Here are 7 questions to ask your mortgage lender
On the Money
From the August 7, 2009 print edition
The Federal Reserve Board has proposed changes to Regulation Z, which is how the Truth in Lending Act is enforced.
Since 1968, Regulation Z and the Truth in Lending Act supposedly have been protecting consumers from deceptive lending practices. The
Federal Reserve Board has proposed changes in both the content and timing of what will be required of mortgage lenders.
In general, Regulation Z directs that disclosures be made to potential borrowers during the application, underwriting and consummation process. Underlying the regulation’s effectiveness is the assumption that the potential borrower will read, and understand, the implications of the disclosures.
Lenders will be required to supply a new one-page Federal Reserve Board publication, titled “Key Questions to Ask About Your Mortgage,” which would explain potentially risky features of a loan.
Whether enacted into law or not, the following seven questions contained in the new publication are worth asking the lender:
- Will my monthly payments reduce my loan balance? Some loans let you pay only the interest on your loan each month. These payments don’t pay down the amount you borrowed. This may seem fundamental and obvious. However, based on a study of defaulted loans, the Fed discovered many borrowers didn’t understand this.
- Will I have to document my employment, income and assets to get this loan? Sometimes a lender will make a loan without requiring you to show that you’re employed and have the income or assets to repay the loan. These no-documentation (“no-doc”) or low-documentation loans usually are approved because of a large down payment and loan-to-value ratio.By not evaluating income at the time of application, the borrowers may lack the ability to make the monthly payments.
- Will I owe a balloon payment? Some loans require a very large payment at the end of the loan – sometimes tens of thousands of dollars. Balloon-payment loans presume an ever-increasing house value, giving the borrower the ability to re-finance, make the large payment and begin the cycle again. As recent months have demonstrated, this isn’t always the case. In the past, this feature was used to create arbitrarily low monthly payments.
- Could I owe a prepayment penalty? Some lenders charge you a hefty fee if you pay off your loan, refinance it or sell your home within the first few years of the loan. For many borrowers, pre-payment penalties are so counter-intuitive, they forget to ask the question. The wise borrower will negotiate this penalty completely out of their loan.
- Even if I make my monthly payments, can my loan balance increase?Some loans let you choose to pay even less than the interest owed each month. The unpaid interest is added to the loan balance and increases the total amount owed. Similar to balloon payments, this feature assumes a constantly increasing value in the property. The increase in property value must be greater than the increase in debt principal for this loan attribute to be workable.
- Can my monthly payment increase? During the height of aggressive lending a few years ago, a low “introductory interest rate” was an attractive, but deceptive, practice, leading to many defaults. That rate, which created payments that didn’t even cover a portion of the principal, spelled disaster for many borrowers.
- Can my interest rate increase? Adjustable rate mortgages (ARMs) are sensible only in times of stable financial markets. The proposed changes to Regulation Z require a much deeper explanation of the possible consequences of ARMs. The entire format and content of the current Adjustable Rate Mortgage Loan Program Disclosure document is being streamlined and given plainer language.
The Truth in Lending Disclosure now will contain a calculation of the finance charge and annual percentage rate (APR) based upon almost all fees and costs in connection with the entire transaction. In the past, excluding fees and costs made the interest rate appear lower.
Other changes within the proposed regulation include increasing the advance notice of a payment change from 15 days to 60, providing a 45-day notice before the creditor places its own property insurance and, if the loan has negative amortization, a monthly statement will be required clearly showing alternative payment options.
Certain payments to a mortgage broker or a loan officer that are based on the loan’s terms and conditions will be prohibited. Mortgage brokers or loan officers will be explicitly barred from “steering” consumers to transactions that aren’t in their best interest in order to increase their compensation.
© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.