Mortgage Loans

Closing Costs

Closing costs, or the fees associated with buying and selling real estate property, can be divided into three basic categories; lender fees, prepaid and settlement costs. 

Lender fees may include points, appraisal, credit reporting, underwriting, settlement and tax service fees.  Prepaid fees may include interim interest, real estate taxes and escrow, and insurance premiums and escrow.  Settlement fees may include title insurance, settlement or attorney fees, taxes, recordation and messenger fees.

As with many elements of a real estate transaction, closing costs are negotiable.  They can be paid by the buyer, the seller or any combination of these two parties.

Some of the more common types of closing costs are described below, although many other types of costs can come into play.  Closing costs are individual to a piece of property, and hence will differ according to region, property type, and numerous other factors.  As always, it is important to discuss closing costs with your agent and lender in order to be fully informed regarding your particular situation.

Commission fees may be paid to real estate agents representing the buyer and seller of a piece of property.  Property taxes must also be paid by the seller (usually), until the last day of ownership.  A new homeowner's insurance policy must also be purchased, usually by the buyer.  Any assessments or liens on the property in question should be taken care of prior to the close of escrow, and are usually paid for by the seller.

Escrow services and title insurance must also be settled.  Other fees may include, but are not limited to, property inspection fees, termite inspection, termite removal, document preparation fees, deed recording fees, loan assumption charges, home warranty and utility adjustments.

Closing costs for sellers usually comes down to commissions plus approximately 2% of the sales price of the property.  For buyers, closing costs usually amount to 3% of the sales price.

Fixed and Variable Loans

Determining your wants and needs is the first step to identifying the right loan for you.  Is it important to you to have your payments remain the same every month, or are you more concerned with having a lower initial interest rate?  There are pros and cons to each of these types of loans.

Fixed Rate

With a fixed rate loan, your principle and interest portion of your monthly payment stays the same every month, despite fluctuations in the market.  This allows you to easily calculate your monthly expenses without worrying about fluctuating loan payments.  It is important to note that taxes and insurance rates do fluctuate

In order to get a lender to commit to lending you money over the full term of the mortgage, you will usually pay a higher interest rate on a fixed rate mortgage.  If interest rates fall significantly after you have obtained this loan, you will be unable to take advantage of them, unless you refinance.

Variable

A variable mortgage, sometimes called an adjustable rate mortgage (ARM) can be procured with a lower initial interest rate than a fixed rate mortgage.  This type of loan can be attractive to homebuyers that plan to move in a few years and are not concerned about possible interest rate increases.  People who are confident that their income will increase faster than potential increases in the market rate also like to take advantage of this type of loan.  Many people who are relocated to another area by their employers know they will only be in a certain location for a limited amount of time.  This scenario makes a variable loan extremely attractive, due to the lower initial interest rate.

This type of loan's interest rate is adjusted periodically to keep in line with changing market rates.  If interest rates increase, so do monthly payments.  Conversely, payments drop when interest rates decrease.

Before deciding on this type of loan, it is important to know how much mortgage payments can increase.  For this reason, ARMs are designed with two caps, or limits to the amounts which payments can increase.

The first cap limits the amount an interest rate can increase during each adjustment period.  For example, if an ARM adjusts annually may have a 2% cap.  The adjusted interest rate can never be more than 2% higher than the year before.

The second cap limits the total amount of interest adjustments during the life of a loan.  If an ARM has a 6% lifetime cap, a borrower may be confident in knowing they will never be required to pay more than 6% above the original rate.  For example, an ARM with an initial rate of 5% and a 6% lifetime cap will never be more than 11%.

Remember to contact your real estate professional for information prior to deciding on the best loan for you.

Financing Home Improvement Projects

Funding home improvement and remodeling projects can be quite daunting.  Surely smaller projects can be budgeted for, but what about the larger ones?  This is a financing guide for those of us who are not independently wealthy.

If you participate in a 401k plan through your employer, you may be able to procure a short-term loan from this account.  To see if this is an option, contact your human resources department.  Don't forget to ask about any potential tax implications.

Additionally, many life insurance policies may be borrowed against.  Ask your insurance agent for details.

Banks, savings and loans, credit unions and other traditional lenders may also provide assistance in procuring other types of loans.  Before you decide on the best loan for you, don't forget to compare interest rates, repayment options and penalties.  Some examples of different types of loans are outlined below.

A second mortgage is a loan against the equity you have built up in your home.  Many financial institutions will let you borrow up to 80% of the appraised value of your home, less any outstanding loans.  To illustrate an example, if you have a home valued at $100,000 and have an outstanding mortgage totaling $70,000, you may be able to borrow $10,000 (80% or $80,000, less the $70,000 mortgage).  Don't forget about the fees that usually accompany mortgages, such as closing costs, title insurance and processing fees.  It is also important to check with your accountant to see if you can use any of these funds as a tax deduction.

Refinancing may also be an option.  If your old mortgage is satisfied, you may be able to take out a new mortgage on your house.  A qualification criterion includes a good credit rating, a steady source of income, and, of course, equity in your home.  As with a second mortgage, refinancing also includes closing costs and the like.

A home equity line of credit (HELOC) is similar to a second mortgage (up to 100% and beyond of the appraised value of your home, less your current mortgage balance).  However, a HELOC can be much more cost effective, since it operates as a line of credit (hence the name).  This means you won't be charged interest until you make a withdrawal.  However, you will still be responsible for closing costs.  You will be able to make withdrawals whenever necessary, enabling you to pay contractors, and so forth.  The interest rate for a HELOC is usually variable, and based on your outstanding balance.  Your interest may be tax deductible, so you should discuss this with your accountant.

Types of Loans

There are many different types of loans available to assist people in buying homes. 

The following information is included for general informational purposes only.  Much loan information is regional specific, varying from location to location.  Ask your lender about specific information as it applies to your situation.  If you have yet to select a lender, your real estate agent can point you in the right direction.

Determining your wants and needs is the first step to identifying the right loan for you.  Is it important to you to have your payments remain the same every month, or are you more concerned with having a lower initial interest rate?  There are pros and cons to each of these types of loans.

Fixed Rate

With a fixed rate loan, your principle and interest portion of your monthly payment stays the same every month, despite fluctuations in the market.  This allows you to easily calculate your monthly expenses without worrying about fluctuating loan payments.  It is important to note that taxes and insurance rates do fluctuate

Variable

A variable mortgage, sometimes called an adjustable rate mortgage (ARM) can be procured with a lower initial interest rate than a fixed rate mortgage.  This type of loan can be attractive to homebuyers that plan to move in a few years and are not concerned about possible interest rate increases.  People who are confident that their income will increase faster than potential increases in the market rate also like to take advantage of this type of loan. 

This type of loan's interest rate is adjusted periodically to keep in line with changing market rates.  If interest rates increase, so do monthly payments.  Conversely, payments drop when interest rates decrease.

Remember to contact your real estate professional for information prior to deciding on the best loan for you.

Jumbo Loans

Jumbo, or non-conforming, loans are designed for homebuyers who need larger loan amounts than allowed for in conventional loans. 

Conventional lenders typically insist that the borrower puts down more than 20% on jumbo loans.  Interest rates on jumbo loans generally run higher than conforming loans.

First Time Homebuyers

Many first time homebuyers can benefit from FHA and VA government loans or other programs based on location or income.  Often, these mortgages require less income to qualify than conventional financing.  There may even be some down payment assistance.

Speak to your lender to determine if you meet the qualification criteria for this type of loan.

Alternative Financing:  80/10/10

Many buyers are unable to put down 20% of the purchase price of a property.  Using conventional financing, buyers would have to pay Private Mortgage Insurance (PMI) without a 20% down payment.  This increases the monthly mortgage payment and can also reduce the amount a homebuyer can qualify for.

There are ways to avoid paying PMI without putting the 20% down payment required by lenders.  A popular way to avoid paying PMI is the program affectionately known as 80/10/10.

With this program, the buyer will get a first loan for 80%, putting 10% down of their own funds.  The additional 10% will be carried back in a second loan by either the lender or the seller, thus avoiding PMI.

The first loan is at market rates.  The second loan, or "carryback," will be at a slightly higher rate.  With the blending of the two rates, the monthly payment can still be a more attractive option than a loan with PMI.

Other combinations of loans are also available to avoid PMI, such as an 80-5-15.  Consult with your loan professional to determine the best mortgage for you.

Points

Points, also known as discount points, are a one time fee a buyer can pay a lender to lower the interest rate on a loan (or just to procure a loan).  Points are paid at closing, and equal 1% of the loan amount of a real estate property (for example, one point on a $100,000 loan is $1,000).

A lender may require a buyer pay points to acquire a specific loan, as well as bring down the interest.  Interest is usually reduced by .25% for each point.

As with many costs associated with a real estate transaction, points are usually negotiable and can be paid by the buyer, the seller or any combination of these parties.  Usually, however, a buyer is required to pay points, when applicable.

Before deciding on paying points, it is important to discover the break-even rate.  You can do this by comparing the monthly payment for interest rates both with and without points, dividing the difference between this figure and the amount of points you plan on paying up front.

In other words, on a $100,000 loan, each .125% in rate usually costs 1/2 a percentage point, or $500.  Each .125% amortizes to approximately $8.70 a month.  Dividing the benefit into the cost ($8.70/$500) will uncover the number of months it takes to break even.  Using the example illustrated above, 57 months is the break-even point, not accounting for inflation.  In other words, if you move before 6 years, you have lost money.

The above example illustrates why having a lower interest rate is not always the least expensive option when considering whether to pay points.  It is important to discuss this with your real estate professional prior to making the decision to pay points.