. I regard this as even more misleading than advertising hybrid's as fixed. Unfortunately, many states do not have good regulations on rate advertising, and in many others, enforcement is lax. When a loan provider advertises, the entire game is to get you to call, and then control what you see and what you learn from that point on. Your best protection from this is to talk to other loan providers. Shop around, compare offers, tell them all about each others' offers. If something is not real, or it has a nasty gotcha!, if you talk to enough people, somebody will likely tell you about it. If you only talk to one person, you're at their mercy. Even if you somehow ask the right question to discover the gotcha!, the people who do this have long practice in distracting you, or answering another question that somehow seems similar enough that you let it go.



Caveat Emptor

I have mentioned this form several times in the past as the only form in the entire mortgage process which is actually required to be accurate. Department of Housing and Urban Development form 1, the so-called HUD 1 form, is required to be filed and correct for every real estate transaction. Whoever your provider is, this is the one and only form they cannot play games with. This article is goes over the form line by line, referencing previous entries.



The top section has to do with identifying information on your transaction. Your name, the name of the other party to the transaction, escrow numbers, name and address of lender, date of settlement.



The meat starts with line 100, the Summary of Borrower's Transaction, and line 100 the section on Gross amount due from borrower.



101 Contract Sales Price: Should be the same as on your purchase contract.



102. Personal property: Say you agree to pay $500 extra if they leave the sofa. Here's where that goes.



103. Settlement charges to borrower (line 1400) adds the costs of the transaction to the total.



106 and 107 are repayments for any taxes the seller may already have paid as of the date of settlement, but are not their responsibility as the time period covered includes some time after the effective date of sale.



120. Adds all the lines up to this together. The rest are simply blank lines that may or may not be a factor in your particular transaction. If they are a factor, it should be because you specifically agreed to pay them!



The 200 section is about stuff that is paid for, or on behalf of the borrower, or you have simply already paid.



201. Deposit or earnest money: The deposit you made, either with escrow (purchase) or the bank (on a refinance) to persuade them that this was a good transaction.



202. Principal amount of new loan(s): Check and make sure this matches your new Note. In some states, they may be able to combine the amounts of two loans here, but they shouldn't.



203. Existing loans taken subject to: If you're assuming a loan or something similar, it goes here.



204. Second mortgage loan: Compare against your new second mortgage amount.



205 and 206 are blank lines for things that may not be a factor in every transaction.



210 and 211 are for city and county taxes that have not yet been paid by the seller, but the cost has been incurred. Let's say today is September 1, and we're in California, where the property taxes run July 1 to June 30. On September 1, the seller owes two months of property taxes, but those taxes haven't been paid, and won't be due until November 1. So there will be a credit here from the seller to the buyer for two months of property taxes, which the seller is responsible for until the effective date of sale, but the buyer will have to pay on November 1. 212 to 219 are blank lines unless something special is relevant to your transaction.



220 is total paid by/for borrower: This is a total of everything paid by you or on your behalf.



300 Section tells if you are due money at settlement or have to come up with some. 301 is transferred from line 120, 302 from line 220. If 302 is larger, you get cash back. If 301 is larger, you have to provide the check in otder to close.



The second column is a summary of the seller's transaction, if there is a seller and it's not just a refinance.



Section 400 is about what's due to the seller, starting with 401 Contract Sales Price, then 402 which is a mirror or 102, then 403, Impound Credit, which is rarely used, as it is pretty much applicable to loans being assumed.



406 and 407 are mirrors for 106 and 107, as are 408 to 418 mirrors of the 108 to 118 section. 420, Gross amount due to seller, is a summation of all of these.



The 500 section has to do with stuff the seller is paying other people.



501 is excess deposit, 502 is settlement charges to seller, 503 is loans that are bing assumed.



504 and 505 are mortgage payoffs being made, 507 through 509 are blank spaces for things not applicable to every transaction.



510 and 511 are mirrors of 210 and 211, as 512 through 519 mirror 212 through 219, blank lines not applicable to every transaction.



Section 600 is analogous to but not mirroring section 300. Line 601 is line 420 brought down. Line 602 is line 520 brought down. The difference is line 603 cash to seller (This can be line 603 cash from seller in the case of a so-called "short sale")



All of this is good and necessary information, but The Really Good Stuff™ is all on page 2. The lines at the right list who is paying it (buyer or seller)



Section 700: division of commission



Line 701 is compensation to the listing broker, line 702 is to the selling broker (i.e. the buyer's broker, the people who "sold" the property), and line 703 total commission paid at settlement. I've never seen this paid by buyer, it's always been paid by seller.



Section 800 is items payable in connection with the loan itself. This doesn't mean that these are all the loan-related charges - far from it.



Line 801 and 802 are dollar amounts of points. If these aren't zero, divide them by the loan amount to make certain they are the numbers agreed upon.



Lines 800 through 1317 are linked on a 1:1 basis with the appropriate lines on the Mortgage Loan Disclosure Statement. In an ideal world, the total of these should be exactly what was indicated on the Mortgage Loan Disclosure Statement. There are some few items that are not under the loan officer's control (again, see the article for which are and are not). A good rule is that if it isn't on the Mortgage Loan Disclosure Statement in one form or another, it shouldn't be here. Compare it to the Mortgage Loan Disclosure Statement to find discrepancies. Other than things like prepaid interest, which the loan officer does not control but should have a pretty accurate estimate of, the most difference there should be between the two documents is one big fee gets broken down into little fees. But if you're told, for example, that the $795 amalgamation of lenders fees was broken up into A, B, and C, make sure that A+B+C=$795, and do not allow additional fees to be lumped in. Grab a piece of scrap paper and take notes. Make certain these numbers jibe. It is easy to hide thousands of dollars in unsuspecting fees to clients in this page if you, the client, are not careful.



Line 1400 is a summation of these lines.



Once again, look hard at the numbers on these two pieces of paper. It is the only honest accounting many people get of the transaction, and the fact that it comes at the end of the transaction makes hiding all kinds of things easy. You, the client, are tired of the whole process and want it to be over, a fact which many loan officers and loan providers rely upon. Put your guard up for a few more minutes, long enough to be certain what you sign for here matches what you signed up for back at the start of the process.



Caveat Emptor.



mortgage real estate home education

The Truth-In-Lending is a form that can or does provide some useful information, but the useful information it provides is both smaller than most people think, and not in the numbers everybody looks at.



The first thing to be aware of is right below the title. "This is neither a contract nor a commitment to lend." They are telling you right there that this is an estimate. It may or may not be an accurate estimate, but most often it isn't, since it is based upon the Mortgage Loan Disclosure Statement, with all of the games that lenders play with those. It's no better than the MLDS form. Remember, Garbage In, Garbage Out. How accurate the MLDS is depends upon the loan officer and the provider they work for. Again, the relationship between this form at the beginning when you apply for the loan and the loan that is actually delivered with the final documents can be extremely tenuous.



The APR in the very first box is the result of an attempt by Congress to compress what is fundamentally at least a two-dimensional number into one linear measurement. It is intended to help give you a direct, one number measurement of the effective interest rate, given the expenses. But, in order to this it has to make some assumptions



The first of these is that you're never going to sell. Back in the early 1970s with stable secure jobs for a large portion of the populace not only in government but in private industry as well, and people living their whole lives in their first house, this was a reasonable assumption. No longer. The median time for ownership duration is about nine and a half years.



The second of those is that you're not going to refinance. This also was not an unreasonable assumption back in the early 1970's. Our habits as a society have changed since then. The fact is that the median age of mortgages (half older, half younger) is currently about two years. Only something like 4 percent of all mortgages are older than 5 years. I'll have other implications of these facts later, in other essays.



But by making this assumption, that you're never going to sell and never going to refinance (again, for the fifth time) and just make that minimum payment every month for thirty years, it allows the illusion that you're going to spread those costs out over thirty years, when the appropriate time frame is much shorter. This is a dangerous illusion. To give a specific example, because it means that, when measured by APR, a 5.5% loan with closing costs plus two points looks like a better loan than a 6 % loan with closing costs but no points. In fact, it is quite likely that the 6% loan is a better idea, and a 6.5% loan where the lender pays your all of your closing costs for you may be better yet.



Let's go through the calculation involved. Assume they're both thirty-year fixed rate loans, so you'll actually keep getting benefits as long as you keep the loan. Assume the base loan we're looking at is $450,000, the same figure I've used elsewhere. This can be either an existing loan, or a purchase where you need $450,000 beyond your down payment to cover purchase price and costs of buying.



As we computed in looking at the Good Faith Estimate, the closing costs of doing this loan are somewhere in the neighborhood of $3400 or so. But "third party" costs, such as escrow and title, are excluded from APR calculation, so we're going to deduct about half of that, or $1700, from them when we calculate APR. I'm also going to assume that you actually pay all of your "prepaid" and "reserve" items out of pocket, which keeps things simple. Your actual loan amount in the case of the 5.5% loan with two points is $462,650, and your monthly payment is $2626.89. Your actual loan amount in the case of the 6% loan is $453,400, and your monthly payment $2718.36. The third loan has a payment of $2844.31 on a balance of $450,000 even. The APRs (a complex calculation) work out to 5.685, 6.035, and 6.500 percent, respectively. Quick Side point: Loan 1 has a difference between the stated rate of less than .2 percent, despite the fact it has two full points on it as well as normal closing costs. So when you see on where the difference is more than that, it measn they're adding even more in points and fees, and that's just what they tell you to get you to sign up. Returning to the main point, looks like the Loan 1 is a better bargain, right?



Your actual interest expense the first month is $2120.48 the first month for the first loan, $2267.00 for the second loan. This is a difference of $88.34, and this number is actually going to increase for the first several years of the loan. The rest of the money is a principal payment. Equity. Money you don't owe anymore. The principal paid the first month on the first loan is $506.41; on the second is $451.36, a difference of $55.05 the first month in the first loan's favor. For the third loan $2437.50 represents interest and only $406.81 is principal. This is really looking like you make the right choice with 5.5%, correct?



But let's look at two years from now - about the age of the median mortgage. I'm going to use the loan in the middle as baseline.

Loan # Interest paid Principal paid Remaining balance Diff in int pd Diff in bal Net $ to you

Loan 1 50,228.84 $12,816.17 $449,833.83 $-3532.83 $7912.78 $-4379.95

Loan 2 $53,761.67 $11,479.02 $441,920.98 - - -

Loan 3 $57,866.96 $10,396.38 $439,603.61 $4105.29 $-2317.37 $-1787.59

Loan 1 has paid less in interest, and more in principal than Loan 2. Looks great, right? But they also paid $9250 more for the loan, or which $7912.78 remains on their balance. Remember, fifty percent of the people have sold or refinanced at this point. When you sell or refinance, the benefits for the lower rate stop. But the cost is sunk. You paid it in full two years ago. And at this point if you sell this home, you will actually have $7912.78 less in your pocket than in if you had taken the 6% loan. This is somewhat compensated for by the fact that you spent $3532.83 less in interest expense. But you're still $4379.95 down as compared to the 6%, and there's no way around that. Meanwhile, the 6% loan has more than paid for itself (only had a quarter the cost of the 5.5% loan) as opposed to the 6.5% loan by this point in time.



And if you refinance, it gets even worse. You're now paying interest on the $7912.78 in higher balance for the rest of the time you're got your home. Let's say the rate is 5% now because you got an even better deal. This means $395.64 per year, $32.97 per month extra that you're going to pay for as long as you have that loan, all for benefits that you don't get anymore and never paid for their costs in the first place. This is truly the gift that keeps on giving, isn't it?



Now let's look 5 years out, when over 95% of the people will have sold or refinanced.

Loan # Interest paid Principal paid Remaining balance Diff in int pd Diff in bal Net $ to you

Loan 1 $122,731.53 $34,881.02 $427,768.98 $-8878.65 $5860.53 $3018.12

Loan 2 $131,610.18 $31,491.54 $421,908.45 - - -

Loan 3 $141,907.77 $28,750.60 $421,249.40 $10,297.59 $659.05 $-9638.54

At this point for loan 1, you have saved in interest and paid down more in principal, right? Yes, but you paid more for the first loan than you would have for the second, and you still owe $5860.53 of this difference. If you sell, you will get $5860.53 less to put in your pocket, although that will be more than balanced out by the interest you saved. Net profit to you of choosing the first loan: $3018.12, neglecting tax treatment. Boy did you make the right choice, right? But remember that over ninety five percent of everyone who made the same choice you did never made it to this point. Furthermore, if you're like most people and you intend to buy some other property where the transaction includes a loan, that loan will have a starting balance $5860.53 higher to start with than if you'd chosen loan number 2 in the first place. Assume you got a great rate on your new home: 5% even. This means, even if the money doesn't cost you anything in points, that you're now paying $293.03 per year in interest that you wouldn't be paying if you'd simply chosen Loan 2 in the first place. Assuming you intend to own property for the rest of your life, in a little over ten years your gain is gone.



On the other hand, you are doing safely doing better with loan 2 than 3 at this point. The difference in interest you've paid has more than made up for the difference in starting balance. Whether you refinance or sell, it's going to be difficult to make up $9638.54 with the interest based upon 659.05. Assuming 5%, this is $32.95 per year, which means it takes over 300 years to recover, and I don't know anyone seriously planning to live that long, even discounting the time value of money.



Now, if you get a great deal and refinance instead of selling, that extra $5860.53 that you still owe on that mortgage is still there, and will be for as long as you own that home. Assume you got a really great deal of 5%. This means $293.03 per year of extra interest expense - just from the fact that your balance is higher because of sunk costs to pay for benefits that have stopped. Assume you keep your home another five years, so altogether you've had it ten years since the initial loan. This has cut your gain to $1552.97.



This happens all the time. It is not uncommon for me to talk with people who bought their homes in the 1970s, have refinanced ten or twelve times, and now owe more than ten times their original purchase price, a good portion of which is directly attributable to unrecovered closing costs of the refinances. Here's the point: closing costs and points stick around, sometimes a long time after the benefits you got from them are gone, and people refinance or more often than most people admit. The only loan that CAN be ahead from day one is the true zero cost to the consumer. Everything else will pay for itself eventually, and more than pay for itself if you hang onto it long enough, but you're sinking a significant amount of money in the bet upfront, money which is going to be around in your balance a long time. Furthermore, people don't hang onto these loans as long as they think they will, and very few people hang onto them long enough to see profits from high closing cost loans. Finally, the rate at which a zero cost loan can be done varies from day to day, and by quite a lot over time. Let's say six months from now I can do a 6% loan no cost. It costs you zero, and now if you're loan 3, you've got the same loan at a lower balance than the guy who chose the 6% loan 2 above, whom I can't necessarily help right now.



Then three years down the line, rates really drop, and I can do 5.5% for no cost. A call to both loan 2 and loan 3 nets borrowers who are eager to cut their rate for zero cost, but I still may not have anything that helps 1 in the sense of being worth the cost of doing it. Now loan 1, loan 2, and loan 3 all have the same rate, but loan 3 owes the least amount of money, therefore has the lowest payment, and has the most equity in their home.



Here's another dirty little not very secret, but rarely publicly acknowledged, fact: People don't always refinance into a lower rate when they refinance. If you've been a homeowner 15 years or so, chances are reasonable that you've done it - possibly more than once. Don't worry, I'm not going to pillory you in public over it, but if you won't admit it to yourself then there's not a lot that can be done for you. People have various reasons for refinancing into higher rates, some of them reasonable, some of them relating to necessity, and some quite frivolous. But you'd be amazed at how often people looking to refinance expect me to believe stories that numbers show to be obvious fiction about how often they've refinanced a property. This is math, and if the numbers tell me you've been making payments on this loan for two years when you tell me five, I'll bet millions to milliamps that if I go check the public records that are maintained on every piece of real property in the country I'll find that Trust Deed recorded two years ago. Now, it's okay to tell some lies of certain kinds to your loan officer, and assuming that any prepayment penalty has expired, this is probably one of them. No harm, no foul. What a typical loan officer cares about is getting paid, and if you're withholding or correct information doesn't make a difference to that, there's been no harm done. A good loan officer will add, "Putting the client into a better position" to that first, paramount concern, and if the information you withheld would have resulted in a different answer to this question, you have only yourself to blame. (Looking for altruists in business is both pointless and hazardous to your financial health. Businesspersons donate huge amounts of time and money and energy to charities or other works for the public good. But we're at work to Make Money. I am very good at what I do and getting better because I want to Make More Money, and mistakes do the opposite of Make More Money). But you need to be completely honest with that wonderful person you see in the mirror every day who follows you around twenty-four hours every day, shares in all of your triumphs and joys, and has to deal with all of your mistakes for the rest of your life. Otherwise you're going to waste a lot of money on mortgages making the same mistakes over and over again.



Getting back to the actual Truth-In-Lending form, finance charge assumes you keep the loan the full term, as I have explained. Amount financed is subject to the same limitations as the Good Faith Estimate, and in fact assumes that the Good Faith Estimate is honest and accurate. So is the Finance charge. Neither of these, nor the Total of Payments, which is simply the sum of these two, is any more valid than the Good Faith Estimate this form is based upon. Do NOT use the Truth-In-Lending as a way to compare loans, numbers-wise. Many people do precisely this because it's such a simple looking, easy to understand form. But if it's based upon a Mortgage Loan Disclosure Statement that's not accurate, it means nothing. Zip. Nada. Garbage In, Garbage Out.



Nope, the minimal information provided by this form is in the details that start about halfway down.



Demand Feature: If checked, this means the lender can require that you repay the loan in full, with a certain number of days (usually 30) notice. It can also mean there's a balloon on the loan.



Variable Rate Feature: if checked, this means that at some point, if you keep the loan long enough, become a variable rate loan. I've seen loans that went as long as ten years before a variable rate kicked in, or it can be right away.



Credit Life and Credit Disability are two products that I would generally recommend against unless it's the only life or disability insurance you can get. Some states do not permit them to be a requirement of the loan - and in those cases where the lender would otherwise require one or both, you won't get the loan as a result. (On the other hand, without these state prohibitions, many lenders would require them much more often, costing consumers in the aggregate billions. Just like everything else in mortgages, it's a tradeoff with winners and losers no matter what you choose.) Both of these products typically pay any benefits directly to the lender, when you want them to come to you or your family. Buying your own life insurance or disability insurance is typically a much better idea.



Property and Flood Insurance The lender can and will require you to maintain proper insurance on the property as a condition of your loan. In California, they cannot require this be for the full amount of the loan, but they can and will require you to maintain coverage for the amount of full replacement costs - what it would take to rebuild your property as it is from the ground up. Many lenders delegate the responsibility for making sure this is done on their behalf to big administrative operations that cover the whole country, and they are ignorant of individual state law even for such major states as California. Be polite, but firm, when they tell you they are looking for coverage in the full amount of the loan. Flood insurance is a separate policy that can also be required if the property is on a flood map. The lender can either demand your loan in full immediately or purchase insurance on your behalf and force you to pay the bill if you fail to show them continuing proof of adequate coverage. FYI: by Federal Law, flood insurance coverage doesn't kick in for 30 days after you pay the premium.



SECURITY: The first box should be checked for purchases, the second for refinances. In rare cases I do see somebody taking out a loan on a home that is free and clear to get a better rate than they would on a new property they're buying, because they'll get a better rate that way. In this case, the second box should be checked.



Filing Fees are for filing the papers with the county recorder, and should be the same as listed on the MLDS



Late Charge basically discloses what your penalty for any late payments will be. It is expressed as a percentage of your normal monthly payment.



Prepayment penalty: Should tell you honestly whether there will be a prepayment penalty on the loan, but often doesn't. Says nothing about the duration of it. Forget the second line. All of the costs to get you the loan are sunk and nonrefundable from the time you sign the papers. All of the interest that you pay as it is due is gone forever. You'll never see it again. They earned it. They're not going to give it back. I've never heard of a loan where in the initial contract the borrower was promised a rebate of part of those costs if they paid off early. Banks did make a lot of offers to discount loans if you paid them off in the late seventies and early eighties, but these were offers made at a later time, long after loan papers were signed, by the banks because they were losing their shirts buying money at 14% or so when it was already loaned several years earlier to customers at 6%. It wasn't a part of the contract in the first place.



Assumption: This means that if you sell the property, the buyer can keep your loan in effect. The VA loan is the only one out there that is generally assumable by the buyer if you sell, but there are some other loans that are assumable as well. It's not usually a good idea to let a buyer assume the loan, but there may be no alternative. The reason: You can still be liable for these if you do allow them to be assumed.



Then there's a line where there are two final square boxes to check, where "* means an estimate" and "all dates and numerical disclosures except the late payment disclosures are estimates. Expect the second box to be checked. It's all based upon the Mortgage Loan Disclosure Statement, which is nothing but an estimate, and in most cases is intentionally a drastic underestimate. If they're stretching the truth on that form, the numbers on the Truth In Lending are going to be similarly distorted. And if it's not checked, that's "an inadvertent oversight" and unlikely to be prosecuted. Which is as it should be - unless there's a pattern of it, which is the case with all too many loan providers.



Caveat Emptor

(Continued from Part I)



Below the "Estimated Closing Costs" line, there are three more sections. The first is "Items required by lender to be paid in advance." These are not negotiable - they are what they are, and except for mortgage insurance or PMI, correct accounting should be the same no matter who the loan provider is. Of course that doesn't stop many providers from playing games to make it look like their loan is cheaper. Sometimes the items in this segment or the one below it may not be exactly knowable in advance, but many lenders make intentionally small misrepresentations.



"901 Interest for (blank) days at $(blank) per day." This is a good example of a fee that isn't exactly knowable in advance. On a refinance, until the current lender comes back with a payoff demand (which are usually in the form of $X, plus $ABC.DE interest per day after Date 1, invalid after Date 2), all I can do is estimate. It should be a pretty accurate estimate if I have last month's statement. On either a purchase or refinance, when the lender's loan funder sends to the funds for the new loan, they will tell how much prepaid interest the escrow company needs to collect, which is also in a comparable form. The same thing applies to that figure as well. Until the actual quote is in our hands, all we can do is estimate closely.



The reason for line item 901 is simple. Unlike rent, mortgage interest and payments are made in arrears. They can't charge you interest until they earn it. You could win the lottery, get an inheritance, or receive some other large windfall, and decide to pay your loan off (or down). You could also sell your house or refinance it. This would affect the amount of interest the current lender is owed. So you borrow the money at the beginning of the month, it accrues interest all month long, and you make a payment at the end of the month. So when you buy a house on March 15th, the lender is going to require you to pay interest on the loan from March 15th through the 31st in advance. This gives them a chance for their servicing department to set everything up. On April first, the loan will start accruing interest normally, and your first regular payment will be due after the end of April - May first to be precise.



When you refinance on March 15, you must pay the old lender for interest due between March 1st and March 15th, which has accrued since the last time you paid them on March 1st. You must also pay the new lender for the interest due from March 16th through March 31st. Between the old lender and the new lender, this figure can never be anything but the whole entire month worth of interest, and there will always be one or two days of overlap between the time they get the funds from the new lender and the time they are disbursed to the old lender. Around the beginning of the month, it can be two months interest if the old lender hasn't received your payment yet or hasn't credited it yet. You borrowed the money from them for the time in question. They are entitled to be paid. They're not going to let you keep it out of the goodness of their hearts, especially not when you're leaving them.



As you can see from the above, you never actually skip a month (or two) in your payments when you buy or refinance your home. It is not going to happen. What is happening is that your new lender is paying for this interest out of their pocket and adding it to the loan balance where you will be paying interest on it for a very long time. Pretty sneaky, huh? Well, you do have the option of making a payment to cover this line, or any other line on this whole form. Many providers will not tell you this because they can't run up the loan amount (and their compensation) if you make these payments. If you decide to make the payment to cover this line, it will be the interest portion of your normal monthly payment, prorated between the two loans in the case of a refinance, or prorated on that portion of the month you have a loan in the case of a purchase. In most cases, I tell people to think of it as their normal monthly payment paid early, because that is what is going on, and a reasonable approximation of the dollar amount.



The most common game played with this line is to decrease the number of days of interest you'll actually be paying. Let's say you're planning this on June 1st, and your loan provider tells you "don't worry about it. We're going to close on July 1st". First off, the chances of this actually happening as planned on any particular day are slim. Second, it's pointless to try. If you do close on July 1st, the lender is going to ask for all the interest for the month of July up front, and your loan starts working normally August first with your first payment being due September first. Third, I've learned the easy way (from watching other people make this mistake, not wanting to lose clients of my own) never delay closing - it always gives something else a chance to pop up, and it's amazing how often something does. It's amazing how often something new pops up at the last minute without this gratuitous opportunity. If you can close it now, do so. Once those loan documents are recorded, the bank can't call the money back unless you violate the contract.



As I have said, on a refinance the number of days prepaid interest can never be anything less than the entire month. Period. Somebody writes anything less than 30 days on this line, they're trying to pull the wool over your eyes. On a purchase, look thirty days out or to the last day for close of escrow according to the contract, and estimate the number of days left in that calendar month. There's the number that should be written. If a loan officer can't do it in thirty days, chances are they can't do it at all on the quoted terms or anything similar, and chances are they were playing games with you from the first. The only general exceptions to this are when refinance is booming. For instance, during the summer of 2003 the delay between complete loan package being submitted to the bank and the underwriter actually looking at it for the first time got to be more than thirty days right there, never mind the time it took for everything else. And even then I could usually run purchases through another department in close to a normal time frame. If you're not writing a check to cover prepaid interest, and you have a $270,000 loan at six percent, that's $1350 getting added to your loan when you may not want it to be, and you'll typically be paying interest on that for a very long time.



"902 Mortgage Insurance Premium" This is another one of those lines that needs discussion. First off, the odds of it really needing to happen, or being in your best interest if it does, are vanishingly small. In the hundreds of loans I've pushed through I've never actually had a loan that included mortgage insurance. It was never the best thing to do for the client.



Let's take a step back and ask, "What is mortgage insurance?" It's an insurance policy that the lender makes you, their client, buy for their benefit so that if you default they get the full amount of their loan. The usual threshold for this is 80 percent of the appraised value of the house. Mortgage insurance is never tax deductible when it's a separate charge, and is always charged based upon the full amount of the loan, and the amount of the loan expressed as a percentage of the value of the home. The larger the loan, the more you pay, the higher your loan value as a percentage of your home's value, the more you pay. It is commonly assessed as a separate charge, but can be expressed as a rate surcharge on the loan interest you'd pay anyway (in other words, say a 6.625% rate on your loan instead of 6%).



"What good does mortgage insurance do me, the consumer?" you may ask. The short answer is it gets you the loan. It gets you the loan when you would be turned down without it. After that, it's just money out of your pocket every month. Mortgage Insurance, also called Private Mortgage Insurance or PMI, is primarily a thing that happens in the A paper world (sub prime loans are usually incrementally priced to cover the higher risk, as the lenders there are in the business of taking those risks for appropriate compensation), and more importantly, it's usually avoidable.



PMI is only charged if the first mortgage exceeds 80% of the value of the home. But if I split even a 100% loan into two pieces with the first mortgage 80 percent or below, it goes away. Yes, the second mortgage will be at a higher interest rate, and yes, the closer to 100 percent of the home value it gets the higher that rate gets. But this tends to be on significantly smaller amounts of money, and this is an interest expense - deductible in most cases. The difference in total interest expense and total monthly payment tends to be in favor of doing this even without mortgage insurance or tax treatment factored in. So when I'm shopping a given loan around, sometimes I don't always even ask about doing the loan as one loan.



"With all this against mortgage insurance, why does it still happen?" you ask. At last the critical question. Lenders usually pay yield spread to brokers or commission to their own loan officers based upon the amount of the first loan. Pay for a second is typically (not always) a flat amount or zero. Your loan provider makes more money by doing it all as one loan. The loan provider wants to make more money and sticks you with the bill. Just warms your heart, doesn't it? Didn't think so.



"903 Hazard Insurance Premium" This is mostly for purchases, the yearly hazard insurance or homeowner's insurance premium. Any sane lender is going to require you to pay your insurance premium through escrow or before closing. They do not want there to be even a fractional second when their investment in the property is not insured. Of course, you don't want this either. I can't imagine paying the current cost of housing around here and not insuring the investment. So they're not asking for anything outrageous on this line. Unless you are one of those people who won't insure their properties, the extra cost to you is zero.



"905 VA Funding Fee" I haven't done a VA loan in three years. All I remember is that it's charged by the VA on VA loans, not by the lender. If it's applicable, it's going to be the same no matter what lender is doing it.



The final section is reserves of money held by the lender to be used to pay your expenses. This is your money; they're just holding it for you in order to make sure these items get paid on time. If you sell the property or refinance you should get this money back.



These are once again, not truly costs of the loan, unless you roll them into your mortgage where you're going to pay interest on them basically forever. The lender may (and most do) require that you hold up to two months reserves in this account. Ironically, this section of comparatively small amounts is one of the most tightly regulated aspects of the entire MLDS, and the whole escrow or reserves account thing is optional - although most lenders require a small fee for no reserve account. Many prospective loan providers, however, use the "safe harbor" rule of six months taxes and two months insurance, so make certain you're not penalizing the company who actually tells you the full truth, as the safe harbor rule is less than the vast majority of these quotes should be. In my experience, Escrow or Reserve accounts are usually more trouble than they are worth. I'm just going to explain quickly, and not with any dollar figures because 1) they vary too much, and for good reason 2) they are not, properly speaking, costs of the loan. As I said, they are your money, just being held by the bank for your expenses. When you sell the home, refinance it, or pay off the loan, you get the remaining contents of these accounts back.



"1001 Hazard Insurance Premium" in most cases, count the number of payments from the time the refinance is effective to the time that the yearly premium is due (usually on the anniversary of the date you bought the property), subtract it from 14. Multiply this number by your monthly premium. Even for purchases, the lenders will generally want a month or two of reserves.



"1002 Mortgage Insurance Premium Reserves" See my comments for line 902. If an early premium on this is due, compute it the same way as your prorated hazard insurance.



"1003 School Tax" California doesn't have it as a separate line item, or at least I can't recall seeing it broken out. Matter of fact, neither of the other states I've done loans in does either.



"1004 Taxes and Assessment reserves" This is the part to make certain your property taxes are paid on time. Same method of computation as line 1001. The lenders really don't want the city, county, or state repossessing the property out from under them.



"1005 Flood Insurance Reserves" Some homes require flood insurance in order to get a loan. Same method for computing as line 1001. If you live in or near an old riverbed, especially with dams and such on the river, research "riparian rights" sometime when you want another real world horror story.



Then there is a line about Compensation to Broker, which may be disclosed here or above. Some will try not to disclose it at all. Once again, you're looking for honest disclosure here, not the lowest number. This line makes no difference to you unless you're the one paying it. This didn't used to be required, but lenders and packaging houses got it put through in order to make the deal a broker offers you look worse in your eyes, thus handicapping brokers in their ability to compete. The thing that's important to you is what happens to you - the loan you are getting. When comparing offers, scrutinize the terms of your loan carefully, not what the broker is making on the deal. It's not like the packaging houses and many lenders aren't turning around and making even more money off the secondary market, just that that particular amount isn't disclosed anywhere.



There is a sum of all the things the client is paying to the broker versus paid to others. I wonder if this might not backfire on the lending and packaging houses that got this part added. They're going to show a line of fees paid almost entirely to them, whereas the only things paid to or from an actual broker are origination fees (if any), processing fee (my processor works for me or for the brokerage, not the lender), and broker's rebate to client (if any, and which if it exists is something paid by me the broker to you the client - a good thing in most client's opinion). Psychologically a telling advantage, even if it doesn't really mean anything. No matter who gets it, you're paying it, right? Concentrate on the loan with the best terms for you



At the bottom of page one, there are subtotals for fees paid to others and fees paid to brokers, and then an overall total. Then there's a section which says "Compensation to Broker," explicitly adding "(Not Paid Out of Loan Proceeds)". In other words, this isn't coming out of your pocket, although they could certainly give you better terms by reducing their compensation in the vast majority of cases. But the fact that one broker is making more than another (or is required to state explicitly what they make, whereas a direct lender or "packaging house" originating their own loans is not) does not mean you're not getting a better loan from them. Some brokers get discounts others do not. Some brokers disclose honestly and completely, others do not. Examine the loan you are getting - all of the terms, rates and conditions, and decide based upon those which loan is better. That's what makes a difference to you. The rest is a matador's red cape - a distraction from what is important.



Page two of this two-page form starts with section I, which is a short accounting of the money. My inclination is not to trust this any more than anything on the Good Faith Estimate. In other words, whether this is accurate is likely to be a function of your particular loan officer's good will more than anything else. Once again, the only form where there are real penalties for being inaccurate is the HUD-1, which comes at the end of the loan, not the beginning. But it's a good intention, nonetheless, and perhaps one of these years it'll actually mean something even if your loan officer is Simon LeGreedy or has a nose fourteen miles long. Proposed loan amount less costs, less other stuff of yours that's getting paid off, less the purchase price of the home or payoff of existing loan. The idea is to give you an explicit "you're going to get this much cash" or "you must pay this much cash to make this balance"



Section II is something I want to draw your attention to: Proposed interest rate is a good thing to have, although there is no more guarantee that this is the rate you're going to get than a federal Good Faith Estimate. But it has a choice of two things to check off "Fixed Rate" or "Initial Variable Rate". Just because Fixed Rate is checked does not mean the loan they are discussing is fixed rate for the full duration of the loan. Let me repeat that: Just because Fixed Rate is checked does not mean the loan they are discussing is fixed rate for the full duration of the loan. It might be fixed for thirty years - or it might be fixed for three months. This is a good place for unscrupulous loan officers to offer misleading information verbally, while checking the correct box doesn't usually mean a whole lot.



Section III is proposed term of the loan. If something less than 360 months is written here (or whatever the amortization of the loan is in years), it's telling you there's a balloon at the end. Once again, there is no way to verify that if 360 months is what is written, it's real.



Section IV is proposed loan payment. Ideally it's computed based upon the amounts given in the previous three sections. Verify that it at least makes mathematical sense by running these numbers through an amortization calculator, or doing the calculation yourself. Many loan officers will play games with the payment because people shop loans based upon payment.



This section is just bookkeeping, really, except sometimes you can spot your loan provider playing games if you pay attention. Remember, if this is a purchase I really hope for your sake you know your purchase price. If it is a refinance, I hope you know what your statement says your balance is. From this you can get to an approximate payoff by prorating your monthly interest. Once you have this figure, look up above on this form for the total of closing costs and prepaid items. Sometimes in a purchase your seller will give you a certain amount of credit for closing costs, so if this is applicable you can subtract those. This is the Amount You Have to Come Up With. Now subtract off new first mortgage amount, and second mortgage amount (if any), but add any closing costs for the second mortgage. The figure that is left is the Check You Need To Have. This is cold hard cash you have to come up with in order to make this all happen as described.



One of the most common tricks I've seen is for loan officers to tell clients and prospective clients they can roll the costs into the loan so they don't have to come up with cash. Despite being told this is what the client intends to do, they then give you, the client a payment quote in the third column here based upon you paying all of these costs out of your pocket - with the Check You Need To Have. In short, they're acting like all those closing costs have mysteriously vanished somewhere, like they're lurking in the Bermuda Triangle waiting to ambush some poor unsuspecting sap who will never be seen again. This poor sap is you. You're going to pay them somehow. They generally can be rolled into the loan, but make sure the loan provider gives you a payment based upon real numbers. Most people shop for a loan based upon payment because they don't know any better. This gives loan providers incentive to play games here, and the vast majority do.



Loan officers know that most clients shop for loans based upon payment quoted. This is the not the best or smartest thing for you to be doing, but it is nonetheless what most people shop based upon. So many loan providers will play a lot of games to be able to quote you a low payment. And this is one of the games they play, quoting you a payment based upon the loan without the closing costs of the loan added in. If you have a financial calculator, use it. If you can do the math yourself, better. Otherwise, go out and do a web search for financial calculators or mortgage calculators. Automobile loan sites will probably be programmed incorrectly (different assumptions), but pick a couple of others and punch the numbers in. Make certain that the real loan amount you're going to need jibes with the payment they quote at the rate they quoted. Of course, this all assumes that they're being upfront and otherwise honest and are not going to hit you with three points out of the blue, but you do the best you can with what you have. Oh, and now that you're done applying for your loan I strongly suggest you find someone willing to act as a back-up loan provider so that you can offer the person who just gave you this form a concrete reason not to hit you with those three extra points.



Section V: does the loan have a prepayment penalty, and on what basis? I'm glad to see this section here. I'll be even gladder if and when I see evidence the answers mean anything in the sense of legal penalties for lying. Lying about prepayment penalties has been rampant for a long time. Lying about prepayment penalties is a good way to make an absolutely awful loan look pretty good. Lying about prepayment penalties gets someone to sign up with the loan provider who lies because of this. And when you find out at the end of the loan process, when they present the loan documents, that they were lying (if you even notice, which many are expert at making sure you don't!), you may not have any good alternatives to signing those documents anyway.



Section VI basically tells you the lender cannot require credit life insurance or disability insurance. Many lenders would if they could. Not that disability insurance is a bad idea - quite the opposite in fact (I'm of two minds on credit life insurance, and this is not the place for that essay).



Section VII requires you the client to tell them, the lender about all the other liens on the property and hints at penalties for dishonesty. Not that the lender or broker is going to take your word for it, of course. But the gall this amazes me: requiring a consumer to be accurate on this or face penalties, pay for the loan, etcetera when many brokers and lenders could submit the form to the Pulitzer committee for consideration in the category for best short fiction.



Section VIII is about Article 7, which covers loan amounts so small as to be irrelevant for all practical purposes in California. There's also a bit about whether or not a broker is lending their own money. This is potentially both confusing and interesting, but beyond the scope of this essay. It's good that they are requiring license numbers now. In California, you can easily look them up for past violations online at http://www2.dre.ca.gov/PublicASP/pplinfo.asp (many other states have similar registries). Not that someone without past violations is pure, and not that someone with them necessarily intends to do anything dirty to you. But it's good information to know. Another good place to check them out is with the Better Business Bureau, which compiles information on every business, members or not, at http://www.bbb.org/ You'll need a business name and address, phone number, or web site. Now, if they've got one strike against them, they could easily have been caught in circumstances beyond their control. But a pattern of abuses is a clear warning. A few days ago, I decided to risk $50 for a business card order with a company that has a truly awful rating BBB rating. The cards arrived two days later and I couldn't be happier with any aspect of the transaction. But my next order from them won't be any bigger until they have established a track record with me (and also I with them so they can see a long history of orders they want to keep coming, and which will stop if their service isn't satisfactory).



Section IX explicitly tells you, the client, that this is not a loan commitment. This is good, so far as it goes. As I said in Part I, I've spoken to many otherwise intelligent people who somehow had acquired the idea that because a loan provider filled out a Good Faith Estimate, it meant the loan was a Done Deal. It most certainly does not mean anything of the sort. No real estate loan officer EVER writes a loan commitment, and it's been that way for at least a couple of decades. Loan commitments are the exclusive province of the underwriter, who is intentionally and for anti-fraud reasons isolated from the client (i.e. the underwriter is not allowed to communicate with you directly). The most an ethical loan officer will say is "my experience does not show me anything that should cause you to have a problem"



Now, here's the rub, and an indication of what this section really should say. Does it not stand to reason that if the loan is not a Done Deal at all, it most particularly is not a done deal on the exact stated terms? This form is supposed to be an estimate. It may be a good estimate, given on a loan that has already been locked, and that the loan provider intends to guarantee in that they will pay any difference, not you. I do this, and I know of one other company. More commonly it's just a convenient story that gets you to sign up with that provider and they couldn't deliver a loan on those terms if they wanted to, which they don't. There is no way to be sure it's good until you get the HUD-1 at the end.



Caveat Emptor



mortgage real estate home loan MLDS Mortgage Loan Disclosure Statement consumer education

My husband and I are completely debt free right now. However, we are wanting to buy a house in the future and I see that as quite probably requiring a loan.

What should I do to make sure that we don't get dinged for having no credit? (A problem my husband has had in the past — ended up needing his mother to cosign for him on an auto loan because he chose to go completely credit card less during college after discovering he could not handle them well)

Without open credit, you won't have a score at all. No score, no loan with any regulated lenders - hard money becomes your only option. It's as simple as that. I can get people with horrible credit loans on better terms than I can people with no credit.

In order to get a credit score, you need two open lines of credit. Three is better, because sometimes one will not be reported to one of the three major bureaus. Car loans count. Installment loans count. Those stupid "Pay no interest for twelve months" accounts count, although they really do hurt your credit. But the best thing to have is credit cards, because you usually only apply once and you can then keep them forever, giving you a long average duration of credit. Read my article on Credit Reports: What They Are and How They Work for what goes into a credit score.

What you do for this is go out and apply for two credit cards. Not store cards, unless you can't get regular credit cards. They don't need to be big lines of credit - $500 to $1000 is more than plenty. I have found credit unions to be a good place to send my clients to for this purpose, as San Diego has several excellent large credit unions, at least one of which any resident of the county can join. They may not be absolutely the lowest rate, but they're usually pretty low. Furthermore, the rate doesn't matter if you don't carry a balance, which you shouldn't. More importantly, credit unions usually have fewer gotchas in the fine print, usually no annual fee, and they want their members who want them to have credit cards, so they're more inclined to give members the benefit of the doubt.

Once per month, use each credit card for something small that you would buy whether you had the credit card or not - you'd just pay cash otherwise. No larger than 10% of your total credit line on the card. I usually pay for a meal out at a cheap family restaurant (in the range of $20 to $30 for two adults and two kids). As soon as the bill gets there, write the check and pay it off. Costs you a stamp but it builds your credit. Or you can do online bill pay if you'd rather. I've heard too many horror stories and dealt with their aftermath too often for that to be attractive to me.

If your husband has trouble with cards, keep his copies of your cards in a safe place, and you be the one who goes out and uses them. He still gets the benefits if they're joint cards.

Caveat Emptor

This is a little harder than shopping for buyer's agents, so congress critters might not be able to do it. But it's nowhere near as tough as high school algebra, so even if you're a politician you can just get your child, grandchild, niece or nephew to help you. High school aged children of your friends would work also. And if you're a politician who doesn't have any friends with children, you've got worse problems than getting the best home loan.



This problem actually breaks into two cases, one where you are looking for a purchase money loan and one where you are looking for a refinance.



For purchase money loans, the first step probably should not be an internet quote shop. Whether it's one of the ones where lenders advertise their lowest rates or one of the ones where you ask for four quotes (and get four hundred companies calling you), neither one of these is likely to be a good use of your time. At this point, you are trying to find out what loans are available to you, and how much of a loan you can afford based upon those loans. What you want is not someone who's trying to sell you their loan, what you want is someone who will tell you what's going on in the loan market right now, and how much you can afford (assuming the rates don't change).



What you need is a good conversation with a loan officer or six. At this stage, you're not willing to sign up for any loan, but you are looking for information that tells you whether or not that loan officer is likely to be a good prospect when you are. Are they willing to take you through the process verbally, and explain the results that they get and how they got them? They should use your salary as a starting point, move through a debt to income ratio and subtract from that your current monthly obligations, to arrive at what your monthly budget is for housing. From there, they can use current interest rates, as well as approximate tax rates and insurance costs, to show how much you can afford per month for housing. I would insist that they perform this computation based upon currently available rates for a fully amortized thirty year fixed rate mortgage with no more than one point of combined origination and discount. If you then want to choose an alternative loan type, and there may be reasons why you want to strongly consider doing so, you nonetheless know that you can afford the loan for the property you are considering, and that you're not getting in over your head with a loan that's going to turn around and bite you.



Now, just because the first loan officer gives you a number you are happy with is no reason to stop shopping. You want to have this same conversation with several different loan officers. The reason is confirmation. There is a large amount of pressure to qualify you for the largest loan possible, especially in the highly priced urban markets where most of the country lives. A little bit of difference can make a lot of difference on the property you think you can afford, which makes it a lot more likely that the average person will come back to them for the loan. They said they could get you a loan for $500,000, while the guy down the street said they could only get you a loan for $470,000. If, by some mysterious coincidence about as rare as gravity or air, these people decide they want to stretch their budget to the maximum or beyond, who do you think most people in that situation will come back to? Most people buy a property at the highest possible end of the range they've been told they can afford. Actually, the most common thing that happens around here is that they'll go back to the people who said they qualified for $500,000 to see if there's any way they can stretch it so that they can qualify for this $530,000 (or $800,000) property they've gotten their hearts set upon.



There are all kinds of incentives for loan officers to inflate pre-qualifications for loans. They get a higher probability of a larger commission check. There aren't any real reasons to give you the real numbers, as opposed to those highly inflated ones, except not wanting you to go through foreclosure and lose the property. The foreclosure thing is months to years away, and not certain, while the commission check is here and now and their benefit, as opposed to your problem. By the way, if you're one of those people who manage to beat the numbers and get through buying a property more expensive than you can afford, you're going to be thinking that loan officer walks on water and is your best friend in the world, because they got the loan through that "nobody else could." This is preposterous, but it's amazing the way that human psychology works, isn't it? With the way prices were climbing in 1996 through 2004, there were an awful lot of loan officers who got used to "betting on the market," and winning, because even if their client could not, in fact, afford the loan, they could refinance on more favorable terms when the rates dropped and the owner's equity went to more than fifty percent due to the general market. And if the rates didn't move by enough to save their house, they could still sell for enough to make what seemed like a mint. The predictable result was that these clients think that these loan officers are wonderful. Unfortunately, that's not the market we have today. That is unlikely to be the market we have at any point in the near future. As a result, you have these same people doing business with these same loan officers today, and losing their shirts as well as their homes.



What you need is to keep going, and keep having these conversations with loan officers. Why? The first one may have been the Marquis of Queensbury, but then again they may have been the Marquis de Sade. What you need is evidence. Evidence of confirmation. Evidence of consistency. Evidence that both they and all of the other loan officers you meet with are performing these pre-qualification upon the basis of sound loan underwriting and rates that are actually available and not too expensive in terms of up front cost, that they are remembering to make allowances for the expenses of property taxes and home owner's insurance, and association dues and Mello Roos and everything else that may be relevant. You're going to pay these things. Prospective loan officers should make appropriate allowances up front, because they're going to be part of what's coming out of your paycheck.



What's a sufficient number of conversations? At least three in any case, but I would keep going until I had talked with loan folks that have at least two or three significantly different approaches to your loan. Negative amortization is right out, of course, and you can cross anyone who suggests one off your list of possible loan providers, but while you should do the calculations of what you can afford based upon a thirty year fixed rate loan, in most markets there are other loans such as a fully amortized 5/1 that are well worth considering, and that will serve most people better in most situations. Every single loan there is has its advantages and disadvantages. The disadvantage to the thirty year fixed is that it is almost always significantly higher rate than other alternatives, and more people than not keep exchanging one thirty year policy of insurance that their rate won't change for another thirty year policy every two years. The question I would like to ask those people is "Why buy the thirty year guarantee in the first place?" Why not buy the three or five or seven year guarantee, if that's all you're going to use? Right now the costs may be very comparable, but the shorter fixed period loans are usually much cheaper.



Similarly, why spend money buying the rate down if you're not likely to keep it long enough to recover the money you spend in the first place? Spending $8000 in points, especially if you roll it into your loan where you're going to have to pay interest on it, may cut your monthly interest charge from $1960 to $1833. However, it takes between six to seven years to break even when you consider interest on the remaining (higher) balance.



It's possible one loan officer will cover several approaches. Much as it pains me to tell you this because I habitually do that, you should still talk to more than one loan officer. You want more than one person's word for one what is available in the way of rates and the costs to get them, and it is always a Trade-off between low rates and high costs. Furthermore, you want confirmation of what loans and rates are available to you. If three or four loan officers independently tell you the same things, you've got a pretty good idea that they're approaching it correctly and giving you real information. The ones that make it up are likely to do base their usually inflated numbers upon different markups and mis-assumptions. Find a financial calculator on the web or buy one or use a spreadsheet, and check their numbers yourself. This is one of the largest sums of money you will be dealing with in one transaction in your life. You owe it to yourself to take the time and do the research to be certain you are getting good information. Due to the fact that real estate loans are very large amounts of money, and the loan transactions are very complex, there are a certain percentage of people in the industry who will use this opportunity to skim money effectively back into their pocket. These amounts of money, quite large by most standards, can be camouflaged under the cover of the much larger amounts of a very complex real estate transaction. Even the most honest loan officer is in the business to make money. This is in almost direct conflict with your desire to get the best loan possible at the lowest costs, but the loan officer who actually delivers the best loan to you has earned every penny of what they make, whatever it is.



Once you have credible, verified data on how much of a property you can afford, then you can start looking for buyer's agents, and actually looking at properties. Keep in touch with loan officers who you might be working with during the shopping process. Why? Rates can change. Actually, rates will change, and the higher up the scale and more highly qualified you are, the more often they tend to change. Sub-prime rate sheets might stay constant for a month or longer, with a modifier that may change or may not. Top of the line "A paper" changes every business day, at a minimum. Maybe not grossly, but it does change. I saw rates on 30 year fixed rate loans with equivalent costs go from about 5.25 to 6.625 in one month during late summer 2003. If you did the math based upon 5.25 and you qualified for $500,000, now you only qualify for about $430,000. That is data that is supremely important to your property hunting. Do not allow a real estate agent to tell you that you can afford more than your real budget. Ever. If they say they can't find all of your desired characteristics within that budget and in your area, ask them for alternative suggestions. Compromising what you want is better than foreclosure. Going without is better than foreclosure. Fire the agent immediately if they won't work within your budget. When you find something you like and have a purchase contract, your procedure becomes very comparable to a refinance. The differences are comparatively small.



For refinances, you have a property already. There is an existing loan that has to be paid off. If you're in a purchase situation, you should already be in contact with several lenders, and you don't really care about any existing loans on the property because they aren't your problem.



But now is the time when you want to do some intensive lender shopping. Furthermore, you really want to compare what everybody has at the same point in time, if it's at all practical. For instance, generally the available rates will be a little bit lower in the middle of the week. They will more often than not be higher on Monday, Friday, and Saturday than they are on Tuesday, Wednesday, and Thursday. This isn't always true, especially if the financial markets are reacting to some large event, but it seems that it happens more often than not.



In a purchase situation, talk to your existing prospects and keep adding others until you get enough of them. For refinances, you want to move quickly in order to be a fair comparison. Whether you are buying or refinancing, ask every one of them this set of questions you should ask prospective loan providers. What you are looking to do at this point is choose who you are going to sign up with. Before you do that, you want to cross-check what every single loan officer tells you with the available evidence. Weigh what you know against what you are told by any given loan provider, and what that loan provider tells you as compared to other loan providers. Most often, the preponderance of the evidence will clearly support the ones you should sign up with.



Now, I know I said this earlier. Not only does it bear repeating as many times as I can find an excuse for, the folks interested only in refinancing might have been skipping ahead. Remember that you can get the a loan officer who's the equivalent of the Marquis of Queensbury, but more of them are closer to the Marquis de Sade, and most will be somewhere in between. All of those quotes, and that nice paperwork like the Good Faith Estimate and Truth in Lending Advisory are basically so much hot air and so much used paper unless they are backed by an effective Loan Quote Guarantee. The bigger the lie they tell you, the more likely it is you will sign up with them. Sure, it's possible you might walk away at document signing, although not likely. If you don't sign up with them, they are guaranteed not to make any money.



There is always a Trade off between rate and cost in real estate loans. It's like gravity. Exactly what the available trade offs are varies over time, and varies from lender to lender at any one time. Remember, that lender can low ball you pretty badly to get you to sign up, and once you sign up, you're not likely to discover that they did low ball you until time to sign documents. By that time, you may have no real choice but to sign the documents you are presented, a fact which many lenders and loan officers are counting on. If the loan they delivered at signing is not exactly the loan they promised at loan lock, the only reason they did not tell you earlier is that they did not want you to have an opportunity to go shop elsewhere. They knew within a week of getting your information. To tell you how endemic this problem is within the industry, let me make a wager: I am not a gambling man, but I'll bet money that I could go into 95 of 100 loan offices chosen at random, audit their 100 most recently funded loans, and find significant discrepancies between the Mortgage Loan Disclosure Statement (or Good Faith Estimate) they got at sign up and the HUD-1 at loan signing in 80 of them. This isn't because they didn't know what the rates would be. They should have locked your loan as soon as you said you wanted it. They knew what the rates were then. Why didn't they lock? Why didn't they tell you what it would really be? The games played are legion, but it's rare that clients emerge better off for them having been played. Furthermore, I am not a gambler. This bet is like the guy who bets even money there will be at least one shared birthday in a group of fifty people, for which the probability is over 97%. The reason many loan providers want a deposit is so they can hold that money hostage for you signing the final documents. Unless no one else can do your loan, I would never even consider putting up a deposit with a lender. What they're telling you by requiring a deposit is that they want you to stop shopping. If they are telling you about a loan that really exists, and their loan prices really are good, there is no reason for a loan to require a deposit. You will pay for the appraisal when it happens, but that's less than a deposit.



The best remedy for this situation, where loan providers can basically say almost anything it might take to get you to sign up, is to sign up for a back up loan, if you can find someone willing to do so. In order to get someone to agree to be a backup provider, you've got to give them a real solid shot at the loan in the first place. Then, once you know who your first choice provider is going to be, go around and ask the other lenders, in order from next best to worst quote, if they think that loan is real and deliverable. If they all say it is, you know that your primary provider has at least quoted you something they might be able to deliver. If they say it's deliverable, follow up by asking why they couldn't beat it or at least meet it. The answers to these two questions should dispel any doubts about why you didn't do business with them.



Most of the time, however, most of the prospective loan providers will say it isn't. After all, they're trying to get you to sign up with them. That's your opening to ask if they'll be your backup provider. After all, if the other quote really isn't deliverable, you'll be signing their paperwork at the end. Every time I've said it's not, I've put my money and time where my mouth was, and every time I've ended up with the loan at the end of the process. For those people who honestly shopped their loans around, this has literally never failed to get me paid for a funded loan, and I've been backup for every category of loan provider from some of the biggest Wall Street banks down to credit unions and other brokers.



You do need to get both sets of paperwork filled out, and do everything necessary so that both loans are ready to go. If you only work on one loan for twenty-eight days of a thirty day lock, only one loan will be ready. The back-up loan is useless to you if it's not ready to go at the same time as the primary. If the back-up is not ready to go at the same time, you're signing the primary loan papers whether they deliver what they said or not. If the primary isn't ready to go, you're signing the back-up's loan papers whether they deliver what they said or not. Signing up for two loans also gives each of the loan officers concrete reason to make certain to deliver your loan on time.



As soon as you have selected your loan providers, lock both loans and order the appraisal. You'll pay an extra fee for having it typed for two loan providers, but that $100 or so is literally the cheapest, most cost-effective insurance policy you can buy. Not having it is likely to cost you thousands of dollars.



Now, on a regular basis, I hear various folk advising people that they can avoid all this by "just picking a large, reputable provider." Nonsense. This is wishful thinking at its worst. "Large reputable providers" will sit you down in a nice comfortable chair in a beautiful office, and lull you with talk of how well they are going to take care of you. Somehow, they manage to deflect the conversation away from exact numbers and exact quotes, let alone quote guarantees. You can't compare loans without specific numbers. Then, this "large reputable company" is going to deliver a loan with a rate that's a quarter of a percent higher and costs you two points more than you could have had, not to mention higher fees - and they'll still be lowballing you! Trusting yourself to a "large reputable company" without the exact same due diligence isn't avoiding the issues of shopping a loan in that jungle out there - it's intentionally delivering yourself into the hands of the head-hunters. These companies do not compete on price. They compete on the basis of serving cattle who want to be comfortable. Serving them up to be slaughtered. On a $400,000 loan, you just wasted $8000 up front, and $1000 per year. Glad you could avoid that hassle, glad to avoid talking to sales people, glad you could avoid taking half a day off work to shop loans? You've paid handsomely for that avoidance. Kind of like committing suicide because somebody might murder you.



The main issue in all of this is finding the loan on the best terms available to you. The main obstacle to that is the fact that lenders can low ball their quotes shamelessly, and it's legal, so it takes some serious research to figure out what is likely to be real from what is not. Once you've done that, it's time to make your choices and get those loans locked in. If the loan isn't locked, the quote doesn't matter - it's not real. It's certainly still possible to get burned, but far less likely, particularly if you sign up for a back up loan and have both loans ready to go. Once the loans are locked, get the paperwork and anything else you need done. Unless there is something external holding the whole process back, such as "Your house isn't going to be finished for two more months," I will bet money that a loan done in thirty days or less is better than one that takes sixty days or longer.



You need to do your due diligence up front. Real estate loan rates change every day, and whatever reason it was that caused you to need or want a loan is almost certainly time critical. For purchases, you've got a purchase contract that's good for only so many days before they'll start charging extensions. For refinances, if it's to get cash out, you have a time critical need for that money, and if you don't get it on time, you're likely to have to pay it out of your checking account or put it on a credit card, if you can. For refinances without cash, just to get a lower rate, those attractive rates are not going to last forever, The one thing I can guarantee is that the available rates are not going to be the same by the time you go to sign documents at the end of the process. If the lender doesn't deliver what they talked about, it's going to cost you a large amount of money. Therefore, you really want to do enough due diligence to give them a reason to actually deliver that loan they talked about in order to get you to sign up.



Caveat Emptor

California has just replaced the one page federal Good Faith Estimate with a two page Mortgage Loan Disclosure Statement. Regulations for filling it out are similar to the federal Good Faith Estimate, especially as the only thing a recent seminar we paid for on changes in the business had to say was, "If you give the client a Good Faith Estimate, you will be held to have complied with federal regulations but not state of California regulations." Which implies that California didn't alter the existing federal standards so much as add a few more lines, the effects of which are to leave all of the games loan providers play with the federal Good Faith Estimate intact, as well as adding a couple more.



I've actually had some looks at abuses of the Mortgage Loan Disclosure Statement now, and they are essentially the same abuses the Good Faith Estimate still suffers from in other states. The abuses of the Federal Good Faith Estimate and the fact that pretty much all of them are actually legal had been something that took time to soak in back when I first got into the business, although a short stint with a Company Which Shall Remain Nameless was a real education. It appears that the regulations for the Good Faith Estimate part are unchanged, which translates into english as "Excrement." Furthermore, I'm certain that somewhere in Sacramento lobbyists are paying bribes campaign donations so that just this or that little detail can be changed "just a little in a way that doesn't really make a difference," and eventually the cockroaches will have even more ways to game the system.



Many people think the forms you get at the beginning of the loan are binding, or in some legal way, indicative of the loan you'll actually end up with. If I had a dollar for every time people have told me, "I've got the quote in writing," in response to my telling them a rate wasn't available, it would make a real difference on my mortgage. The fact is that neither a MLDS nor a Good Faith Estimate in the other forty-nine states means anything unless the person or provider giving it is willing to stand behind it with a guarantee that they will pay any difference, not you. I can point to many, many loan offices - the vast majority, as a matter of fact - who intentionally misrepresent the loan on the beginning paperwork. I don't know how many people tell me, "I'm sure Super-Colossal Mega Bank intends to honor its commitments." By themselves, neither the MLDS nor the Good Faith Estimate are in any way, shape, or form a commitment. It's not an underwriter's loan commitment, it's definitely not signed loan documents, and it most definitely is not a funded loan. The Truth In Lending form doesn't mean anything either, as it's based upon numbers in the MLDS. Garbage in, Garbage out. The only form that means anything is the so-called HUD 1, a two page form required by the federal government, but you don't get that, even in provisional form, until you sign loan documents. There are guarantees that can make the MLDS mean something, but without those guarantess, the MLDS is a used piece of paper with unimportant markings.



The first page of this new form is similar to the Federal Good Faith Estimate. The first major difference is that there is no explicit loan or rate quoted at the top, and the broker or lender must disclose whether each given cost of the loan is paid to the broker or to someone else. There is no explicit line item (as there is on the Good Faith Estimate) for "Estimated Closing Costs" to explicitly sum all of the things that are actual fees or costs of the loan, as opposed to reserve requirements or things that are your fees paid in advance, such as property taxes. Your property taxes are the same whether you have lender A, lender B, or no loan at all. Ditto your homeowner's insurance, school taxes (if any) and flood insurance (if any). Setting a form where they are part of a total to be compared, rather than apart from that total, is just offering the loan provider one more opportunity to play games or distract you from the really important information.



On the line above where all of this starts, there should be written a total loan amount, an interest rate, and a term (360 months for all 30 year loans, whether it is fixed for the full term or not - numbers less than 360 mean that the loan is due in full in less than 360 months. This can be one clue that they're trying to hit you with a balloon payment loan). As I have said elsewhere on this site and will continue to stress, just because a mortgage provider puts these numbers on an MLDS does not mean that they have any intention of actually delivering them. I think bait and switch is the official company game of many providers. The MLDS, along with the Good Faith Estimate it's based on, is THE most abused loan document, bar none. It's supposed to be a real estimate of what the loan is going to be like, based upon the loan officers best estimate. In practice, it's become nothing more serious than the loan provider wants it to be. In many cases with many providers, it's almost like a joke: "(giggle) and this is what we had to tell him in order to get him to sign up! (loud guffaws)" and this carries through the rest of the document as well. The relationship of the loan described on the MLDS to the loan that is actually available and that said provider will actually deliver is completely arbitrary and up to the provider within very broad limits. Because at the end of the process, the client has very little leverage to get the provider to deliver the loan they talked about to get you to sign up. Unless, of course, you signed up for a backup loan like I keep telling you to do.



Now, it is also important to note that with two exceptions, all of the fees below are commonly held in abeyance until the end of the loan process, and you don't owe them if you don't end up refinancing or purchasing with that company. They can be added to your loan balance instead of being paid out of pocket. It is the biggest red flag I know of for a loan provider to ask you for money up front beyond the credit report.



The first actual line item on the Good Faith Estimate is "801 Loan Origination fee." This is an explicit fee charged by the loan provider who signs you up. It can be expressed in dollars, but it is more commonly expressed in terms of "points". One point is one percent of the final loan amount. Put another way, if you have a loan for $198,000 plus one point, the way to do the computation is $198,000 times 100, divide by 99 (100 minus the total number of points), which equals $200,000. It's probably not unethical if the loan officer uses $199,980 ($198,000 plus 1%, or $1980) on a quick calculation, just a desire to get an approximate answer quickly. It's still not mathematically correct. Now, if as is common, the loan provider only writes down 1% here rather than converting it to dollars as well, it can appear as if that loan is much cheaper at first glance or to the uninitiated than it actually is. If you've got a loan that's $200,000, leaving the estimate as one point without an explicit dollar figure is a way of making it look like the loan actually costs you about $2000 less than it will. Two points without an explicit dollar figure is twice as much ("The other guy wanted $5000 to do my $300,000 loan, but this guy only wants $3000 and two of these point thingies. What a great deal!" You would be amazed and dismayed how often I have to explain even to people who know what points are that $3000 plus two points on a $300,000 loan is about $9000). Nor is this figure, whether expressed as points, dollars, or both, carved into anything more than silly putty. I worked for a short time at a Company Which Shall Remain Nameless, and one of the things that got me yelled at several times, and one of the many reasons I left, was that I violated company quoting policy by actually adding in all of the little miscellaneous adds for half a point here and a quarter point there that the customer was going to get hit with at the end of the process anyway, and telling the customer about them up front. Finally, there is no reason why this line has to be more than zero in all cases, and indeed I've done more loans without than with points, but that's a subject for another article.



The next line is "802 Loan Discount". In theory, this is supposed to be used only for actual discount points charged by the lender. In practice, it is used almost interchangeably with "Loan Origination Fee" on the line above (not without some justification in fact, which is beside the point of this essay). Once again, watch out for whether the figure in points is converted into an actual dollar value. Again, there is no reason why this line has to be nonzero, and I've done more loans without than with.



"803 Appraisal Fee" in California is $350 to $450 for the average home, depending upon what that particular appraiser charges for that particular job. It is legitimate and correct to mark this as PFC (prepaid finance charge) so long as the loan officer gives you an approximate figure. Unless they have a contract with a particular appraiser, it's not under the loan officer's control. This is another place where many providers play "hide the closing costs." Quoting from one less than ethical example "Hey, I'm not the one charging it and if it makes my loan look better than the guy stupid enough to tell the client, that's not my problem." I tell people with average homes that it's likely to be about $400. The abuse that happens here is that this is one of those things that's called a "third party charge" - paid to a third party service provider. As such it is not included in total fees when calculating APR on the "Truth In Lending Statement", and will almost certainly not be included in any computation of total fees by your loan provider (Other than me, I know exactly one company that includes it). The vast majority of those billboards advertising "Total fees $X" really mean "Total fees $X plus third party fees," not to mention the fact that they're going to give you a rate which gives them an Earth-Shatteringly Large Rebate (see my essay on rates and points when it's posted for more). It is not unethical for the loan provider to ask you to pay the appraiser at the time the appraisal is performed, provided the person being paid is an external appraiser (see my essay on the appraisal for in depth reasons).



"804 Credit Report" is usually somewhere around $20. Single Individuals buying a house on their own are cheaper than two married people, but unmarried individuals must each be run separately, and so it may be a little more than $20 if you're buying a house with your brother, parents, or whatever. It is neither unusual nor unethical for the loan provider to ask you to pay for this up front. So long as the check is written to the credit reporting service, there's nothing wrong. And there is a rule now in effect that we must have explicit written consent to run credit from every person, so don't get angry with your loan provider for following it.



"805 Lender's Inspection Fee" is charged by the lender to have one of their inspectors go out and take a look and make certain the house isn't falling down. It is common for the lender's fees to be ignored by a broker, and then you'll get another MLDS from the lender that discloses this, and the correct summary of the costs is the sum of the numbers on the two sheets - not that anyone will tell the client that. On the other hand, Lender's Inspection Fee is not necessarily charged on every loan. Many lenders will rely upon the appraiser's work in this, and not do one of their own, particularly on refinances. Since (assuming you're sane) you're going to want a building inspection yourself in the case of a purchase, the lender may make it a condition that they get a copy. And, I will admit as a broker that although I do disclose a total of all lender's fees I know about, I don't always break them out into categories and may amalgamate them all under one category. (I can ask a lender what their fees are, and one will tell me A, B, and C adding to $750. The next one will tell me A, D, and E adding to $780. The third might tell me B, E, and F adding to $995. And so on. The brokerage I work for is approved with well over fifty lenders. I maintain that as long as I disclose the total amount, most clients don't care whether it's going to underwriting or document preparation or spa visits for the CEO. It's just not important to them where it goes. It's a fee they've got to pay to do business with that lender and get that loan. Whereas I will help them consider the total cost in comparison to the cost of other options, this total is not subject to negotiation).



"808 Mortgage Broker Fee" (there is no line 806 or 807 on the form). This is another fee potentially charged by a brokerage. Just because it's not, or listed as zero, here doesn't necessarily mean you're not going to end up paying it. One trick I've seen is leaving it blank at the beginning, then at the end it's "We charged that based on how difficult your loan was. You don't expect us to work for free, do you?" Trust me, they're not working for free, although I don't think you need an astronomical level of trust for you to believe this.



"809 Tax Related Service Fee" I've never had to include it as a separate line item even if present. It's usually amalgamated and lumped in with something else, if it's applicable.



"810 Processing Fee" This is what they pay to the nice person who processes your loan and coordinates your transaction while the loan officer is off doing other loan officer things. This varies, but I'd be very suspicious of anything less than $300. I know brokers that say to charge $600 when they pay the processor $300. My attitude towards that is that at least they're telling you, the consumer, about it up front. Better that than being told $300 and hit for $600 at the end. The processor knows what they make. The broker knows what he pays the processor. Don't worry if the processor gets the whole thing. It's not your concern, and it's not really negotiable, and whereas you have the option of going elsewhere, the elsewhere you go has the option of lying to get you to sign up.



"811 Underwriting fee" is charged by the bank to pay their underwriters. It's also a good category for brokers who hate pointless detail to lump all of a lender's fees together in. If it is broken out, as a direct lender should do, be suspicious of anything less than three to four hundred dollars - typical actual underwriter's fees. But just because he's showing $995 here where everyone else is showing $400 doesn't mean he's overpriced. Just to mention it, if you are doing a first and second mortgage simultaneously with the same lender, the lender's fees will go up by about $500 to cover the second. If the second is being done with a different company, they're probably going to charge a whole other set of lenders fees.



"812 Wire transfer fee" is charged by the escrow/title company to wire the money into your account for immediate availability. Otherwise, it's going to be a few days before the check clears. If it isn't something advantageous to you, don't get it. Most of the time it probably isn't necessary, but considering daily interest on typical amounts of real estate transactions, it may be a good investment. Last time I had this done for a client it was a little under $25. The lenders fees I've talked about elsewhere usually include a charge for wire transfer between them and escrow or title, but this doesn't cover sending it on to you.



Below this are several blank lines. An ethical loan provider will use them to disclose that he's getting a rebate from the bank (assuming he's getting such a rebate) or tell you that the price quoted includes a rebate to you from them reducing the price, if such is the case. (Most of the loans I have done tend to have this feature. You'll find out why in a different essay). Just because provider A is getting a bigger rebate does not mean provider B has a better loan. It happens quite often that one broker shops a better lender or works a little harder. A 5.5 % loan with $3500 in total closing costs is a better loan than the same loan type with the same terms at 6% with $5000 in total closing costs, even if the broker in the first case is getting paid $10,000 more by the lender, to pick an extreme figure. Now it's unlikely that there's that much of a difference in broker compensation when the one is delivering a better loan, and if there is that much of a difference I'd bet millions to milliamps that the loan terms are different. But the point is for you, the consumer, to look hard at the actual terms of the loan involved - that's what's important to you. There was just a study released a few months ago about how most people would just choose the loan where the broker made less money, or where a loan provider's compensation wasn't disclosed, rather than the loan that's actually better for them (If anybody finds a link to it, send it to me. I tried and couldn't find it again among my search engine results). If we weren't all adults here, I might need to make the point that if the loans are otherwise the same, the broker in the first case earned every penny of his extra pay by finding you a better loan on the same terms and qualifying you for it. But we are all adults here, so you know that.



There also may be other fees listed here. I've only done significant business in three states, but there really is no need for anything else that I've seen. Additional fees in this area usually amount to a "Loan Officer's Latte Fee", or a "This is going to make me miss my surfing!" fee. If they actually list them, at least they're telling you up front instead of keeping it a deep dark secret that the consumer has no way of knowing about. Every once in a while, I'll see somebody write something like "Amalgamation of lenders fees" rather than using line 805, 811, or 1105 to cover it.



Finally, some states require a survey if none has been done for a certain period of time, usually ten years. California does not, and it's very rare for it to be required otherwise, usually due to ongoing boundary disputes which must usually be resolved before the loan funds. This will cost $300 to $400 if required, possibly more.



So when we look at this section, we are left with midpoint fees of $400 for the appraisal, $20 for the credit report, about $800 between line 805 and 811 and miscellaneous other lender imposed fees, and $500 for processing. Believable total, thus far, $1720, plus the amount for any points you pay, less any rebate to you. $2220 or so if you're doing a simultaneous first and second, $2500 or more if you are getting a first and second from different lenders.



The next section is title fees. These are the fees you are charged by the title company for doing the work necessary and writing appropriate policies of title insurance upon the transaction. Title insurance is a part of every real estate transaction in California, although I am given to understand there are still states where it isn't necessarily so. And even in California, if you're silly enough to buy the property for cash and insist that you don't want any kind of coverage in case it turns out later that the seller didn't really own it, or in case what you think you see is not necessarily what you got, it is possible to do a transaction without title insurance. Otherwise, when you buy the property, the seller should, as a condition of the sale, buy you an owner's policy of title insurance. When you get a loan on the property or refinance that loan, the lender will require you to buy them a lender's policy of title insurance.



"1101 Closing or Escrow Fee" depends upon the company and type of escrow. Many loan officers will write PFC, but ethical ones should tell you what it costs. Middle of the road is $450 for a refinance, the same plus $1 per thousand dollars of purchase price, divided by two for a purchase, because it is split two ways between buyer and seller. Like the appraiser's fee, attorneys fees, and title insurance, this is a third party fee that is excluded from the calculation of APR, and it's not under the lender's control unless there's a contract. Still they should let you know how much it's going to be, as it's not like there's any possibility of you not having to pay either an attorney or an escrow company, and many will pretend it doesn't exist or try not to give you a dollar value, as $X plus unknown escrow charges sounds cheaper than $X plus 450 for refinances or $X plus $375 for a purchase.



"1105 Document Preparation Fee" somewhere between $100 and $200 in most cases, this covers the cost of generating the mortgage documents. Will be covered in total lender's fees if that's accounted for elsewhere. Grant Deeds, etcetera usually prepared by the escrow or title company for the process will be extra, usually about $50 or so per document.



"1106 Notary Fees" $100 to $150 is reasonable, and about the range of what the various mobile notary services charge. Even if your loan officer agrees to act as notary, this is likely to be charged. You may or may not be able to save yourself money by taking it somewhere yourself as state laws are different, but if you do, you're going to have to cover it out of pocket, and you're going to have to deal with the issue of the notary's business hours, taking time off work, everybody who's party to the loan being there to sign, etcetera, not to mention the fact that getting loan documents signed is something that is always time critical.



"1107 Attorney Fees" Some states require the use of actual attorneys to do the escrow and/or title functions. Luckily, California isn't one of them. Attorneys are more expensive. I haven't done any actual work in these states but from what I can tell $800 is about average. Disclaimer: the company I was working for at the time may have had a contract for reduced rates to which I wasn't privy. Like appraiser fees, escrow fees and title fees, this is a third party fee excluded from APR calculation, and can be marked PFC, but the loan officer should give an known dollar value, as the company should have a contract with the attorney's office. Once again, unethical providers will try to keep a dollar value from finding its way onto the paper because it looks cheaper that way.



"1108 Title Insurance: Like Appraisal, Escrow, and Attorney's Fees, this is a third party charge, and as such is excludable from the calculation of APR. A dishonest loan officer will mark it PFC without telling you how much, as once again, $X plus unknown title fees sounds cheaper than actually adding the title charges from the rate book to the paper. In the case of a purchase, the seller should purchase an owner's policy for the buyer, and the buyer's lender will require the buyer to purchase a lender's policy of title insurance, which should be heavily discounted because it's the same title search under slightly different rules of relevance. In the case of a refinance, the lender will require the borrower to purchase this. I took an average of the costs to the nearest dollar between several rate books, but they companies are really pretty comparable in most cases. If the property had a policy of title insurance issued on it within five years (the vast majority of properties in California qualify, as only about three percent of all mortgages are older than that), the owner's policy will cost the seller about $1400 base rate, and the concurrent lender's policy will cost the purchaser about $650 or so for an average property. In the case of a refinance, the lender's policy would cost about $900-1000.



So adding this section up at the mid points, in the case of a refinance you have $450, plus $150 plus $125 plus $950, totaling $1675. In the case of a purchase, you're talking about $375 plus $200 (somebody is going to have to do a Grant Deed) plus $125 plus $650 (remember, the seller usually pays for owner's policy of title insurance, and we're talking about a Good Faith Estimate for a loan, which the seller doesn't need unless he's buying another property) totaling about $1350.



I'm going to lump two sections into one here.



"1200 Recording Fees" charged by the county recorder. Should be the same for every lender. In San Diego County it's currently $63.



"1202 City /County Tax Stamps" Some city and county governments have an intangibles tax on mortgages.



"1203 State Tax/Stamps" Some states have an intangibles tax on mortgages, computed based upon the dollar amount of the loan. California does not. Usually it's the states without state income tax. If your state charges this it will be the same no matter your lender. If you're in such a state and one company gives you an estimate that's different from everybody else, that's a matter for investigation.



"1302 Pest Inspection" On refinances, if something raises a red flag with the lender, they will require a pest inspection. There may also be areas of the country where it is required of every loan, but I've never heard of one. On a purchase, you're going to want a pest inspection anyway. There is potential for abuse (somebody charges you $200 and orders a $100 inspection), but it's relatively small potatoes, and most just won't bother when it's so much easier to hide big ticket scams elsewhere. Order it yourself from an approved vendor if you're concerned.



So the section total is $63.



Below these sections on the Federal Good Faith Estimate, but not the MLDS as they have taken it out, is a line "Estimated Closing Costs". This really was the total of all the closing costs associated with the loan. I keep telling folks that the numbers which go onto this sheet may be fictional or incomplete, but if they are actually complete and correct then the number here on this line was the most important one on the whole sheet. This was the total of the costs you were really paying to get your loan. Some call it the "total of non-recurring closing costs." If you pay attention to nothing else on this sheet, (begin Groucho Marx accent) chances are that you're being taken for a ride (end Groucho accent). But this is the most important single number. Adding the midpoint estimates from the sections we come up with $1720 if you're getting one loan on a refinance to $1675 or $1898 plus $63 plus any charges for points. Using consistent assumptions, this makes for a total for a refinance cost of $3460 for a typical single family residence in San Diego. The totals for a purchase under these assumptions is $3130. If you're buying a small condo, these numbers will be a little smaller, whereas if you're buying something upscale, they will be somewhat larger. None of these numbers account for points you're paying or rebate you're getting, of course.



Just to make an important point again, this sounds like a lot more than $1658 plus third party fees, doesn't it? If offered the choice between buying one item for $3460 and buying the same item for $1658 plus third party fees, most people think the second choice sounds cheaper. However, as I've just demonstrated these are exactly the same given comparable assumptions. And there's a lot of leeway in those third party fees for junk fees if your loan provider wants to make use of them to pad their own pocket, not to mention they could trivially be much higher if your loan provider doesn't choose third party providers wisely. Insist upon actual numbers.



Continued in Part II



mortgage real estate home loan MLDS Mortgage Loan Disclosure Statement consumer education

Well?



You would be amazed how often I encounter people who are certain they're getting a great deal on this loan that's in process, but they have no idea what that that deal is. All they really know is that their prospective loan provider sure acted like their friend.



Well, excuse me, but have you ever heard of "Honest Iago"? Any sales person is going to at least pretend to be your friend. The tricks are legion, and they're not evil, in themselves. But it's much easier to betray someone from a position of trust. "Don't worry, I'll take good care of you." Yes, and even better care of your wallet after it's in their pocket. A real friend may ask for your business, but they won't get upset if you can find a better deal somewhere else.



Loans are complex transactions, but there are three main things to know: Type of loan, interest rate, and the total cost to get that loan at that rate. You should be able to remember three things about one of the biggest transactions of your life, right? Beyond that, there's what the costs include, and whether there's a prepayment penalty, both of which are also important. The reason the existence or non-existence of a prepayment penalty is important should be obvious. A very large proportion of people who agree to even two year prepayment penalties end up paying them, and half of seven percent of $400,000 is $14,000 more that loan will cost you down the road. The equivalent of three and a half extra points, for crying out loud!



What it includes is equally important. Does it include appraisal, title, and escrow (or legal fees in those states that still require the use of attorneys)? There are all kinds of fees involved in a loan, but these are the three biggest, and because they are paid to third parties, the law allows the actual dollar amounts to be excluded from quotes. What sounds cheaper: $3022 or "$1405 plus third party fees". In this instance, it works out that they are exactly the same. Similarly, you want to find out if the dollar figure you are being quoted includes the dollar amount of any points you will be charged. Each point is one percent of the final loan amount, so if you've got a $400,000 loan when everything is said and done, you've paid $4000 for each point. If that's two discount points and one of origination, that's $12,000 on top of all the usual fees.



Force them to add in all the costs, and quote you in terms of what the loan amount is going to end up being after rolling all those costs into your loan, if that is what you intend to do. Make them quote your payments based upon that final loan amount, not the base loan amount. Those are the costs you are really going to end up paying, whether or not you wrote a check out of your account to pay them. Those are the payments you're really going to end up making. There are two sorts of mortgage consumers out there: The ones who insist upon understanding what they will really be paying, and suckers. Suckers sometimes stumble across someone who actually gives them a good loan at a good price, but it's blind luck, and far more often, they don't. Furthermore, just because you're not writing a check out of your account doesn't mean you're not paying those costs. You are, and the dollars you spend that way are every bit as real as the dollars left in your grocery bill, even if they are in much larger amounts for mortgage loan fees.



Every time I write an article like this, I get emails that say, "What if I'm doing business with a large reputable company?" Those are some of the worst. Those beautiful buildings, that plush carpet, those beautiful furnishings, those attractive salaries? Your fees are going to pay for those, along with the investor payouts that make that company so attractive to investors. They are competing upon the basis of advertising and reputation, not price, but a loan is not a vehicle. As long as it's on the same terms and conditions, it's exactly the same whether it is from National Megabank or the Bank of Nowhere. And terms and conditions are mostly standardized. The only real exception I'm aware of is the Islamic loan programs. So there is no reason not to force lenders to compete on price.



Now it is another misconception to think that the standard forms you get at the beginning of the transaction mean something. They don't. There are too many games lenders are allowed to play with those. The only way to be reasonably certain that they actually intend to deliver that loan on the terms they tell you about is to get them to give you a written loan quote guarantee, detailing:



-loan type (e.g. "thirty year fixed rate loan")

-interest rate (e.g. 6%)

-total maximum costs including third party fees and points (e.g $3022)

-whether there's a prepayment penalty. Yes or no. Not maybe. Not probably not. Yes or no.

-any conditions upon the guarantee. (almost always, "underwriter approval of the loan as submitted")



There should also be a statement that if they do not deliver the loan as described, they will pay any difference so that the net cost to you does not increase. Once you've got a guarantee with all of this, then and only then can you make a real comparison between loans. Companies that will not guarantee their quotes in writing are telling you that they cannot deliver what they talk about, that they are intentionally low-balling you in order to get you to sign up, and that they will add hundreds to thousands of dollars and quite possibly a higher interest rate when you go to sign the papers. I'm sure that makes you feel all warm and tingly and inclined to use them, right? If they could deliver that loan they are talking about, they would guarantee it. But if they won't guarantee their quote, you have no idea what loan they really intend to deliver. It's only if they will guarantee their quote that their loan can really be compared to other loans.



Loan rates and the prices to get them do change over time. They cannot be locked indefinitely, and the longer the lock, the more expensive the loan. Furthermore, all quote guarantees are going to be subject to locking while the rates are still in effect, which for A paper loans and lenders is no longer than the end of the day. But missing a day of works that costs you $300 to $500 in pay in order to intensively shop loans is likely to save you thousands of dollars.



Now, how to compare loans if one has a lower rate and the other has a higher cost. Figure out the difference in monthly interest charges, and divide the difference in closing costs by the difference in monthly interest. This will give you a break even figure in months. Due to time value of money and other factors such as the loan with higher costs will leave you with a higher balance, and therefore cost you additional interest later after you sell or refinance, add fifteen to twenty percent to this figure. Keeping in mind that most people only keep their loans two to three years, that will tell you if you're getting something worthwhile for that extra money. On the other hand, if the break even time is longer than the fixed period of the loan, you know it isn't.



Finally, it is to be admitted that getting a loan guarantee is the second best thing to make certain you get the loan they tell you about. There is a better one: Apply for a back up loan. If you have two loans ready to go, you're not relying upon the good intentions of one provider, and your choices are not limited to sign that one set of loan documents or you don't get a loan.



Caveat Emptor

I'll keep hitting this and hitting this until everybody understands this critical point.



From email:

First of all, I love your website. It is just a plethora of information for first time buyers like me who wants to be an educated buyer. Although there will be some things that I won't be able to understand completely, I try my best to learn the things I need to and have to.



I am located in DELETED and a first time buyer. We went with DELETED for our lender after shopping around for quite sometime. Our closing date is (23 days from now). There has been tell tale signs that they might be charging us junk fees. Please tell me if this is just my imagination or if I have the right to feel this way. When we got the first Good Faith Estimate from them they listed their lender's fees and all the other fees. Now when we got the paper work to sign begin the loan approval process new fees showed up on the lender's fees. I know this is an estimate but should their fees be constant on all of the Good Faith Estimates? Second, I was told to believe that the rate they will quote us will be based on the middle credit score between the three credit score bureaus. They used the lowest credit score. I am worried that come closing day that new lender fees will pop up on the loan papers and god knows what else. Is there a reason for me to worry about this lender?

Yes, there are reasons to worry about this lender. There are reasons to worry about most lenders. To be perfectly fair, there are reasons to worry about most brokers, as well.



There is a fact that it is critical to understand in order to be a well-informed loan consumer. If you ever lose sight of this fact as a loan consumer, you are likely to be setting yourself up to get rooked. Conned. Taken. Lied to. That fact is that there are all kinds of incentives for loan providers to tell you about a better loan than they can deliver in order to get you to sign up, and there is a huge upside and no real downside to them for telling you about something better than they can really deliver.



Let me haul out a rate and cost sheet for one of my favorite lenders (This sheet will be outdated by the time anyone reads this) and favorite title and escrow companies. If you are buying a $400,000 property with 20% down, then with this lender I can lock and deliver a 30 year fixed rate loan at 6.00% with zero total points to the borrower and total real costs of $3022. That's the grand total in costs. Lender's fees, broker's fees, appraisal, escrow, title, notary, recording, etcetera. For traditional purchases, where everything is like the default ways of doing it, the seller would also pay a $750 escrow fee and a $1253 policy of owner's title insurance. There would be prepaid interest on the loan of $160 for every three days remaining in the month ($53.33 per day), and the costs of an impound account if you wanted that. If you were in my office ready to lock that loan as I write this, that's what I could guarantee in writing to deliver. If you wanted to buy the rate down, I could deliver 5.75% for about 0.8 total points, which translates to about $2600 in dollars. If you wanted to buy it down further, I could deliver 5.50% for 2 points total, or about $6500. That's what's real. I can prove it, because I could write a loan quote guarantee that says if the rate is higher or the cost is more, I pay the difference.



Now, let me illustrate how far it's legal to low-ball. First off, all "third party" fees mysteriously disappear, as do the lender imposed fees, and now I'm quoting total costs of $610 plus four things marked "PFC" on the Good Faith Estimate. If I decide to tell you about those lender imposed fees in order to make it "feel" more real, that changes the costs to $1405, plus, of course, those four pesky PFCs. Or three PFC's plus $1530. Sounds like a lot less than $3022, doesn't it? But it's going to be $3022 PLUS any "junk fees" I try to sneak past you. Make no mistake: You are going to pay for that appraisal, that escrow, and that title insurance policy. It's a fact of life, inflexible as gravity. But I don't have to tell you about it initially.



Now, let's start playing games with the rate, and I must emphasize that these are legal. I would face no penalty for any of them. First off, I can have a legitimate belief that rates are headed downwards, and I could use the rates that include a 15 day lock instead of thirty. A fifteen day lock costs less. So I could tell you that you're actually getting a rebate of an eighth of a point to pay your closing costs. Many loan officers will tell people this. However, when the loan takes twenty-five days to fund, now the clients are paying that eighth of a point due to extension fees. I can actually hit fifteen days most of the time from a standing start if the buyer and seller cooperate, but it's not something I can promise because if they don't cooperate in a timely fashion, there's nothing I can do to force either of them to work faster. So I don't use fifteen day locks.



But that's only the first game. Let's say I think rates are going down, so I don't lock, but I do tell you what I think rates will be when I have to lock, and I tell you that I can do 5.75 for zero points. Once again, I'm thinking the rates will go down that much, and also thinking about getting to use the fifteen day lock. Lest it be unclear to you, my entire justification for this is raw naked optimism. But it's legal raw naked optimism. Actually, in order to cover myself, I'll say one tenth of a point net cost to you for the rate. That way, I haven't told you it's a no points loan when it may not be. By the way, I'm going to do my darnedest to keep a dollar figure from being associated with any points quote. Why? Because 5.5% for $1405 plus "two of those points thingies" sounds an awful lot cheaper to the average person than the real fact that 5.5% will cost them roughly $9500 altogether. Same loan for the same set of facts, but one way of putting it certainly sounds cheaper, doesn't it?



But suppose my raw naked optimism does not come true in the real world. Suppose the rates end up staying where they are now. This is actually better than what often happens, because you get 5.75% delivered for about three quarters of a point, because they don't lock the loan until they're ready to print final documents, and so they can use the fifteen day rate. Pretty cool, eh? You saved about 5% of a point, or roughly $160, off what the quote was. But remember, they did not, in fact, lock your loan. Suppose rates are higher in fifteen days, which is what I really do expect. Let's take a WAG and say that 5.75% gets delivered for 1.2 points, and the loan officer says, "Sorry, that's the best I could do." Now, failing to lock cost you four tenths of a point, or about $1300, and I've seen it much worse than this. In fact, since the loan officer didn't guarantee their quote, they then blow it up to 1.5 points, and they've just put an extra $1000 in their company pocket.



Now, type three games: Don't tell you about the pre-payment penalty they're sneaking in so that they can get paid more. Two year pre-payment penalty gets them roughly $1900 more in the company pocket if they're a broker, $6500 if they're a direct lender. These numbers go up for longer penalties. But when you get transferred in a year and a half, it costs you $6500 extra for that penalty when you have to sell your property. I can even give you a small part of that to make it look like my loan is better than the competition. "Sure, I'll pay for the appraisal," or give you tenth of a point back to reduce closing costs, while hiding this $6500 salami in your loan papers or even coming back after the loan has funded and asking you to sign a prepayment rider "for compliance."



There is a type four game: Games with the loan type. Suppose I tell you about a "thirty year loan at 5.5% for 1 point total." Sounds much better than any of the preceding, right? Except that what I'm talking about is a 5/1 ARM, not a thirty year fixed rate loan, and I'm still able to play all of those type one and type two games with this quote. I could be talking about a 3/1, a 1/1, or even a three month LIBOR loan with those words. Point of fact, I actually can lock, guarantee, and deliver a 5/1 at 5.5% for 1.2 points with a thirty day lock while I'm writing this, and a 5/1 is something you should probably consider very strongly, but it's not the same thing as a thirty year fixed rate loan.



Let's take it up a couple more notches. How does a "Forty year loan at 0.5% with a fixed payment of $735.70" sound, especially when the payment for that 6% thirty year fixed rate loan I talked about is actually $1918.57? Pretty good? And the forty years explains why the payments are so low? Well, congratulations! You've just signed yourself up for a negative amortization loan at a real rate of 8.2% right now, and not fixed at all. The payment is fixed, all right, but the interest rate isn't. Oh, and by the way, if you keep making that payment of $735.70 for three years, you'll owe $59,000 more while under threat of a pre-payment penalty that starts at $10,500 and gets bigger until it expires. Refinance then, and your payment goes to $2272.27 if the same thirty year fixed rate loan is available them. May not be too bad for some folks, but if you couldn't afford the $1918.57 in the first place, why would you think you can afford 20% higher payments than that in three years? I'd say it's more likely that you can afford $1918.57 now than $2272.27 then. But everything I actually told you about that loan was not only legal, but also true.



Enough horror stories for now. What can you do about this? Keep it in mind that the prospective lender has every incentive to play these sorts of games, and very little in the way of concrete incentives not to. People sign up for loans based upon who tells them about the best deal, and if that lender can't get you to sign up, there is an absolute ironclad guarantee that they don't make anything. If that loan officer is paid on commission, and the vast majority of all loan officers are, the choice is probably get money in their pocket or definitely no money in their pocket. But the cold hard fact is that without a written guarantee, none of the initial paperwork means a damned thing. Furthermore, most lenders are quite adept at avoiding giving you a guarantee. "We're a large ethical company that's been in business for 100 years and we honor our commitments." Sounds great, right? But neither a Good Faith Estimate nor a Mortgage Loan Disclosure Statement in California is any kind of a commitment. None of the forms you get at the start of the process is. Both forms say right on them that they are estimates. They could be accurate estimates or they may not be. The only thing that's required to be accurate is the HUD -1 form, and you don't get that, even in preliminary form, until you are signing final loan documents.



Now, some facts and industry statistics to illustrate why the incentives are there to tell you anything it takes to get you signed up. First off, the only universal guarantee in this whole situation is that if you don't sign up with them, they make nothing. Zero. Zilch. Nada. They've got bills they need to pay, same as you do. So you sign up, and they work on your loan for three weeks, and now it's time to sign papers, and they're not quite what you were led to expect. But you don't notice the difference. In fact, industry statistics say that over fifty percent of people don't notice at signing, and a substantial fraction of that never figures it out. I understand why; it wasn't easy for me to learn what's important, and I have an accounting degree. These forms are confusing to the uninitiated. Furthermore, the loan officer keeps you busy with a line of patter, and is talking about how much you're going to enjoy your new home, or what you're going to do with the money you're saving from the lower payment. This makes it more difficult to concentrate on those numbers swimming on that unfamiliar form. Some companies actually train their loan officers in how to distract the victims. I worked for one such company for about a month, until my loans started being ready to close and I discovered what they were up to when they showed me how to distract these people who were putting money in my pocket from how badly they were getting gouged.



Now, let's say you do notice. The situation is not the same situation as when you've signed up. If it's a purchase, you no longer have thirty days to get your loan. Indeed, your loan contingency has expired and you'll not only lose the purchase escrow, but your good faith deposit as well, if you don't sign those loan documents. You've been building up your emotions for the last three weeks thinking you're getting ready to move. You've put in your thirty days notice, you've packed up all your stuff, you've got the moving van reserved and the friends lined up, not to mention that you and your spouse are totally ready and emotionally psyched up to be owners!, and to be moving into this property. Darned few people will not sign purchase loan docs, even if they do notice the discrepancies. Industry statistics say less than 5%.



In a refinance, the motives are not as strong to sign loan documents that are less than it was indicated earlier. Most of the time you've got the house and you've got a loan you could keep, you just thought this one was better. But you've been told about this lower payment, or lower rate, or you need that cash out for your vacation that's starting next week or the remodeling contract that you've already signed. Your loan officer quite likely rolled thirty days of interest into the loan and told you that you would be "skipping a payment" (You never skip a payment, as I've explained many times), and so you've gone and spent the cash on a long weekend in Las Vegas. Now you don't have the money, and if you don't sign these documents, you won't have the money for your payment, never mind the kitchen remodel the contractor has already started or the nonrefundable tickets you put on your credit card. Finally, quite often the lender required a deposit that you're going to lose if you don't sign those loan documents. Industry statistics say that about 80% of refinances who notice major discrepancies in their final documents will sign anyway. All they have to do is sign their name, and it will all be over.



Now, whether you noticed and signed anyway, or didn't notice, you have just rewarded that loan provider for lying about that loan in the first place. They lied, you signed up, they got paid. Wow! It's like a license to print money! Not only that, but if they just play the game a little bit carefully, there's no legal liability or responsibility to you. I should note that there are a significant number of loan providers who do go over the top into illegal territory and liability, but it's not difficult to tell what is for all intents and purposes a huge whopping lie and stay legal (it is slightly more difficult if they're acting as your real estate agent for a purchase as well).



Now, what can you do about this? The absolute smartest thing you can do is apply for a back up loan at the same time you apply for the one you think you're going to actually get. This way, you can use the existence of another loan being ready to go to get leverage your bargaining position into a better deal for you. Now loan officers don't want to be back up providers - unless they think there's a real chance they'll end up with the business. In order to persuade them there is a real chance, for the business, you have to give them a real legitimate shot at being the primary provider. As my article on Getting a Loan Provider to Agree to be a Backup Loan says, if you're already signed up with someone else when you approach a loan officer about being a back up, you should expect to hear something that contains the word, "No." Failing that, I want to be paid something for my work, or I don't want to work. I'll want a deposit that I can keep if you don't do my loan.



The second best thing, which is an excellent supplement to the above, is a written Loan Quote Guarantee. Any quote that's backed up by a real guarantee is much stronger than one that's not. I don't care if the difference is three percent on the rate (and it won't be that high). I'd take the guaranteed quote over the one that isn't guaranteed, every time.



Finally, you can always insist upon answers to the same set of Questions for loan providers before you sign up. They can lie, and they can evade, but they are good and necessary questions to ask.



Caveat Emptor

Not very long ago, a woman who was impressed by my website called because she wanted to get pre-qualified for a loan. "Great!" I told her, and proceeded to ask about her income and her monthly obligations and everything else, and came up with a figure of about $220,000 that she could realistically afford. If you're familiar with San Diego, you know that that's a 1 bedroom condo, or maybe a small two bedroom in a not so wonderful area of town. With a Mortgage Credit Certificate, it got to maybe $260,000. If she bought somewhere there was a Locally based first time buyer program, that would add whatever the amount of the program was, but the only one with money actually in the budget was a place she didn't want to live. If we went so far as to go interest only, we might have boosted the base loan amount as high as $300,000. Severe fixers might be had for $350,000 or so - and she had the literature for a brand new $700,000 development. She had her upgrades and drapery all picked out, too. So I tried to be gentle in pointing out that the property appeared to be a bit more than she could afford.



Was she grateful? Heck no! She then asked, "How am I supposed to afford a house with that?" She was spitting mad! She acted like I was personally standing there saying "None Shall Pass!" (about a minute and a half in). "Well, if you won't qualify me for a house, I'll go find someone who will!"



I'm sure she did find someone to tell her she could have a $700,000 loan if she wanted it. Put negative amortization together with Stated Income or NINA, and there are any number of people out there who will not only keep their mouths shut about the consequences to you, but aid and abet you in staying ignorant about those consequences - at least until they've got their $25,000 commission check. And you know, I can do that loan also, if you don't mind that real interest rate adds $100,000 to what you owe over the course of three years and the payment all of a sudden adjusts to over four times what you can afford, and you lose the property and your credit is ruined for at least ten years. Not to mention the fact that rarely do people allow the mortgage payment to go south on its own.



There is no conspiracy keeping you away from home ownership. There is no smoke filled back room deal setting the price of properties such as the one she wanted out of her reach. Lest you be unaware, here in Southern California, we haven't been building enough new housing for the people who want to live here for thirty years now. Those desirable properties are highly priced because they are scarce, and the prices are where they are because that's where the supply of such properties balances the number of people who want them badly enough to pay those prices. Notice that I did not say, "The number of people who can afford those prices," or "The number of people who can afford those payments." This is intentional. If you want them bad enough, there are lots of loans out there, and lenders eager to make them, such that you can have that dream house - for a while. But the way financing works is like the laws of physics. Specifically, like gravity. It's there, all the time, pulling away, and there is no analog to the ground that holds us up. Think of it as an very tall elevator shaft going both directions from where you start. This month's interest is gravity, pulling you down. What you're paying is like the upward thrust of a rocket, pushing you up. When you make an investment (and a property is an investment), you want to go up, but if pull down is more than thrust up, you start going down instead. Furthermore, we are talking in terms of acceleration, not just velocity. If down is more than up next month, too, you're now going down even faster. And so on and so forth.



But the elevator shaft is never infinite going down, and now ask yourself what happens when you're going down, at a speed you've been building up for months and months, and the elevator shaft ends? I've noticed that they usually don't show Wile E. Coyote's impact any more, but what just happened to you makes the time he got caught under the anvil, the lit cannon, and the huge falling rock look like a love tap.



Real estate agents don't set prices. The market does that in accordance with supply and demand. In southern California, there's twenty million plus people demanding housing and not enough being built. You want to change this, take it up with politicians. All buyers agents can do is try and find the best bargain out there, while listing agents are trying to get the most possible money.



Your budget is your budget. You make what you make. You spend what you spend. Your savings is what you have saved plus what it has made. You can afford more for a home if you make more, spend less, save your money, and invest it effectively. If you don't do these things, you can't afford as much. Indeed, most people kill their budget voluntarily, by spending more than they need to. But it isn't my opinion that matters. All of these are cold hard numbers. You know what you make, you know what you spend. If you could do better, that's something for you and your family to work with. All a loan officer can do is work with the numbers as they are.



These numbers give the payments you can afford and your down payment. The rates are what they are. The variations in available rates are smaller than most people think. Actually, the largest difference in rates and their associated costs is how much the loan providers want to make for doing your loan. Not the only difference, but the largest one. The second largest difference is in finding the loan program that is the best fit. When you put all of these factors together, if you come up with variations of more than half a percent on the rate for the same loan at the same cost, then I will bet money that either the higher quote wants to gouge you badly, the lower rate is not quoting something they can really deliver, or possibly both. The point is this: If someone working with real numbers says that you can afford $X, I'll bet money that any pre-qualification or pre-approval you get that's more than about 5% different should set alarm bells ringing.



So now let's revisit Ms. Eyes Bigger Than Her Wallet. She thinks all she has to do is say "Abracadabra!" and the whole thing will work out. But the interest rate is what it is, which means the monthly cost to have that loan is fixed - if she didn't bump it up by wanting something she can't afford. That lender is run by some pretty smart people, who understand all of this extremely well. They have the assistance of some very sharp lawyers in writing those loan contracts. One thing I can absolutely guarantee is that if they don't get their money - all of their money - you will be even unhappier than they are. The upshot is that the vast majority of the people who think they're solving their problems with a wave of some magical wand and the phrase, "Abracadabra!" are in fact doing something Unforgivable to their own financial future, roughly equivalent to pointing that magic wand at their own finances and mangling the pronunciation to "Avada Kedavra"



Caveat Emptor