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Gov't proposes simplified mortgage disclosure forms

By Jason Alderman Practical Money Skills for Life Published: September 14, 2012 3:00 AM

No doubt many wannabe first-time homebuyers have been sitting on the sidelines of the volatile housing market, unsure when or how to enter the game. If that describes you, you're probably fortunate to have missed out on the housing bubble and lax lending standards of a few years ago, when millions of people took out mortgages they couldn't afford -- or understand.

Homeownership is a long-term commitment filled with expenses -- both expected and unexpected -- and responsibilities. The upsides, not to mention the tax advantages, are why approximately two-thirds of Americans own instead of renting. But homeownership is not always right for everyone or at every stage of life.

Here's hoping that now, as home prices have plummeted and loan interest rates are at historic lows, you can resist the temptation to get in over your head and first bone up on the many one-time and recurring costs involved in owning your own home.

A good place to start is Know Before You Owe, the financial education initiative launched last year by the Consumer Financial Protection Bureau (CFPB) to ensure that people receive concise, easy-to-understand information regarding mortgages, credit cards and student loans, among other major financial decisions (www.consumerfinance.gov).

After soliciting input from thousands of consumers, lenders, mortgage brokers and consumer advocates, the CFPB recently developed new prototypes for the federal disclosure forms borrowers receive after applying for a mortgage and before closing on the loan.

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"When making what is likely the biggest purchase of their life, consumers should be looking at paperwork that clearly lays out the terms of the deal," said CFPB Director Richard Cordray.

The proposed forms combine several different but overlapping documents now required by various federal agencies. But they will simplify the language and format and make it easier to compare different mortgages and more easily understand loan terms, including interest rates, monthly payment amounts, closing costs and how the loan amount might change over time (e.g., with an adjustable-rate loan). They also highlight features borrowers may want to avoid such as prepayment penalties and negative amortization.

In the meantime, if you're considering buying a home, review the proposed forms to get an idea of which costs you should be watching out for. And, even if you're already comparing loans or in escrow, ask your lender to show you where the various costs highlighted in the new forms are located in your current disclosure documents -- it might help avoid costly last-minute surprises.

Here are some factors future homebuyers should keep in mind:

Start planning now. It could take years to save enough for a down payment and closing costs.

Don't forget ongoing expenses. These include a monthly mortgage payment, mortgage insurance, homeowner's insurance, property taxes, furnishings, maintenance and repairs.

People with poor credit ratings usually either don't qualify for loans or pay much higher interest rates. Work on repairing your credit at the same time you launch a savings plan.

Get that 20 percent. If your down payment isn't at least 20 percent, you'll probably be required to buy Private Mortgage Insurance (PMI), which protects the lender if you default.

For a comprehensive overview of how different types of mortgages work, check out Bankrate.com. Also, watch the easy-to-follow video explaining mortgages at Practical Money Skills for Life (www.practicalmoneyskills.com), a free personal financial management program run by Visa Inc.

Jason Alderman directs Visa's financial education programs.

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