Q: We have just completed the settlement on our new home and it was not a good experience. The title attorney obviously wanted to rush us through the process, since there were several other people waiting to go to their own settlements.
We did not get copies of any of the documents we signed. Are we entitled to obtain this material? Additionally, it appears that the interest rate, which we carefully negotiated with our lender, was considerably higher than was initially promised. We thought we were obtaining a rate at 7.5 percent, but the Truth in Lending disclosure statement that we had to sign at settlement stated a rate of 8.106 percent. Is there anything we can do now that we have already gone to settlement?
A: Settlement is a very important process, and must not be rushed because the title company or title attorney has other people waiting in the lobby. You are paying for services rendered, and you are entitled to good quality.
A settlement happens every time someone buys a house, a condominium or cooperative unit. This is the time when all parties usually appear in the office of the settlement provider, which could be a private settlement company or an attorney, to complete the legal paperwork for the sale and to exchange money. The buyer has the right to select his or her own settlement provider, and this selection should be done after careful comparative shopping.
At the settlement, the buyer and seller should discuss any unique issues relating to the house, such as which keys work on which doors, where the security system is, and perhaps some helpful tips (or gossip) about the surrounding neighbors. The buyer should have inspected the house the morning of settlement to make sure that everything is in working order. In my own experience, I have seen eight situations where a water heater was not functioning when the buyer made the pre-settlement inspection.
Settlement is the time to resolve these remaining issues. It may be too late once the deed has been signed and recorded, and the sellers have received their money.
You definitely should get copies of every piece of paper that you sign at settlement. Although you should have been given a copy when you completed the settlement, it is not too late to ask the settlement company to send you--at their expense--a complete set of all documents.
You also asked about the interest rate. To confirm what the actual interest rate is, look carefully at the promissory note that you signed. Somewhere in that document it should note that your interest rate is 7.5 percent.
However, the Truth in Lending statement that you received at settlement probably states that the annual percentage rate (APR) is 8.106 percent. What is the difference?
Those are good questions, and the answers can be found in a law known as the Truth in Lending Act.
The act, effective since 1969, was the first major piece of national consumer legislation. Its purpose was simple: allow consumers to shop and compare the cost of all types of loans, including automobile, credit card and mortgage loans. Congress determined many years ago that lenders often charged upfront costs to consumers, but the consumers did not realize--or understand--these charges until they sat down to sign the loan documents. Thus, consumers were unable to compare the cost of their loans.
The Truth in Lending Act was designed to correct this problem and to take the mystery out of consumer loans. One of its primary purposes was to impose a nationwide standard, so that consumers in California as well as consumers in Maryland would be able to understand the lender's terminology and be better prepared to compare the cost of credit.
Annual percentage rate is one such credit-cost concept. Simply defined, the APR is the cost of credit expressed as a yearly rate. It includes not only the basic mortgage interest rate, but also points, mortgage broker fees and certain other credit charges that the consumer is required to pay.
Thus, when your lender quotes you an interest rate of 7.5 percent, but you have to pay 1 point plus a host of other charges when you go to settlement, the lender's "yield" is more than the interest rate that was offered you.
It is this "yield"--this APR--that the lender must disclose. Because it includes more than just the basic interest rate, it will be higher than the interest rate that your lender said you would get.
Mortgage lenders are required by law to give you (or place in the mail) a Truth in Lending statement within three days after receiving your mortgage application. Armed with this document, you should be able to shop around. Contact several lenders; do not commit yourself--and do not give a lender any money--until you are satisfied that you are getting the best rate possible.
The Truth in Lending disclosure statement is a valuable tool, and if used properly, can assist consumers in comparative shopping. The mortgage lending business is highly competitive, and rates--and the APR--often vary. Unfortunately, too many consumers do not take advantage of these required disclosures.
From its pamphlet, "Looking for the Best Mortgage," here are some questions that the Federal Reserve Board suggests you ask each potential lender:
* Give me a list of your current mortgage interest rates. Are the rates being quoted the lowest for that day or for the week?
* Is the rate fixed or adjustable?
* If the rate is adjustable, what are the terms and conditions for the adjustment?
* How often will the rate be adjusted? Is there a cap and a ceiling for each adjustment period? Will the monthly payment be reduced when rates go down?
* Will the lender charge points? If so, how many? Each point is the equivalent of 1 percent of the total loan amount. For example, two points on a $175,000 loan will cost you $3,500, and this is an upfront payment when you go to settlement. Over a 30-year mortgage, paying a point costs you the same as as if you added one-eighth of a percentage point to your rate. Thus, a lender may charge you 7.375 percent and 1 point, or 7.5 percent and no points; the APR should be the same, if all else is equal. Explore all of these variables with several lenders, and then sit down and do the numbers yourself.
* Finally, what other fees and charges will be required at settlement? Lenders typically charge "underwriting fees," "transaction fees," "courier costs," etc. According to the Fed, "Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable."
This brochure and other consumer-oriented Fed publications are available at no cost. For information, call 202-452-3244, or go online to www.federalreserve.gov/ pubs/brochure.htm.
Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.