Key Considerations When Reviewing Mortgage Documents
Prospective homebuyers are often overwhelmed with a plethora of documents to sign in the eleventh hour. With the fear of losing their dream home or a favorable interest rate, they may hurriedly sign these documents, unwittingly exposing themselves to hidden risks. Let’s dissect some of the clauses that homebuyers should scrutinize closely.
A. HOME MORTGAGE DOCUMENTS
Generally, there are TWO crucial terms that every potential homeowner NEEDS to comprehend in a home mortgage note, typically a 10-page document filled with fine print. These critical points are:
This clause denotes the fee, or penalty, you’ll incur for settling your mortgage ahead of schedule. The logic is that early repayment deprives the lender of the interest they would have earned throughout the loan term. Pre-payment penalties usually range from 1% to 3% of your total mortgage amount, meaning you could pay at least $4,000 extra on a $400,000 mortgage.
If you encounter this clause in your loan documents, strive to negotiate its removal. This is PARTICULARLY crucial if you were not previously informed about this penalty.
Adjustment of Adjustable Rate Mortgages
Firstly, it’s prudent to avoid adjustable rate mortgages (ARM) in favor of fixed-rate options.
However, if you’re still considering an ARM, be aware of how much your loan rate could change once it becomes adjustable. Most ARMs begin adjusting after about five years. If you’re not informed about this adjustment, you may be shocked to find your loan has ballooned beyond your financial capability. This information is typically found on the second page of your mortgage note. The adjustment rate, or “margin rate,” should fall between 2.5% – 3%. If yours exceeds this range, consider having your attorney renegotiate the terms or advise you on the appropriate steps to take. Keep in mind that even a 1% difference can amount to thousands of dollars over the life of your mortgage.
B. CLOSING DOCUMENTS
Before signing the multitude of documents at a real estate closing, look out for SEVERAL KEY provisions. Here are some of those:
Comparing Closing Statement with Good Faith Estimate: Ideally, you should receive a closing statement at least 24 hours prior to closing. Compare this statement with your Good Faith Estimate, paying special attention to any fees, including mortgage origination fees, appraisal fees, and credit report fees. If the figures do not align with those on your Good Faith Estimate, insist firmly, yet courteously, that the numbers match those provided in your Good Faith Estimate.
Eliminating the “Hold Harmless Agreement” Clause: The Hold Harmless Agreement clause absolves the lending company, closing agent, and loan officer of liability for defects such as mold or substandard drywall. This shifts the burden of repair costs solely onto the buyer. Therefore, it’s in the buyer’s best interest to locate such a clause and, if possible, seek its removal.