Among the byproducts resulting from the mortgage meltdown and subsequent credit crunch is a newly designed Good Faith Estimate (GFE) to be presented at the time of loan application. The new form is unarguably far worse than its predecessor in terms of clarity, accuracy and ease of understanding.
Perhaps the worst part of the new GFE is that it doesn’t differentiate actual closing costs from escrow deposits and interim interest.
When a homeowner obtains a mortgage for a refinance, there are several fees and charges that must be disclosed. These include the cost of the appraisal report, county recording fees, a title search and lender’s title insurance. Closing costs, as I describe them, are “items that must be paid in order to obtain the requested mortgage.” In other words, closing costs do not exist if the would-be borrower decides not to apply for the refinance.
Interim interest and escrow deposits, however, are incurred by the borrower regardless of whether or he chooses to refinance. When a borrower settles on a refinance, the new lender will charge interim interest to cover the number of days from the day of settlement to the end of the month. The reason for this is simple. Mortgage payments are due on the first of each month and cover the interest charged for the previous month. If the settlement occurs on the 15th of the month, the new lender will charge 15 days of interim interest to cover the period of the 15th to the 30th of that month. The first mortgage payment isn’t due until the end of the next month.
Similarly, a new lender will collect funds to create an escrow account so it can make tax and insurance payments on behalf of the borrower. While funds are collected at settlement for this purpose and disclosed on the GFE, it’s important for the borrower to understand these items are not “closing costs” or, as they are described on the new GFE, “settlement charges.”
I object to this wording because it’s beyond inaccurate. The new GFE bunches all items together and defines them as “settlement charges.” This is just plain not true. If a homeowner chooses not to refinance, the cost of the appraisal, lender’s title insurance, county recording fees and other items don’t exist. But if the borrower chooses not to refinance, interest and tax payments do not go away. As long as the homeowner owns the home, he will owe real estate taxes. And as long as he has a mortgage, he will owe interest. The new GFE includes the estimated escrow deposit and interim interest with the loan fees and marks them as “total estimated settlement charges.”
The old GFE very appropriately separated these items. Closing costs were itemized and summed up as “estimated closing costs.” In a separate box, escrows and interest were summed up and labeled “estimated prepaid items.”
This is just the tip of the iceberg when it comes to my beef with the new GFE, but my space for this column is limited. Readers, next time you apply for a mortgage, make sure you know what items are true transactional fees and what items are those that you would have to pay regardless of whether or not you take out a new loan.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.
Please read our comment policy before commenting.