I want to add my “2 cents” to the article that appeared in Yahoo Finance in December of 2013, which can be found by clicking here.
1. APR (Annual Percentage Rate)
My first thought is that if you start comparing lenders by using APR you will be very frustrated and unhappy. The rules on calculating APR are very confusing and if you use it as a shopping tool your choice might as well be based on “Eeny, meeny, miny, moe…” Please get more details on relying (or not relying) on APR here.
The only way to compare lenders in terms of numbers is to ask 2 questions: 1) What is your interest rate if I were to lock it today for X number of days; and 2) What are the bank-associated fees. The reason you only want to ask about these fees is that for a purchase transaction most of your closing costs (legal and title fees, transfer taxes, etc.) are independent of the lender and should not be used for comparison purpose. If you are refinancing and the bank is taking care of the title work, it is appropriate to ask what the total cost of refinance will be.
The bank wants to make sure that the property taxes on your house are being paid on time and that the insurance coverage does not elapse due to non-payment. The reason that the bank is concerned about these things is that if either one is not paid the bank’s collateral (your property) is jeopardized. Your house can be sold at the sheriff’s sale if the taxes are not paid. If your house burns down in a fire and there is no insurance, everybody loses, including the bank. So mechanism does the bank use to control both payments? Very simple: the bank collects money from you on a monthly basis, keeps that money in a separate account (escrow account) and makes payments to the municipality and insurance company when they are due. Most lenders will charge you extra fees for allowing you to pay your own taxes and insurance costs as this adds extra risk for them. My advice is, if your lender allows you to make your own payments without penalty you should take advantage of that. There is no economic advantage in maintaining an escrow account, as it benefits the lender but not you.
3. Prepayment penalty
There is not much to say about this since you will have a hard time finding a mortgage that has a prepayment penalty even if you were looking for one.
4. What not to do before your loan closes
The best way to address this question is: don’t do anything without running it by your loan consultant first.
5. Who services your loan
Several years ago there was a multi-million dollar fraud perpetrated against one of the largest mortgage banks in this country. Thousands of its mortgage customers received a letter from a company that claimed to be a new service company for their mortgages and requested that payments be made out and mailed to them. Needless to say all of this was completely bogus but it took the original bank several months to realize that a big number of their customers stopped paying their mortgage. It then took several more months to correct the situation. The moral of this story: if your mortgage gets sold to another bank, the notification letter will come from the original bank, not the new one.