Finance

GetLoans.com® Seminars: Financial Tips

Closing Costs

You pay closing costs to the title company, state/county/city, lender, and you also pay tax and insurance escrows, and per diem interest. The closing costs that you pay the lender are usually far less expensive than you pay the other parties.

The following are the seller concessions that the seller can pay on top of splitting the transfer & recordation taxes (splitting these taxes is customary in many areas). Sellers may pay up to 3% of the sale price towards a buyer’s closing costs, escrows, and per diem interest, on a loan with a 5% down payment. Sellers can pay up to 6% of the sale price to the borrower’s closing costs, escrows, and per diem interest on a loan with a 10% or 20% down payment. On an investment property the maximum seller credit for closing costs is usually 2% of the sales price.

Homeowners Insurance:

Insurers check your prior claims history, and some even check your credit to give you a quote. Insurance policies typically cover “replacement cost” and not market value. Replacement cost is the amount needed to repair the damage or rebuild the home. If you are not getting a “replacement cost” policy, mortgage lenders require that you get coverage for at least the amount of the loan, which may exceed replacement cost.

If you are buying a condo, insurance is part of a “Master Umbrella Policy” that covers the whole building, and payment for this is included in your condo fee. So with a condo you do not shop for insurance that covers the structure.

Be sure to get an accounting of what you are covered for under your policy. Note that the typical homeowners policy does not cover flood damage. It is recommended you do a complete inventory of your belongings. Take video or shoot still photos. Then record make, model, date of purchase, serial numbers and purchase price. For antiques and jewelry appraisals are important. Store this information away from your home.

Higher deductibles carry lower premiums. ‘Consumer Reports’ suggests carrying a high deductible. The logic is that you should only use your insurance for major losses. Another helpful hint: you can typically double your liability coverage very cheaply.

Refinancing:

There is no general rule as to when to refinance. It has been said that you, “have to reduce your interest rate at least 1“, or that you, “have to reduce your interest rate at least 2%”, or that “you need to save at least $150 a month”. The real answer is that refinancing depends on “recapture period”.% And this simply means how much would you spend in closing costs to refinance, how much would you save every month, and how quickly would you recapture the cost of the closing costs with the monthly savings. Then you determine if it is worth it to you. Some examples:

  • Example #1
    • $400,000 loan balance
    • 7% current rate
    • 6% new rate
    • $256 monthly savings
    • $3000 closing costs (to title company, lender, state/county, appraiser, credit bureau)
    • $3000 costs divided by $256/month savings = 11.72 month recapture period
  • Example #2
    • $160,000 loan balance
    • 7% current rate
    • 6% new rate
    • $102 monthly savings
    • $3000 closing costs (to title company, lender, state/county, appraiser, credit bureau)
    • $3000 costs divided by $102/month savings = 29.41 month recapture period
  • Example #3
    • $500,000 loan balance
    • 7.25% current rate
    • 6.875% new rate
    • $126 monthly savings
    • $3000 closing costs (to title company, lender, state/county, appraiser, credit bureau)
    • $3000 costs divided by $120/month savings = 25.00 month recapture period

Make sure you plan to own the property long enough to at least achieve the recapture period. Of course the longer you are there, the more money you will save after the refinance. If you are considering refinancing and are going to sell within 1-2 years, it may not be worth it.

There are “no closing cost” refinances. Since there are no closing costs, then recapture period is not a consideration. On a no closing cost refinance the lender is simply raising the interest rate, effectively building the closing costs into the loan. If you can do a no closing cost refinance, pay a higher than market rate, and still save money; then there is no downside. Some examples:

  • Example #1
    • $400,000 loan balance
    • 7% current rate
    • 6% new market rate, rate for a “no closing cost refinance” = 6.375%
    • $160 monthly savings
    • $0 closing costs (to title company, lender, state/county, appraiser, credit bureau)
    • $0 costs and $160 a month in savings is a great refinance!
  • Example #2
    • $160,000 loan balance
    • 7% current rate
    • 6% new market rate, rate for a “no closing cost refinance” = 6.375%
    • $64 monthly savings
    • $0 closing costs (to title company, lender, state/county, appraiser, credit bureau)
    • $0 costs and $64 a month in savings is a decent refinance, if you think going through the
    • paperwork is worth $64 a month.
  • Example #3
    • $500,000 loan balance
    • 7.26% current rate
    • 6.875% new market rate, rate for a “no closing cost refinance” = 7.25%
    • $0 monthly savings
    • $0 closing costs (to title company, lender, state/county, appraiser, credit bureau)
    • Obviously in this example, there is no reason to refinance.

Many people ask about refinancing a 2nd trust. People get a 2nd trust when they purchase their home, to avoid paying PMI (Private Mortgage Insurance). This is an excellent idea, and a good money saver. Although 2nd trusts are at higher rates than 1st trusts, the amount of PMI you are saving far exceeds the slightly higher payment on the 2nd trust caused by the higher rate of the 2nd trust. Inevitably people eventually ask about refinancing their 2nd trust because the 2nd trust rate sounds high. This is usually not a good idea, because the 2nd trust loan is usually a smaller loan amount and a lower rate does not generate enough savings to justify the closing costs. And keep in mind that 2nd trust rates are always higher, so finding a lower 2nd trust rate is difficult in the first place.

  • Example:
    • $38,000 2nd trust loan balance
    • 8.125% current 2nd trust rate
    • 7.75% market rate for a new 2nd trust
    • $9 monthly savings
    • $900 closing costs (to title company, lender, state/county, appraiser, credit bureau)
    • $900 costs and $9 a month in savings is a 100 month recapture period, or 8.3 years. This is not a good refinance.

Even if you were able to find a new, much lower 2nd trust rate; it probably would not make sense:

  • Example:
    • $38,000 2nd trust loan balance
    • 8.125% current 2nd trust rate
    • 7.00% market rate for a new 2nd trust
    • $27 monthly savings
    • $900 closing costs (to title company, lender, state/county, appraiser, credit bureau)
    • $900 costs divided by $27/month savings = 33.00 month recapture period. To wait 2.75 years to recapture your closing costs, and then when you do finally recapture your closing costs you are only savings $27 a month; probably means the transaction does not make a lot of sense.

However, you can refinance a 2nd trust into a new 1st trust, if you have enough equity to do so. In this case refinancing the 2nd trust may make sense. If you have a 7 1st trust and an 8.5% 2nd trust, and you can refinance both loans into one new loan at 6%, then it obviously makes sense to do so.%

Shopping Interest Rates

There are many things to consider when shopping interest rates. When most homebuyers are shopping for a mortgage they only look at the interest rate and points. There are numerous things to consider beyond the interest rate and points. I will go over some of the more important things to consider when shopping for a mortgage.

  1. Mortgage loans have so many variables that you can’t just view a rate quote online and be sure it applies to you. Interest rates are priced differently according to:
    • .loan amount (is your loan amount Conforming at $417,000 and lower, Conforming-Jumbo from $417,001 to $729,750, or Jumbo which is considered $729,751 and up?)
    • .property type (single family detached, condo, multi-family)
    • .credit score
    • .state or region the property is located in
    • .occupancy type (primary residence vs. vacation home vs. investment property)
    • .how many days the rate is “locked-in” for (15 days, 30 days, 45 days, or more)
    • .whether or not there is a pre-payment penalty
    • .debt ratios
    • All of the above, and more, will affect the exact and final interest rate quote.
  2. Is the lender you are looking at an internet lender, mortgage broker, mortgage banker, or a bank? Knowing who will ultimately be processing and funding your loan, helps to know what kind of staff they have to process the loan, if the appraiser is a local one that has local knowledge, how legitimate the firm is who will be handling your loan, and how quickly your loan approval can be turned around. All of this affects your ability to get to the deal you signed up for, and getting to the settlement table on time. The deal that sounds the best will not be the best if you do not get it at all because the firm could not deliver, or if the firm closes its doors, or if the deal never existed in the first place and was simply promises that could never be kept.
  3. What are all of the fees, such as processing fees, underwriting fees, appraisal fees, credit report cost, etc. Does the loan have any origination fee, discount points, or broker origination fees? There are many third parties to a loan, and they all get paid. There is no such thing as a loan with no fees. If someone offers you a loan with no fees, you are paying for it somewhere else (in the form of a higher interest rate, or a pre-payment penalty).
  4. Are the quotes current, and are all the options you are considering quoted on the same day?
  5. Did you get the APR (Annual Percentage Rate)? Many times lenders will quote you low interest rates, but then have high APR’s, which indicates that they have higher than normal closing costs. This means they made up their low rate quote by charging extra fees. Most consumers are so focused on the interest rate, that they take their eye off of the ball in other areas like closing costs. For a more detailed explanation see: APR

Tax Breaks

Under the current tax code, mortgage interest on first and second homes is generally deductible as long as these loans total $1 million or less (or $500,000 if married filing separately), making home ownership one of the best ways to trim your tax bill. Figuring out if you can deduct your mortgage interest deduction, and how much it is, is complicated. It is something you should either talk to an accountant about, or go to www.irs.gov and in the “Search” box type in Home Mortgage Interest Deduction. Check the resulting pages, and do some initial homework on your own.

Title Insurance Reissue Rate

Title insurance insures against defects in title to real estate. Title companies search public records to document the chain of title. There is the ‘lender’s title policy’ and the ‘owner’s title policy’. The owner’s policy insures the buyer that the title to the property is free from defects, like old liens and encumbrances. Occasionally, hidden hazards can emerge after closing. Things such as mistakes in the public record, previously undisclosed heirs claming to own the property; or forged deeds could cloud the title. Owner’s title insurance offers protection against these issues. The lender’s title insurance policy protects the lender for the amount of money lent against the property. Banks will require you get lender’s coverage, but they do not mandate owner’s coverage (although it is wise to get it).

When you refinance, your lender will require lender’s title insurance again. You will not need to purchase a new owner’s title policy; the one you bought at the home’s purchase is good for as long as you and your heirs own the property. So you may end up getting the existing lender’s title policy “re-issued”, in which you case you would pay a lower reissue rate. On a refinance title insurance is still needed. You might have a mechanics lien from a contractor who claims they were not paid. Or you might have a judgment due to unpaid taxes or child support.

On a new construction home you may think you are the first owner, and don’t need title insurance. However, there were likely prior owners of the land. Builders routinely fail to pay subcontractors and suppliers. This could result in a lien on your property. So title insurance is necessary in this instance as well.

Yield Spread Premium (YSP)

The yield spread premium (YSP) is the cash rebate paid on an interest rate above the wholesale par rate. For example, if a mortgage broker offers a borrower a loan of $100,000 at an interest rate of 6.25%, and the par rate is 6%, the broker may earn a YSP equal to 1.0% of the loan amount. This $1,000 fee (1.0% of the loan amount) is paid by the lender directly to the broker as a “rebate.” Although the borrower is not charged the fee directly, the borrower does pay the fee indirectly by accepting a higher interest rate in exchange for lower fees.

YSP’s are not controversial. What is controversial is how brokers and lenders have to disclose them. Mortgage brokers say the disclosure requirement puts them at a disadvantage when compared to Institutional (“Retail”) Lenders, who do not have to disclose YSP. All loans have YSP, so choosing to get a mortgage through a mortgage broker does not mean there is a higher cost. Many times a mortgage broker has the lowest terms. For a more detailed explanation, go here: YSP.