Decoding lending disclosures Part 2: Mortgage agreements

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By: NathanielCopeland
on 23rd Nov,2012

When the housing bubble burst during the 2008 subprime mortgage crisis, it triggered a financial meltdown on a massive scale.
Decoding lending disclosures Part 2: Mortgage agreements

When the housing bubble burst during the 2008 subprime mortgage crisis, it triggered a financial meltdown on a massive scale. Companies like Goldman Sachs and Merrill Lynch went underwater and the entire American auto industry needed Federal bailout.

The economy was under siege from every direction but it was the average American citizen who got hit the hardest. Millions were downsized and in a matter of months, unemployment and national debt was spiralling out of control. In the midst of all this, millions lost their homes in foreclosure.

Since those dark days, the economy has been on the path to recovery although the pace has been somewhat tepid. The real estate market is slowly recovering under the effects of the HUD laws introduced by the Obama administration.

Credit conditions have been tightened up and it is not as easy as it was to get approved for a home loan. Moreover, consumers are playing it safe and reading between the lines of loan agreements to figure out if they deals are watertight. Once burned, twice shy.

The fine print on the loan agreement is the most important thing that you should go through in order to understand the nature of the debt that you are going to assume. Before you put your signature on the dotted line, you should go through the following points appearing in the agreement disclosure.

  • Annual Percentage Rate (APR) - The importance of the APR cannot be stressed enough. It is the total amount of interest that is charged by the lender per annum and it is the sum of the total expenses, taking into account the cost of originating the loan, discount points and the actual applicable interest rate. The simple reason behind the importance laid down on the APR is that a loan advertised as carrying an interest of 12 percent yearly only tells half the story. The actual interest rate may be as much as 12.9 percent when the different charges are factored in.
  • Finance charges - As in the case of any loan, the finance charge can be defined as the quantified cost of credit. In simpler terms, the finance charge is the amount you pay in order to receive the loan and it may be the sum of a number of associated charges like fees incurred to prepare legal documents and deeds.
  • Payment schedule - The payment schedule lays out the number of payments that you would need to make on a loan to successfully repay it as well as the amount of each payment payable when due. The schedule also provides a breakdown by separately listing the amount which goes towards the principal, the interest payable and the cost of insurance which is covered by each payment. One of the things that you might note is that the first few payments on the schedule is dedicate mostly towards covering the interest while the final few payments are structured to cover a large portion of the principal.
  • Financed amount - The amount financed is the actual amount that you have borrowed. The requested loan amount would always tend to be greater than the amount financed since it includes all prepaid financing charges or in other words, whatever amount you paid the lender up front (not to be confused with a down payment).
  • Total amount payable - This is the amount you would necessarily pay in case you are able to make all the payments on your loan as per schedule. The total payble amount is variable taking into consideration circumstances in which you might miss a payment and late fees are added to your due balance.

Every mortgage or loan agreement is carries densely printed pages with lines after lines of miniscule, almost indiscernible text and most people tend to skip out on the mind-numbing amount of details and go straight to the bottom of the page and sign. You just need to filter through all the details and get the most important data out of it.

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