Closing Costs on a Mortgage

When a homebuyer, or homeowner looking to refinance, obtains a mortgage, there are always associated costs. Even in the so-called “no cost” loan structures, trust me, you’re paying something. When a consumer does the research on what it will cost to get a loan, there are a few ways to categorize and better understand what’s being charged. Specific numbers will vary wildly depending on the nature of the transaction, the amount and where the settlement takes place. A key takeaway of this article will be to differentiate between a “cost” and a “settlement charge.” They are not the same, and how they interact plays a large part in the total amount of cash a borrower ends up bringing to the closing table. I have found that by using three broad categories, we can get a better sense of how things will play out, and as a result, feel less of a sense of shock about the total amount of any settlement. Let’s look at these “buckets” now:

Lender Costs and Fees

Most lenders will charge an “origination fee,” and that cost is usually intended to cover their overhead. What I see across the industry is that this fee will typically range from $500 to $1500, though it may be called something other than origination. Lenders might also charge separate fees for credit reports, appraisals, flood certs and tax service, for example. If you are paying any discount points to lower your rate, they will be listed in this section as well.

Title/Escrow/Closing Agent Fees

Two things you’ll likely need in your transaction will be a closing agent (this can be an escrow company, attorney or other, depending on the real estate practices in your area) and some form of title insurance. While your fees for the settlement services themselves and the title insurance policy(s) will be the largest costs in this category, you’ll also see smaller amounts such as document preparation, notary, recording and other costs associated with title and escrow.

Prepaid Items

If there’s a place where things get tricky and where a settlement can “blow up,” this is it. “Prepaids” are amounts of mortgage interest, property taxes, insurance (both homeowner’s and flood, if required) and other components of the total monthly housing payment that are collected in advance and that contribute to your settlement. Without going into the complex calculations, know that when you have an impound or escrow account and you close a purchase or refinance transaction, your lender will collect those amounts in multiples of months. If the timing of your close predicates that you must reserves six months of property taxes and your property taxes are $6000 per year ($500 per month) then at close the lender will collect $3000 in tax impound reserves. It should be noted that this is not a “cost” of getting the loan. Your property taxes are due once you are an owner, but how you pay them drives this calculation and adds to your settlement.

While in this category, let’s do a little refresher on how mortgage payments are made. You pay mortgage interest ‘in arrears,’ which means that you live in the house for one month and then you pay your mortgage payment on the first date of the next month. If you close a home transaction on July 15, for example, your first payment on your mortgage will be due on September 1, not August 1. But why? Because mortgage interest is paid in arrears. At this closing, you would pay prepaid interest from July 15 through the end of July. You would have no August 1 regular payment (sometimes called “skipping a payment”). Then, because you’d live in the home all of August, you would get a ‘regular’ mortgage statement on September 1 for that time. It is by this logic that we discourage our clients from financing the prepaid interest, which can amount to several thousand dollars. If your settlement statement shows this amount of closing costs, it may be financially wise to bite the bullet and pay it, as you will not have your regular mortgage payment coming right on the heels of the closing.

Understanding how closing costs work goes a long way to understanding the actual amount you’ll see on your settlement statement. In any transaction there will be a total settlement amount, of which only a part will be actual costs to get the loan. Still, there is always a bottom line and understanding that at the start can help avoid confusion and unwanted surprises with cash to close.  If you have questions or need my help, get in touch any time.

Coffee is for closers, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

What Is an Impound or Escrow Account?

When renters desire to become home buyers, they quickly learn once in the mortgage process that their single rent payment will morph into “PITI” or “principal, interest, taxes and insurance,” or a “total monthly housing payment.” So, yes, there are additional monthly expenses to consider when you become an owner. Historically, ownership has bestowed tax benefit on the buyer and that’s been an offset to the higher cost of ownership and because of this, the “rent vs. own” calculation has been used to more fairly compare the cost of putting a roof over one’s head. Rent may be simpler, but ownership is more comprehensive, if more expensive.

Let’s assume that our buyer has done the comparison and decides to move forward with purchasing a place of his own. At some point, his or her mortgage lender will offer a choice (or maybe not…) about how they will pay their property taxes and homeowner’s insurance. There will be two options:

  1. Waive impounds. The owner foots the property tax bill and insurance premium when due.
  2. Impound or “escrow” taxes and insurance.  The lender creates an account through which the borrower pays 1/12th of the tax and insurance bills along with the principal and interest payment (P&I) each month. When the bills come due, the lender pays them instead of the borrower.

What does this mean, how does it work and which is better? Let’s look at all three in plain language.

What Is an Impound Account?

As outlined above, “escrows” or “impounds” are a financial account where your loan’s servicer can collect, hold and disburse your property tax and homeowner’s insurance payments. The servicer maintains this account and documents it on your monthly statement. Escrow accounts are required on government loans, such as FHA and VA, but are elective in many other cases. Here in California, escrow accounts are required on a loan-to-value (LTV) of 90% or greater. Interestingly, in most states across the country, escrow accounts are customary (if not required). But here in CA, it is more common not to have an escrow account. Go figure…

How Does an Impound Account Work?

Escrow (aka, “impound”) accounts are “pre-funded” at the time of purchase and thus can make your settlement more costly. Why is this? Let’s look at California’s property tax year. It runs from July 1 through June 30. Let’s say you close on your home purchase on June 30. You will live in the house from July 1, forward, but you won’t make your first payment on the mortgage until August 1 because unlike rent, mortgage is paid in arrears. Our first installment of taxes is due November 1 and for a six month installment (July through December of the fiscal year). But note that if your mortgage payments start on August 1 and you have to pay your first installment on November 1, you will have only made three payments by the time the tax bill is technically due for six. Unless the servicer “pre funds” at least three months at close, it cannot cover your installment. This is why you’ll see a number of months of taxes and insurance added to your closing when you have a loan with an impound account. It’s important to note that even though your ongoing mortgage payments continue to add a fraction of your total tax and insurance bills each month, your servicer does not pay the county or the insurer monthly. They pay when the bill is due, just like those borrowers who waive an impound account.

Which Is Better, Taking or Waiving Impounds?

As mentioned, some loan types require impounds. Where that happens, buyers must carefully consider and accept the payment requirement. If there is a choice, it comes down to personal preference and budgetary discipline. Those who waive an impound account do have a smaller monthly expense to cover because they are only paying the principal and interest portions of their total monthly housing expense. When their insurance and tax bills inevitably come due, they have to be prepared to pay them in full, and that requires budgetary discipline on their part throughout the year — just as if the loan servicer was requiring allocations for these expenses. So like with most things in the mortgage industry, there are pros and cons but there is no free lunch. No matter how you opt to pay it, your tax and insurance bills will be the same and must be paid in full at the end of the day.

If you have additional questions about escrow accounts for property taxes and homeowner’s insurance, get in touch any time. As you can see, there are instances where using or foregoing an escrow account comes down to a choice. If you’re wrestling with the best fit for your situation, it often helps to remove the myths and emotions from the decision making process. We can help you do that and get the facts and math straight, and from there, the choice to take or waive escrows often becomes so much more clear.

Paid in full, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Time Is of the Essence

There it is in black and white.  Section 29 of the California Association of Realtors’ residential purchase agreement.  “Time is of the essence.”  And in real estate transactions, which are inherently complex, this simply means that every day matters.  To be competitive as a buyer you need time on your side because very likely the seller of the home in which you’re interested knows that the longer things take to get to the closing table, the greater likelihood something might go wrong with the financing you need in order to acquire the home.

“Like what?,” you ask.

Perhaps the borrower/buyer will file his tax return and it will change the qualifying income.  Or gosh, maybe the buyers will inadvertently miss a credit card payment, or their autopay will malfunction and they’ll learn that they’re late on a revolving debt.  Or as we’ve recently seen, the darn government could shut down.  You get the picture.  Things happen.  And more things can happen if you give them more time.

[Too lazy to read the rest?  Watch the video instead.]

What can a buyer do about this short of a mad and stressful rush in their loan process?  There are two key actions that prove to be universally helpful across all buyers, all price points and all markets:

1)  Get your loan underwritten in advance.  Every serious real estate agent will require that you have a valid pre-approval before you begin looking at homes.  But what if you could not only get a pre-approval but also have the certainty that your loan application has been through a complete underwrite?  That way, all you’d need to complete and provide to your lender once having your offer accepted is a fully-ratified purchase contract and a satisfactory appraisal.  Wouldn’t it be great, in advance and free of time constraints of the contract, to not only gain the confidence of a rock-solid approval but also eliminate the time it typically takes to underwrite a file once your offer is accepted?  In fact, we do this all the time.  An “advance underwrite,” a “pre-underwrite” or a “TBD underwrite” is an extension of our pre-approval process for those who have the time and inclination.  Once we have the underwrite complete, it is sometimes possible for the buyer to offer with an exceptionally fast close of escrow (again, without requiring a rush) and even offer without a financing contingency.

2)  Get organized!  All borrowers owe it to themselves to take the homebuying process seriously.  After all, there is a lot at stake.  Simply, get your financial house in order before searching for a house to buy.  Get all of your income, asset and credit documentation in one place.  We’ll typically require two years of tax returns and W-2 forms, 30 days’ worth of paystubs and often a year-end paystub for the last two years.  For bank statements, we’ll want two months — all pages even if blank.  Other items we request?  Driver’s license and/or valid US identification.  Also, letters of explanation for any unique characteristics of your application.  Remember, I may know your story because we’ll talk about it together, but an underwriter will not have the benefit of those conversations.  The more you’re able to concisely convey any specifics of your credit profile, the better you’ll help your cause.

Every year, some home buyers will fall out of contract both because they cannot take the pressure or they cannot meet the deadlines that were spelled out when they got their offers accepted.  Time is of the essence.  And there are two really good ways, above, that help you adhere to, and succeed in, that reality.

Time stand still, 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283