The New World of Cheaper Closing Costs

There's a big debate in lending centered on how much borrowers should know. You'll be happy to learn that borrowers are winning -- and that a new round of clarity is likely to soon begin.

To understand what's going on consider the simple Good Faith Estimate of closing costs. The GFE shows what you should expect to pay for your loan. The current form was introduced in January 2010 after 14 years of arguing and a major court challenge.

The big deal here is very simple: Money.

"Through a simpler and better understanding of their costs, consumers can shop more effectively for a mortgage," then-HUD Secretary Steve Preston said in 2008. "Based on HUD's economic analysis, we estimate that improving upfront disclosures on the GFE and limiting the amount that estimated charges could change will save consumers nearly $700 in loan costs."

Good Faith Estimate Revisions

Now there's a new effort to revise the GFE once again, and this time the process should be fairly quick.

The need for the new form arises from the passage of Wall Street reform last year. The legislation did away with yield spread premiums, or YSPs, which are fees paid to lenders who were able to up-sell loans to borrowers. In other words, if you qualified for a 5 percent mortgage and paid 6 percent, the lender got a larger fee.

An end to the use of yield spread premiums is important to VA mortgage borrowers because in the past lenders often sold expensive loans to borrowers who actually qualified for better financing. Indeed, the Wall Street Journal has reported that 61 percent of all subprime loans originated in 2006 went to borrowers who actually qualified for loans with less interest and better terms.

The newly minted Consumer Finance Protection Bureau (CFPB) now wants a fresh Good Faith Estimate based on the latest mortgage rule changes. They actually have two forms in mind.

Which is better? That's a matter of opinion so the CFPB asked the public what it thought. The period for public input ended Sept. 17 but the two forms remain online so you can judge for yourself.

Looking at the forms you can see they're each two pages long with extremely plain language, lots of big type and plenty of boxes and graphics. The lender must clearly state if the form of financing being provided in VA, FHA, conventional or other.

But hidden within the simplified forms are real protections for borrowers.

Borrower Safeguards

What can and cannot change before closing is clearly shown. As the form points out, "your interest rate, points and lender credits can change unless you lock the interest rate."

So -- hint hint -- be sure to lock you interest rate and terms unless you think mortgage costs will plummet before settlement.

Unfortunately, neither form comes out and says whether or not, yes or no, the loan is actually locked. This is a huge flaw.

What can and cannot change after closing is also clearly shown. Unfortunately, the two examples provided by the CFPB both use adjustable-rate mortgages. Had one example used a fixed-rate loan borrowers would see that their payment for principal and interest is frozen at closing and will not change.

All in all the forms are step forward. Clarity in the marketplace is good for both borrowers and lenders.