Before you sign your name on a legal document that gives you several hundred thousand dollars in order to buy a home, and before you sign your name on a legal document that will require you to pay back that loan by making payments every month for the next 360 months (30 years), please review the legal document and make sure you understand what you are agreeing to do.
I recommend that you hire an attorney to review the legal document, and that this attorney discuss the document with you, prior to you signing the legal document.
If you borrow several hundred thousand dollars from a lender in order to purchase a home, and if you don’t pay that money back, the lender will want to take back their collateral, which in this case is the home you are going to buy.
Again, if you borrow money to buy a home and then can’t pay it back, your lender will want the house back.
Contrary to what you might read in the press, no, a mortgage note is not a confusing document **.
It’s a very easy-to-understand document.
It states how much money you are borrowing, the interest rate on the loan, and how much you will be required to pay over the next 360 months.
If it is an adjustable-rate loan, the document will include information on the changes to your interest rate over the next 360 months.
Now, it will not include a breakdown in dollars as to how much your monthly payments may rise. But, if you are worried about how high your monthly payments might rise (and you should be), I suggest you use a handy online calculator to figure it out (one is on this blog, in the right-handed column).
For example, if your adjustable-rate loan says that your rate can rise as much as 6% from what it is on day one, then add 6% to your initial rate to figure out whether or not you can afford the new amount, meaning whether or not you think you’ll be able to afford the new amount, three-to-seven years from now, when your loan resets.
Any story you read in the press where it says “loan documents are s-o-o-o-o confusing” is crap.
From today’s Globe:
Getting a mortgage is often the single largest financial transaction in a person’s life. Yet borrowers, presented with a dizzying array of legal documents full of complex conditions, can find the process daunting.
Just ask Peter S. Milewski, director of mortgage insurance at state agency MassHousing, who recently refinanced his own home.
“I’m in the business, and it probably took me 1 to 1 1/2 hours to go through the documents to make sure I knew what I was signing,” he recalled. “Even then, I probably didn’t understand every single sentence.”
That’s pretty ridiculous.
I am not an expert on mortgage loan documents. I don’t have to be, I’m not an attorney.
But, I can tell you this. I have bought my own home, twice. Each time, I reviewed the documents pretty quickly, yet I understood exactly what they said.
In my case, all I cared about was how much was I borrowing, what was the interest rate, what was my monthly payment today, and what could my payment increase to, down the line (the first time I borrowed, it was an adjustable rate mortgage loan).
One thing I definitely understood pretty well was, if I didn’t pay back the money, the bank was gonna want the home back, in return.
(Honestly though, the Globe article does a great job of explaining all the documents you will be signing when you buy your home, and it describes what each of the documents do and when you should receive them (most importantly, get your HUD-1 settlement sheet at least one day prior to closing (er, it’s the law)).)
How easy is it to understand your loan documents?
It says that the homeowner is borrowing $308,800 from the bank, and that the money will be due back to the bank on a monthly basis for the next 360 months, until December 1, 2033.
Here is page one of the adjustable rate rider on the loan.
It says that the loan starts out at 4.625% for the first three years of the loan, until December 1, 2008, and that every year after that, once a year, it may change.
Here is page two of the adjustable rate rider on the loan.
It says that the rate may change every year.
The first time it changes, on December 1, 2008, the loan rate may go as high as 6.625%.
It may go higher or lower than that, in the future, but it will never be more than 2% from the rate of the previous year.
And, it will never go higher than 9.625% (5% higher than the initial rate).
As a potential borrower, I can do those calculations pretty quickly, to get an idea of what my future payments may be.
If (and when, ha-ha!) my rate goes from 4.625% to 6.625%, my payment will go from $1,587.77 to $1,977.24.
If (and when, ha-ha?) my rate goes from 4.625% to 9.625%, my payment will go from $1,587.77 to $2,625.34.
So, I need to decide: do I think I’ll be able to afford the additional $490 per month, in three years? Do I think I’ll be able to afford the additional $1,038 per month, after that? If I think I’ll be able to afford the (much) higher payment in subsequent years, I will take out the loan.
And, I will realize that if I can’t, I’ll lose my home.
Pretty simple, yes?
( ** Okay, that’s not exactly true, of course. They are not necessarily written very clearly, but really, do they have to be? The only thing you need to know is how much you’re going to pay on day one, how much you’ll have to pay if your interest rate goes up, and that’s about it. I mean, I don’t know how electricity works, but I understand the lamp goes on when I turn the light switch, right?)
More: Sifting out surprises in mortgage fine print – By Lynn Asinof, The Boston Globe
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