A mortgage form people can actually understand?

New federal rules that take effect Friday, Jan. 1, are supposed to make it easier for consumers to shop for mortgages by providing uniform estimates of loan costs and requiring the estimates to be closer to the actual costs when it comes time to close the loan.

 

How much the new rules, an update of the 1974 Real Estate Settlement Procedures Act (RESPA), will really help consumers is still being debated.

 

Under the new rules from the U.S. Department of Housing and Urban Development, borrowers will receive a three-page standardized form that clearly spells out key loan terms and closing costs. You can see a form here.

 

The new Good Faith Estimate clearly discloses the mortgage amount, the interest rate, whether the interest rate can rise and by how much, and whether there is a balloon payment or prepayment penalty. It also details settlement charges, such as title insurance and real estate transfer taxes, as well as escrow and upfront payments for real estate taxes and homeowners insurance.

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The new rules require lenders to disclose all the various fees in a standardized manner so consumers can compare costs. As The Wall Street Journal writes:

One difficulty of shopping for mortgages is that the lender with the lowest rates often isn't offering the best deal. High fees can wipe out the benefits of low rates, and little-noticed features such as prepayment penalties can burn borrowers. Even for savvy consumers, it is hard to compare different combinations of rates, "points" (paid in exchange for a lower rate), fees and other terms. Lenders often sprinkle in lots of confusing charges, such as processing and messenger fees. Dickering over the smaller fees could distract borrowers from the bigger picture of total costs.

"The bottom line for consumers is that it's going to be a lot harder to bait and switch and pile on junk fees. Consumers win," Kurt Pfotenhauer, chief executive of the American Land Title Association, told The Chicago Tribune.  

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But others disagree. Some fees, like the underwriting and processing fees that are part of the loan origination process, are now grouped together instead of being itemized, The Tribune noted.

 

Plus, price-change guarantees that apply when service providers are arranged by the loan originators don’t apply if customers choose their own service providers, which could discourage comparison-shopping.

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"I think the net result is that it will cost consumers more because it will discourage shopping," Hank Shulroff, senior vice president at Attorneys' Title Guaranty Fund, told The Tribune. "The early disclosures are more transparent, but in the end the consumer is going to have less information about what it is they actually purchased, especially as it relates to title services."

Jeri Lynn Fox, president of the Illinois Association of Mortgage Professionals, told the newspaper: "It's exceedingly confusing. Whenever you have confused consumers, isn't that when the opportunity for them to be taken advantage of comes up?"

 

Jack Guttentag, a retired Wharton School finance professor who operates the Mortgage Professor Web site, believes the new Good Faith Estimate will help borrowers, but there is still room for improvement.

 

He told The Wall Street Journal that borrowers should focus on two items:  the interest rate and the "adjusted origination charge," which includes any points paid to lower the rate.

 

The new rules also restrict how much the final charges for some items can vary from the estimate. In the past, they have often varied widely.

 

Customers can download a free 49-page booklet from HUD, which explains the process of shopping for a home loan and related settlement services.

 

Related reading:

• How mortgage shopping could change
• 4 ways to save on closing costs
• When should you lock in a mortgage?