Monday, November 2nd, 2015
Mortgage borrowers will find it easier to compare different loan products and understand the total cost of their loan under the new mortgage rules that took effect last month.
The changes are part of the Consumer Financial Protection Bureau’s “know before you owe” initiative.
Here’s a breakdown of the changes to the mortgage forms.
First, four documents are reduced to two. The Loan Estimate or “LE”, will replace two documents, the Good Faith Estimate and the initial Truth-In-Lending disclosure. The Closing Disclosure or “CD” will replace the HUD-1 Settlement Statement and the final Truth-In-Lending disclosure.
Borrowers can now more easily check the Closing Disclosure to determine whether the loan amount, interest rate, monthly payment and the amount they need to bring to settlement (a new feature) have changed from the initial Loan Estimate. The LE also itemizes all closing costs and indicates which services a borrower can shop for, such as title insurance providers and home inspectors.
The third page of the Loan Estimate includes information to help a borrower better understand the long-term costs of the loan. One new feature looks ahead to what the borrower will have paid in principal, interest, mortgage insurance and other loan costs at the five-year mark.
To help with comparison shopping, the LE details the annual percentage rate (APR), so a borrower can put documents side by side and compare overall costs easily between loan products, such as a 15-year and 30-year mortgage. APR is the cost of credit expressed as a yearly rate.
The Loan Estimate also shows the total interest percentage—the total amount of interest that you will pay over the loan term as a percentage of the loan amount.
The Closing Disclosure is also more user-friendly than the documents it replaces. For example, escrow costs are itemized to show what portion of the payment goes toward homeowner’s insurance, mortgage insurance, interest and taxes.
The new disclosure forms are easier to understand and are designed to help borrowers pick the best loan for their situation.