At the beginning of the mortgage process, the lender is required to provide the borrower a Loan Estimate that outlines a good faith estimate of key mortgage terms such as interest rate and closing costs within three business days of the borrower submitting a mortgage application. At the end of the mortgage process, the lender is required to provide the borrower a Closing Disclosure that outlines the final, actual terms of the mortgage at least three business days before the mortgage closes.
The borrower should compare the Closing Disclosure with the Loan Estimate to ensure that your final, actual interest rate and closing costs did not increase significantly as compared to the initial estimate provided by the lender in the Loan Estimate. The key items to review when comparing the Closing Disclosure and Loan Estimate are interest rate (middle of page one of the Closing Disclosure) and total closing costs (bottom of page one of the Closing Disclosure)
If the figures and information in the Closing Disclosure and Loan Estimate match or are relatively close, then you are all set to close your mortgage. Significant differences between the Closing Disclosure and Loan Estimate such as an increase in interest rate or higher borrower costs may be a sign that the lender has ‚Äúbait and switched you‚ÄĚ -- promised you one set of terms but delivered another set of terms that cost you more money.
If there are meaningful discrepancies between the Closing Disclosure and the Loan Estimate, ask the lender for an explanation and do not sign the loan documents. You should cancel (also known as rescind) the mortgage if you are not satisfied with the lender‚Äôs explanation and the discrepancies cannot be resolved. You can cancel your refinancing up to three days after you sign loan documents and you are free to work with a different lender; however, we recommend that you do not sign your loan documents if you identify any significant issues or discrepancies. Although you may be out non-refundable costs such as your appraisal fee and certain lender fees, canceling a bad refinance will save you much more money over the life of the mortgage.
One way to avoid potential negative surprises is to lock your mortgage. When you lock your loan, your interest rate, closing costs and other key terms are set for a fixed period of time, usually between 30 and 60 days. Your lock period should be long enough to close your refinance. Locking your loan helps you avoid bait and switch by lenders and also protects you if interest rates increase over the course of the refinance process.
According to mortgage guidelines, the rule that governs the mortgage process, there are specific rules about how mortgage costs can change and increase from the beginning of the mortgage process to when your refinance closes. The rules are designed to prevent lenders from quoting one set of mortgage terms up-front to win your business and then attempting to charge you a higher interest rate or fees prior to your refinance closing when you are under pressure to complete the transaction. In general the interest rate and closing costs outlined in the Loan Estimate should match the Closing Disclosure.
A lender may charge the borrower higher costs than the amount disclosed on the Loan Estimate when a changed borrower or mortgage circumstances permits the cost to increase. Examples of these circumstances include:
If the actual closing costs paid by the borrower at closing exceed the amounts disclosed on the Loan Estimate beyond the limits and rules outlined below, the lender must refund the excess costs to the borrower within 60 calendar days of the mortgage closing
For the following items the lender may charge the borrower more than the amount on the Loan Estimate without any limit:
For the following items, the lender may charge the borrower more than the amount disclosed on the Loan Estimate as long as the total sum of the costs added together does not exceed the sum of the costs disclosed on the Loan Estimate by more than 10%:
For all other cost items, lenders are not permitted to charge consumers more than the amount disclosed on the Loan Estimate under any circumstances other than changed circumstances that permit a revised Loan Estimate. The cost items include:
If any of your final loan terms increase more than the guidelines specified above, you should immediately contact your lender to understand the discrepancy. Your goal is to work with your lender to make sure that you are not overpaying for your mortgage. If you cannot resolve the differences, then you should consider canceling your loan and working with a different lender. While this involves extra time and effort on your part, it may save you thousands of dollars in the near and long term. When done correctly, comparing the Closing Disclosure to the Loan Estimate can help borrowers ensure that their final loan terms are fair and accurate. If you are considering switching lenders we recommend that you contact multiple lenders in the table below to compare loan proposals. If you change lenders make sure that your new lender can close your mortgage within your desired time frame.
‚ÄúCan my final mortgage costs increase from what was on my Loan Estimate?‚ÄĚ CFPB. Consumer Financial Protection Bureau, September 13 2017. Web.