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Understanding Settlement Costs:
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RESPA Disclosures
When you choose your lender and visit him/her for your pre-qualification,
you by law should received a Good Faith Estimate of settlement
costs. RESPA is a law established in 1974 that
created the Truth-in-Lending laws. One of the provisions of RESPA
is the lender, upon any application for credit, must provide a
Good Faith Estimate to the person or persons making application
for credit within 3 business days. Also required within the three
day period is an estimate of the Annual Percentage Rate or APR.
Good Faith Estimate of Settlement Costs
Good Faith Estimate of settlement costs is just that; an estimate
of what to expect to pay for closing costs at settlement. This
is usually a higher figure than what you will expect to pay because
a number of the costs are prorated for an entire month and you
will usually close within the month. So these prorated numbers
will be lower. Your lender should explain the costs line by line
to give you an idea who will receive these costs. Keep your Good
Faith Estimate so you can compare it with the final settlement
costs and ask the lender questions about any changes.
Annual Percentage Rate/APR is the interest you
will pay over the life of the loan and the closing cost portion
of your settlement costs averaged over the term of your loan expressed
as a percentage. Sound confusing? It is a method to look at the
interest rate you are being quoted and the closing costs as an
interest rate so you can compare one company's rates to another’s.
As we mentioned in the Banking on a Mortgage step, the lowest
interest rate may not be the best for you. To get a lower interest
rate the lender could be charging you higher closing costs and
these higher closing costs will reflect in the APR as a higher
rate. So always in comparing rates ask what the APR is. If you
choose an FHA loan, FHA will only allow only a lender to collect
a certain amount of costs and usually the FHA loans have similar
APR’s as these costs are very similar from lender to lender.
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