Shopping For Your Home Loan: Hud'S Settlement Cost Booklet - U.s. Department Of Housing And Urban Development (Hud) Page 10
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48Some adjustable rate mortgages allow the borrower to pay either the “interest
only” or less than the “interest only.” In both options, none of the mortgage payment
is applied towards the loan balance (principal). In a less than “interest only” option,
the unpaid interest is added to your loan balance and you can owe more than the
amount you initially borrowed.
When the loan balance increases to the
maximum amount the loan is “recast” and your loan payment may double or
even triple. When faced with “payment shock,” you may discover too late that the
loan payments no longer fit within your budget and that the loan is difficult to
refinance. You may then be in danger of losing your home.
WARNING: Choosing an ARM product could affect your ability to pay your
mortgage in the future resulting in loan default or foreclosure. You need to become
familiar with the features of ARM products to find the one that best fits your needs.
If you decide to obtain an ARM, consider obtaining additional information. Additional
information may be found by contacting the Federal Reserve Board.
Contact
information is given in the Appendix to this booklet.
Taxes and Insurance
In addition to the principal and interest portion of your mortgage payment, you
will have to pay property taxes and insurance to protect the property in the event of
disaster such as a fire or flood. Based on your down payment, you may also have to
pay mortgage insurance. Your lender may require an escrow or impound account to
pay these items with your monthly mortgage payment. If an escrow account is not
required, you are responsible for making these payments.
Mortgage insurance may be required by your lender if your down payment is
less than 20% of the purchase price. Mortgage insurance protects the lender if you
default on your loan. You may be able to cancel mortgage insurance in the future
based on certain criteria, such as paying down your loan balance to a certain amount.
Before you commit to paying for mortgage insurance, find out the specific
requirements for cancellation.
Mortgage insurance should not be confused with
mortgage life, credit life, or disability insurance that are designed to pay off a
mortgage in the event of a borrower’s death or disability. Your Good Faith Estimate
should not have any charges for mortgage life, credit life, or disability insurance.
Homeowner’s (hazard) insurance protects your property in the event of a
loss such as fire. Many lenders require that you get a homeowner’s policy before
settlement.
Flood insurance will be required if the house is in a flood hazard area. After
your loan is settled, if a change in flood insurance maps brings your home within a
flood hazard area, your lender or servicer may require you to buy flood insurance at
that time.
VI. Good Faith Estimate (GFE)
The GFE is a three page form designed to encourage you to shop for a
mortgage loan and settlement services so you can determine which mortgage is best
for you.
It shows the loan terms and the settlement charges you will pay if you
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