closing costs « Home Loan Information

23Oct/100

What are closing costs?

It would be simple to say “closing costs” are the amount of money required to be brought to the closing table at the time of purchase or refinance. Oh that it were that simple yet it is not. In fact different agencies and organizations have different definitions for the same term. Perhaps we can do some good here and provide the true definition for the components of closing costs, establish which costs go where and which costs are negotiable.

If you want to say closing costs are the total fees you bring to the closing table that would include this list and maybe more in some cases:

Appraisal fee – to the appraiser
Pie Chart of Closing Costs
Credit score fee – to the credit bureau
Origination fee – to the loan officer
Funding fee – to the lender
Underwriting fee – to the lender
Processing fee – to the processing company
Broker fee – to the mortgage broker (if there is one)
Recording fee – to the county courthouse
Loan registration fee – to the state department of banking and finance
Title exam – to the title company/private investigator
Attorney fee – to the closing attorney
Attorney’s wire fee – to the attorney
Lender’s title insurance – to the title insurance company
Owner’s title insurance – to the title insurance company
Real estate taxes and escrow – to the state, county, city where due
Home owners insurance – to the owner’s insurance company
HOA fees – to the HOA/COA

Some of these fees are only closing costs because the lender, unless the borrower chooses to waive escrows of taxes, insurance and HOA, would be required to be paid over time anyway. In fact most HOAs require an initiation fee even if you are paying cash. That is the best way to think of closing costs as associated with purchasing a home anyway: which fees would exist even if there were no lender: attorney fees, recording fees, appraisal fee, home owner’s insurance, etc.

Two of the biggest fees associated with the purchase of a home are not considered closing costs and those are the down payment and the real estate broker fees. Brokerage fees are not considered a closing cost because they are added to the sales price and the seller pays them and down payment is going straight to the purchase of the home. If we counted down payment as a closing cost then someone paying cash would be considered to be paying 100% closing costs.

What about “no closing costs” loans? Simple. They don’t exist. The buyer or home owner who is refinancing pays the costs either in cash, from the proceeds of the loan, using a down payment assistance program, or by the lender increasing the rate enough to earn more in interest. None of those closing costs go away when they are required. The attorney doesn’t work for free, the appraiser doesn’t work for free, the loan officer, processor and underwriters do not work for free.

Hopefully understanding these fees and where they go will help you in your next purchase or refinance to understand the cost and how to better manage or prepare for your closing.

*The set of closing costs used for this chart are typical for a mortgage broker. They will vary from state to state and lender to lender … but not by much.

Good-faith estimates bring higher closing costs (sfgate.com)
Survey: Mortgage closing costs 37% higher (usatoday.com)
New rules limit too-low estimates of closing costs (knoxnews.com)
What are “seller concessions”? (kennycook.com)

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Tagged as: closing costs, Credit score, Insurance, Loan, Origination fee, Real Estate, Refinancing No Comments

20Oct/100

What are “seller concessions”?

: Image by familymwr via Flickr

You may have heard the term seller concessions in conjunction with a home purchase. What is generally meant by that term is when the seller uses part of the proceeds of the sale to pay some of the costs of the loan for the buyer. Generally speaking government loans allow up to 6% (of the loan amount) in seller concessions and conventional loans allow up to 3%.

Seller concessions are intended to pay closing costs and pre-paids, not down payment. If the seller wishes to contribute more than the allowed maximum in lender allowed concessions the simple solution is to lower the sales price. In return this lowers the loan amount and the seller can still cover the closing costs and pre-paids (taxes, insurance, HOA escrows) from the proceeds of the purchase. The proceeds, in case you are wondering, come from the money going to the seller for the purchase of the home.

Plain math example:

Allowed seller concessions 6%
Closing costs 1.5%
Pre-paids 4.5%
Sales price $200,000
Loan amount $193,000
6% of $193,000 is $11,580
Cash to seller decreased to $181,420 ($193,000 – $11,580)
Cash from buyer $7,000 (down payment)

The seller cannot contribute (under most rules) to the down payment. Seller concessions can only go to closing costs and pre-paids. Check with your reputable lender and see what maximum concessions are and how they may be used for your particular loan program.

As a seller offering the max in concessions is a great way to attract buyers.

UPDATE: Taxes, insurance and HOA are NOT considered closing costs. Although they may be paid at the time of closing they are costs that would be required to be paid regardless of whether or not there is a loan. If you do not wish to escrow your taxes, insurance and HOA fees most lenders and most loan programs allow a “waiver of escrow” for a small increase in interest rate. The reason the interest rate increases is because loans without escrow accounts present a higher risk to the lender.

FHA Gets Tougher on Mortgages (online.wsj.com)

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16Oct/090

Finance Challenge: Reserves – the right amount, the right type, the right timing

So you have the down payment – sourced and seasoned just like it needs to be. All saved up, stored away nicely in the bank for the last 60 days, and ready to be invested into a home. The closing costs are there, too, and all perfectly documented for the last two months. Great job! Your down payment and closing costs are in order. This is something to be proud of!

It’s always something that needs to be covered right up front. When the loan officer is taking the application and they know what it requires for down payment and the approximate closing costs they also need to calculate in the speficied amount of reserves. What are reserves? Straightforward it is enough to conver the principal, interest, taxes, and insurance (at a minimum).

Most loans require two months of reserves on the purchase of a primary residence and as much as six months (PITIA) on investment property purchases. But it’s not enough they be available they must also be sourced and seasoned just like the down payment and closing costs.

Here’s a little good news, though: reserves don’t have to be in cash form. In fact 100% of the following can be counted for reserves:

Stocks, bonds, mutual funds, U.S. government securities, and other securities that are traded on an exchange or marketplace general available to the public (such as NYSE, NASDAQ, Midwest SE, CBOT, or OTC) whose price can be readily verified through financial publications.
Cash-value life insurance (rather than face-value) that is verified. The borrower must be the owner of the policy and not the beneficiary.
Personal IRA and SEP-IRA accounts that are owned by the borrower and verified.
The borrower’s portion of undistributed trust funds.

Additionally a portion of the value of the following may be counted as reserves:

401(k), KEOGH, 403(b) and other IRS-qualified employer plans may be counted as reserves; however, to account for withdrawal penalties and estimated taxes, 70% of the vested amount of the account should be used to determine the borrower’s available reserves. The borrower will be required to provide documentation that the funds are accessible for withdrawal. If the retirement account only allows for withdrawals in the event of the borrower’s employment termination, retirement, or death, these funds should not be considered as reserves.
Savings bonds may be counted at 100% of face value if mature. If the bonds are not mature, the amount counted towards reserves is based on the redeemable value at the time of underwriting.

Ask your Loan Officer about reserves. If you are an agent and want help understanding these please never hesitate to call me or have your client call me. I’m more than happy to help even if I do not have the ability to assist in your area.

Ken Cook – Nationwide Specialist – Information/Marketing – FHA Home Loans – 678-439-8683

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16Oct/090

Finance Challenge: Reserves – the right amount, the right type, the right timing

It’s always something that needs to be covered right up front. When the loan officer is taking the application and they know what it requires for down payment and the approximate closing costs they also need to calculate in the specified amount of reserves. What are reserves? Straightforward it is enough to cover the principal, interest, taxes, and insurance (at a minimum).

Tagged as: closing costs, down payment Continue reading

30Jul/090

Is Ditech Lying About Hidden Fees?

Sometimes advertisers use language which may insinuate something different than the facts. Other times they may simply use a small strength they offer to obfuscate the massive strengths of their competitor. No, I don’t think Ditech is lying in their commercials about hidden fees. What they are doing, however, is insinuating their competitors have hidden fees. Chances are they are pointing to the much maligned Yield Spread Premium (YSP) which is not a fee and can be compared to their Service Release Premium (SRP).

Hidden fees don’t exist. Hidden “fees” are illegal on home loans. It doesn’t matter if it is a lender, a bank or a broker. Surprise fees, on the other hand, are usually not the fault of the lender, bank or broker but rather come from taxes, insurance or HOA fees. But here is what Ditech may be trying to make look bad – Yield Spread Premium is used in many ways. I most often don’t even include it so I can get the interest rate as much as .25% lower than any competitor. I do, however, use it for customers who don’t want to pay as much in closing costs to pay their closing costs.

Brokers are currently in a major war over YSP. The FDIC (no friends of yours but definitely friends of Big Banking) are trying to take it away completely. YSP is part of the broker’s earning. Every broker has the individual choice of how to use it. Some use it to make more income from you and others use it to keep your closing costs down. Some, like me, don’t usually include YSP.

Now you must read this:

Ditech and other direct lenders or correspondent lenders do not have to disclose YSP because they don’t actually get it. No they get something much larger in dollar amount called Service Release Premium (SRP) or they portfolio the loan and collect hundreds of thousands of dollars from you. Why, then are banks screaming about a mortgage broker earning, maybe, $1500 from YSP? Is it because they don’t want you the borrower harmed? HAHAHAHAHA!

Remember, banks are the ones who hit you with NSF fees, low balance fees, deposit fees, withdrawal fees, transfer fees … pick a fee! Lenders are the ones who take your interest every month for as long as you have your loan. On a $1500 monthly payment as much as $1425 is interest and does not go toward paying off your home and every penny goes to the lender.

Why do they care about maybe 1% or less YSP? Because they want the brokers gone because brokers are getting as much as 25% of the origination business and are COMPETITION to the bankers for originations. The FDIC wants that, too, because they are friends of the Big Bankers.

I know this turned into a ranting educational post but you need to hear it. Barney Frank (friend of Big Banking), Chris Dodd (Google him and the word Mozilo in the same search) and others in Congress want brokers GONE and it NOT to protect you. It is to get the brokers out of the way to let direct lenders and big banks have direct access to you and elminiate the pesky brokers who are required by federal law to disclose ALL of their fees and even their “back end income”.

Think about it, Big Banks want brokers gone … does that make sense?

Tagged as: closing costs, hidden fees, Interest rate, srp, yield spread, ysp No Comments

16Dec/080

Should I Refinance Today?

By the time you read this article everything will have changed. One thing is certain about the mortgage banking industry and that is change. Do not take this as a smack on the face because it certainly is not intended to be but it should be somewhat of a wake-up. The truth is the far above average home owner and real estate investor are not capable of properly answering this question. We, and I include myself, make the terrible mistake of thinking if we know a few terms about something that we understand it well enough to make important decisions. Most people are not capable of making wise or even correct mortgage decisions. The frightening part is most loan officers also do not have any idea how to really determine if a certain mortgage is the best for you.

Be not dismayed: Even financial planners are often wrong with their advice.

So, am I the genius to answer the question? No. But I will give you a little more information than you probably already had to help you make the best possible decision you can make for yourself, your family or your investment strategy. More than that this may help you avoid “tricks” used by the so-called “no closing costs” providers. By the way, “no closing cost home loans” do not exist. There is no such thing as no closing costs. There are always closing costs and one way or another you always pay them. Repeat that to yourself: there is no such thing as a loan with no closing costs. If you refuse to believe that you are beyond help and get everything you deserve. (I write that with a sideways smile.)

There is a long standing argument among many people as to which is more important between interest rates and monthly payments. The bottom line is: nobody can answer for you. They can pontificate for weeks but ultimately it is your decision. So let me direct this to you about the difference between interest rates and monthly payments and how this could become an issue.

Most people automatically assume that if you have a lower interest rate you will have a lower monthly payment. They also often assume, and to their detriment, that a lower payment or lower interest rate may be the best loan. Neither is true and both are true but the paradox is simple to decode. FOr example a fifteen year mortgage has a lower interest rate but a higher monthly payment. A forty year mortgage has a higher interest rate but a lower monthly payment. So which best fits your goal?

For today I can actually offer a loan to the right buyer for 4.75% with no discount points. This loan has an APR of 4.893 which is still phenomenal. What you, Mr. or Ms. Borrower, need to understand about numbers like this is this is not *your* number. In fact it is the best case scenario number. Your rate may in fact be much higher from any and every lender -not just us. There are “hits” to rate and adjustments to pricing which are, in part, dictated by Fannie Mae or Freddie Mac. Those are called Loan Level Pricing Adjustments and they are based on the risk presented to FNMA or FHLMC by the borrower, the property and the type of loan.

If you and I were on the golf course and you asked, “Ken, is this a good time for me to refinance?” If I did not start my answer with, “What are you trying to acheive?” I would be a fool to answer. This may be a great time for you to refinance you loan with interest rates as low as they are today but this may be a horrible time for you to refinance if you are living in a home with an upside down mortgage, you have had a change in careers or an income drop, your debt-to-income ratio is off the charts or any other number of reason. Now, if you are one of the few who qualifies for the advertised rate and you have equity in your home (which you would to qualify for that rate) then yes, this is probably one of the best times in recent history to refinance in to a long term fixed rate mortgage.

Call me and let me be honest with you. We can refinance your Fannie Mae loan in Georgia or Florida and your FHA loan anywhere in the southeast. 866-946-0120

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7Dec/080

What is Most Important: Closing Costs or Interest Rate?

I recently wrote an article telling how the “no cost loan” works and in it I demonstrated there are always costs and the borrower always pays them. Of course only 132 people in the entire world have read that article and millions have seen the big bank’s nationwide advertisements showing how they can purchase a home or refinance a home without writing a check for the closing costs. Pretty silly considering most refinances do not require the buyer to write a check for the closing costs. But when we start talking about closing costs on a purchase that’s a different story.

So let’s quickly revisit: there are closing costs and the buyer always pays them. No matter what any big Bank in America tells you. For example, if you pay the closing costs the big Bank in America puts you into a 30 year loan (on that day) for 5.375 interest rate and about $3700 in fees on a $200,000 loan or a 6.875 interest rate and no fees on a $200,000 loan. Now when ARM loans were cheap and attainable they could have compared with no fees on an interest rate even lower than the rate for a fixed 30 year loan.

$1,313.86 would be the monthly P&I at 6.875

$1,119.94 would be the monthly P&I at 5.375

So if you are going to keep the loan for less than 35 months this could make sense but if you keep the home longer than 35 months you will now be paying an additional $94 per month in closing costs for the remaining life of the loan.

If you must assume then assume there is no free lunch and ask for a comparison chart from a trustworthy mortgage advisor.

Tagged as: closing costs, home loans, interest rates, no cost loans, no cost mortgage No Comments

1Dec/080

What They Don't Tell You About Their "No Fee Mortgage"

They are big. They have millions to spend on advertising. In fact, they don’t pay for that advertising at all -their customers do. Since we started back in 2001 we have fought giants and we have always beaten them and we will continue to do so. Currently there is a very large bank offering what they call the “No Fee Mortgage Plus”. Now if you visit the website you will see rates advertised in the mid 5% range. If you click on the link to take you to their super special you will not see any rate changes when they show you how you can have a loan with all these thousands of dollars in closing costs or this loan with no closing costs shown.

They recently bought another huge defaulting lender who claimed “No Closing Costs” but were ordered to cease and desist on those advertisements because they were misleading. The truth is they were no more misleading than what you see today from the huge American bank who purchased them. I will write it again for probably the 100th time in the last two years, “There are closings costs and the borrower pays them.”

One way or another you are going to pay the closing costs. You either pay them in cash at the closing table for no payments and no interest on them … ever (because you paid them in cash). Or your interest rate is going to be jacked up so high that the lender (notice I’m not writing about a broker here but one of the largest lenders in the world) will earn enough “back end fees” from the interest to offset the costs. Oh it’s just horrible when a broker does it but completely acceptable when a big name bank does it?

Here’s how it works. As of this writing if a borrower has a 700 middle credit score, fully documented income and assets, is getting a $200k home loan in the state of Georgia the interest rate with 20% down on a fixed 30 fully amortizing loan should be about 5.5% -what the big bank advertises. Now, they are only making about $2500 immediate profit on that loan at that price (of course they’ll make interest over the life of the loan) and this is not enough to pay the costs of closing a loan. Stay with me, I know you aren’t aware of all the costs associated with closing a loan on the back end but at that price we would all go out of business because it costs more to close.

So the big bank, per their own web page, at 5.5% interest would also want $5974 in closing costs (higher than ours by the way). So how can they recover those costs on their “No Fee Mortgage”? You know they have to or they would not be in business.

It’s simple: they raise the interest rate which pays them higher SRP (Service Release Premium) or interest over the life of the loan. How much higher? When I was in their local branch 3 days ago the interest rate on the “No Fee Mortgage” was 6.875% or a full 1.375% higher than the rate with fees not included. How does that affect you? Hugely. However, the truth is not only can we do the same thing but on that same loan we can do it cheaper! Here is the difference.

At 5.5% on a 200,000 loan for 30 years the monthly payment would be $1130.39
At 6.875% on the same loan for the same borrower the monthly would be $1306.37

This represents a difference of $175.98 per month (keep the loan for 30 years and that $5974 you saved costs you $63,352.80

Now, as I tell all of my clients, doing this makes great sense if you plan on keeping that loan for just a few years and, in fact, I encourage it. What my writing is concerned with today is the big bank hides this fee jump until it is too late. You’ve already applied and you’re in the system so now why bother switching to the company that was honest with you from the beginning?

If the difference in closing costs is $5974 at closing you need to get out of that loan within 34 months to break even. That’s less than 3 years. After the 34th month you start losing money -now we give you the choice and, unlike the big guys, we give you the information up front and personal. Call me personally and I will be more than happy to be honest with you. I can help you on your primary residence in Georgia and Florida. 866-946-0120 extension 101

(This is an opinion post and not an advertisement to lend or an advertisement of interest rates.)

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Daily Rates for Qualified Buyers

	Today	Last Week
30 Year Fixed	3.56%	3.61%
15 Year Fixed	2.87%	2.92%
5/1 ARM	2.34%	2.51%
See more mortgage rates at Zillow.com

(Note: These are the lowest rates possible offered through advertisers and lead buyers at the company providing the data. They may require discount points.)