I closed my mortgage refinance last month. I often hear the media saying that people who signed up for an adjustable rate mortgage (ARM) didn’t know their interest rate can adjust. Well, make no more excuses. I’m going to list all the documents I signed at closing and explain what they mean. This way anybody can look up in Google and be prepared before they go into closing.
Before I continue, let me say these documents are what I signed for my loan. The required documents may vary depending on the lender and the laws and customs of the state where you live.
1. Promissory Note. This is your promise to pay. The note clearly spells out your loan terms, including
- the principal borrowed
- the interest rate
- the date of the first and last payment
- the monthly payment amount
- how late charges are assessed
- whether there is any prepayment penalty
If you only read one document at closing, this is it. Read it carefully before you sign. Double check and verify the terms are what you think you were offered.
2. Security Instrument. Depending on where you live, this document is called a Mortgage, a Deed of Trust, or some other name. There are some legal differences between a mortgage and a deed of trust, but you really don’t have a choice because it’s purely a function of where you live. This document basically says you are using your property as the collateral for your loan. It spells out in details your rights and obligations, which include:
- make payment on time
- occupy the property as primary residence
- keep insurance
- pay taxes
- keep the property in good shape
- do not store explosives
- etc. etc.
This document gives the lender the right to take your home away if you don’t comply.
3. HUD-1 Settlement Statement. This is a standard form by U.S. Department of Housing and Urban Development. It shows you the closing costs and various other charges related to finalizing the mortgage.
4. Truth In Lending Disclosure Statement. This form shows an APR and the total finance charge through the life of the loan. If you are getting an Adjustable Rate Mortgage (ARM), you will see the "Variable Rate Feature" box checked here. There are also two checkboxes for whether or not the loan has a prepayment penalty. Pay attention to those checkboxes.
The four documents above are the most important ones. These other documents below are mostly formality.
5. Escrow Instructions. This document contains authorizations from you to the closing agent on how they should distribute the funds. The closing agent will then act on your behalf to pay off your old loan and record your new loan.
6. Notice of Rights to Cancel. This is telling you that you have 3 days after signing the loan documents to change your mind and back out of the loan.
7. Signature/Name Affidavit. Here you confirm your name and signature.
8. Errors and Omissions Compliance Agreement. Here you agree to cooperate with the lender if they have to correct clerical errors.
9. Escrow Waiver. If your lender lets you pay your homeowner’s insurance and property tax on your own, as opposed to include it with your mortgage payment, you sign this document and promise to pay insurance and tax before the bills are due.
10. Acknowledgement of Disclosures. They want you to acknowledge that you received a bunch of notices and disclosures.
11. Form 4506-T. You give the lender permission to request your tax return information from the IRS so they can verify your income.
12. Loan Servicing Disclosure. This document tells you whether the lender typically retains the servicing of the loans it makes or transfers the servicing to someone else. Servicing means accepting payments from you and providing you tax form after year-end. If servicing is transferred, you will receive a notice in the mail telling you where to send your payments.
13. Loan Application. For some strange reason, they want you to sign your loan application again.
That’s it. Although there are a lot of documents, if you pay attention to the important ones, it’s pretty clear what kind of deal you are getting into. If you don’t understand what a particular document means, ask the closing agent.