Appraisals
Closing Costs
Homeowner's (aka Hazard) Insurance
Insurance
Loan Documentation
Pre-Payment Penalty
Rates
Should I Refinance
Appraisals
- Will the lender require an appraisal of the property? If so, will I receive a copy of it?
Yes. The property is the collateral for the mortgage, therefore an appraisal is almost always required and if a borrower pays for the appraisal he or she is definitely entitled to receive a copy of it. back to top
Closing Costs
- What type of closing costs can I expect to pay on my loan?
Refinance Mortgages
The costs of closing a refinance mortgage generally include the following: Title and escrow fees, lender fees, points (an optional expense), appraisal fees, credit fees, insurance and taxes. When refinancing, the major expense is the title and escrow fees (though they are not as costly as when purchasing property). Refinancers have the option of financing their closing costs by adding them onto their current mortgage balance (assuming there is sufficient equity in the subject property to do so) or they may cover the costs with cash at closing. Another increasing popular option is the no cost mortgage (available typically with mortgage amounts in excess of $180,000).
With a no cost mortgage a borrower can avoid adding fees onto their existing mortgage balance, or paying for their closing costs with cash, by taking a higher interest rate whereby the mortgage originator can cover all non-recurring closing costs on the mortgage, (all costs except taxes, insurance and interest) utilizing the rebate they receive from the lender funding the mortgage.
Title & Escrow Fees
Include both the owner's and the lender's policy of title insurance as well as the escrow fee. Title insurance protects both the buyer and lender by insuring a clear chain of title, that the persons with the legal right to convey title to your property are the ones who have actually done so. Also, some polices protect against the occurrence of fraud and forgery.
Many refinanciers voice resistance to paying for another policy of title insurance when they have already incurred the expense at the time they purchased the property. Keep in mind that the lender is insured as well as yourself, the owner. Refinancing creates the need for a new policy for the new mortgage. Most title companies offer substantial reductions in the price of both the title policy and escrow fees of refinanciers.
The escrow fee is a service fee charged by the title company for acting as an independent third party in facilitating your transaction and insuring that all parties to the transaction perform as agreed.
Other title fees include the fee to notarize your mortgage documents (the notary fee) the fee required to record your deed of trust with the county recorder's office (the recording fee), as well as miscellaneous drawing, courier and express mail fees. You may call a title company conveniently located near your property, provide them with the mortgage amount you'll be requesting and they can supply you with an accurate fee quote.
Lender Fees
The flat fees that a lender charges to process and fund your mortgage fall under a variety of names and can generally be lumped into one category the industry refers to as "garbage fees". They include: underwriting, processing, administrative, document preparation and funding fees. Additional lender fees include wire, tax service fees and flood certification fees. These fees are charged by virtually all lenders and range from approximately $650-$850 in total fees charged.
Points
Points generally fall into two categories, discount fees and origination fees. Discount fees are prepaid interest that a borrower elects to pay up front to buy down the interest rate down on the mortgage. An origination fee is also used to buy the interest rate down but is used to compensate the mortgage originator in the transaction, rather than accepting a higher interest rate where the lender funding your mortgage compensates the mortgage originator.A point is equivalent to 1% of the mortgage amount (i.e. one point on a $300,000 mortgage is $3,000).
Appraisal Fees
The fee an appraiser will charge to inspect your property will depend on the type of property involved (i.e. single family vs. duplex to fourplex) and whether the property will be owner occupied or used as an investment property. The typical fee for a standard owner occupied single family tract home, condominium or townhouse is $300-$400. An investment property typically requires a rental survey and operating income statement to be completed with the appraisal and can add an additional $200-$300 to the cost of the appraisal. Also, if you are purchasing new construction, the appraiser may have to return to the property an additional time to complete a final inspection (referred to as a 442), to insure that construction has been completed as proposed. This fee might amount to an additional $75-$150.
Credit Fees
The fees to check your credit (using three credit bureaus as lenders require) range from $25-$65 per person or per married couple. If your credit report has many inaccuracies on it, the costs to correct the errors could generate higher fees from the credit reporting company.
Insurance Fees
Your policy of homeowner's or hazard insurance will need to be current at the time the new mortgage closes. The standard coverage requirement a lender requests is replacement cost coverage. Most lenders require that your current policy be effective for a period not less than four months after the first payment date on the new mortgage (though some lenders and insurance companies my require you to pay up to a year's premium). For example, if your current policy expires within two months of the first payment date on the new mortgage, the lender may ask you to pay two more months premiums. Also check with your insurance carrier to verify that they will accept an incremental vs. annual payment, otherwise you may have to pay up for another year.
If your property is located in a geological hazard zone (i.e. quake or flood zone) the lender will ask that you have policies in place to cover these hazards as well. Geological hazard zones are established by FEMA and the appraiser can determine whether your property is located in such a zone by referring to the most current FEMA geological hazard map. FEMA reclassifies hazard zones periodically and although your property was not located in a zone at the time of purchase, your property may now be included in such a zone.
Check with the insurance carrier or agent of your choice for a homeowner's or hazard insurance quote as well as a quote for quake coverage if you require it. Contact The National Flood Insurance Program at 800-638-6620 for a flood insurance quote if this coverage is needed. Mortgage insurance may be required on your mortgage if only one lender is financing in excess of 80% of the appraised value of the home. You may also be able to eliminate an existing policy of mortgage insurance on your home if you have experienced an increase in property value and you now have sufficient equity in your property to do so.
Taxes
The lender will request that all delinquent or outstanding property taxes be paid at mortgage closing. Most counties require the payment of property taxes on a semi-annual basis. But if you happen to be refinancing during the window of time where your property taxes are due but not yet delinquent, you may be required to pay the installment in escrow, prior to closing, because your property taxes are now a valid lien on the property.
It is important to note that if you do fall within the aforementioned window, you should not attempt to pay your property taxes outside of escrow because it could take the county weeks to post your property tax payment as received. Then you may be left in the position of having to pay your taxes a second time, in escrow, because the title company was unable to verify that the county received your first payment (of course one of these payments would be refunded to you after closing once your property tax payments were both posted - but what a hassle). It is best to always consult with your loan coordinator or escrow officer before making a property tax payment during the escrow process. back to top
- Is it best to pay points up front to reduce the interest rate?
When points are paid on a mortgage, the result is to buy down the interest rate, typically 1 point (or 1%) will buy the rate down .25%. The key to analyzing whether paying points makes financial sense is to determine: 1) How long do you anticipate remaining in the property? 2) When would the breakeven point occur? For example if you pay two points to buy your rate down from 8.00% to 7.50% on a $300,000 mortgage, the payment at 8.00% would be $2,201 and at 7.50%, the payment would be $2,098, with the difference in payment amounting to $103/month. With two points costing $6000, divided by the savings of $103/month equaling 58.25 months or 4.85 years to break even. You would want to hold the mortgage and remain in the property approximately 5 years for this to make sense. Other factors to consider are the tax implications of paying points (see our link to the IRS website) as well as the time value of money (could you put these funds to better use). back to top
Homeowner's (aka Hazard) Insurance
- How much Homeowner's insurance coverage will I need to close the new loan?
A safe bet is to buy a guaranteed-replacement-cost policy that will generally pay out 20-50% more than the face value of the policy to rebuild your home (this is also the preferred policy of lenders). A replacement-cost policy typically adjusts the amount of insurance each year to keep pace with rising construction costs in your area. It is important to note that local building codes require structures to be built to specific standards which could vary over time, if your home is severely damaged, you may be required to rebuild it to current codes. Even guaranteed-replacement-cost polices do not always cover this expense. However, many insurers offer an endorsement that will pay for the upgrading cost, it is a good idea to consider adding such an endorsement to your replacement-cost policy.back to top
Insurance
- How can I avoid having to get mortgage insurance on my loan?
Many borrowers who have less than 20% equity in their homes, choose a combination first and second mortgage (referred to as a piggyback mortgage) to avoid mortgage insurance (MI). The most common method of financing without MI is an 80-10-10 (an 80% 1st mortgage, 10% 2nd mortgage with 10% equity). Also available is an 80-15-5 (requiring an 80% 1st mortgage, 15% 2nd mortgage with 5% equity).back to top
- How much Homeowner's insurance coverage will I need to close the new loan?
A safe bet is to buy a guaranteed-replacement-cost policy that will generally pay out 20-50% more than the face value of the policy to rebuild your home (this is also the preferred policy of lenders). A replacement-cost policy typically adjusts the amount of insurance each year to keep pace with rising construction costs in your area. It is important to note that local building codes require structures to be built to specific standards which could vary over time, if your home is severely damaged, you may be required to rebuild it to current codes. Even guaranteed-replacement-cost polices do not always cover this expense. However, many insurers offer an endorsement that will pay for the upgrading cost, it is a good idea to consider adding such an endorsement to your replacement-cost policy. back to top
Loan Documentation
- What documentation will the lender typically require to process my loan?
The answer depends upon the quality of your credit and the amount of equity you have in your property. On a typical fully documented mortgage application (where an applicant is seeking to qualify based on an employee's salary), the lender will require: one month's current pay stubs, W-2's for the prior two years and bank and investment account statements for the prior 2-3 months. If an applicant is self-employed (has a 25% or greater ownership in a business) then additional documentation could be required (i.e. 1040's, 1165's, 1120's, P & L statement). back to top
Pre-Payment Penalty
- What is a loan prepayment penalty and is it generally advisable to get a loan that has one?
A prepayment penalty on a mortgage allows the lender to charge a borrower additional interest, typically six months worth, when a mortgage is repaid during the penalty period, which is usually somewhere in the first three to five years of the mortgage. If a mortgage does have a prepayment penalty, this is clearly stated within the mortgage disclosures, mortgage note or prepayment penalty rider to the note. The advantage of taking a mortgage with a prepayment penalty is that it could carry a lower rate of interest or you may be permitted to take a mortgage without paying for non-recurring closing costs. back to top
Rates
- Should I lock my interest rate at loan application or float the rate until closing?
The answer depends on one's outlook for interest rates, whether you are satisfied with the current rate being offered (and would not be deterred from proceeding if rates declined), when you need to close and whether or not a rate increase could effect your ability to qualify for the mortgage. With a purchase, there is a contractual obligation to close on a specified date. With a refinance transaction, there is no such obligation to close and therefore a refinance applicant could postpone closing for a more favorable rate. Some lenders take the guesswork out of the process by allowing borrowers to lock and then float the rate down one time during the mortgage process. Typically a borrower is required to bring in a fee of ½-1% of the mortgage amount which is then credited (or refunded) to them at closing. It is a lock fee the lender requires to insure the transaction will in fact close. back to top
- If I decide to lock my interest rate and rates go down, will the lender give me the current lower rate?
It depends upon the lender involved and how much of a rate decline has occurred. Some lenders may re-price the mortgage at a rate close to market if there has been a substantial rate decline (i.e. = or >3/8%) and some may prefer that a mortgage is canceled rather than re-price it at a market rate. Some lenders allow borrowers to lock and then float the rate down one time during the mortgage process, typically a borrower is required to bring in a fee of ½-1% of the mortgage amount which is then credited (or refunded) to them at closing. It is a lock fee the lender requires to insure the transaction will in fact close. back to top
Should I Refinance
- How do I know if it makes sense for me to refinance?
First determine your financial mortgage related goals: i.e. are you looking to improve your monthly cash flow, reduce your mortgage term, do you need to take out cash utilizing the equity from your home? Obtaining the right mortgage for your particular needs could make sense even when rates are not at their lowest levels. First identify your goal and contact a mortgage professional for suggestions on mortgage programs that would best help you meet your objectives. Then shop for rates after you have selected the appropriate mortgage program. back to top
- I've always heard about the 2% rule when refinancing, is it important?
This rule is somewhat obsolete due to the variety of closing cost options that exist today. With the proliferation of no cost and zero point mortgages, a potential refinancier can recoup the costs of refinancing very rapidly if not immediately. The 2% rule may be a helpful tool when paying both points and closing costs in order to refinance. back to top
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