CLOSING COSTS

Many people think that because they have $10,000 in the bank, they can put the entire $10,000 down on the home… WRONG!  They forgot something...CLOSING COSTS.   

$10,000 doesn’t go very far when you consider the Down Payment , Points , Closing Fee’s, Pre-paid items, Escrow ’s and Reserves  (if applicable).   You must consider these fees and then what ever is left over can be used for a down payment .   If you don't, you will be SHORT TO CLOSE. 

Unless you have GIFT  money, seller concessions  or a whole lot of money in the bank, you can expect to structure a loan with a much smaller down payment than originally planned.

 

Assets are verified by providing THREE (3) months of bank statements collected at application.  The down payment and costs to close must be in the bank for at least 3 months prior to application.  The underwriting goal here is to show a stable and increasing ability to save money on the part of the applicant.

 

LARGE deposits into any account must be explained or the underwriter will not allow these deposits and might cause you to be “short to close”.  An example of a Large deposit would be a weekly deposit (over the past 3 months) of $500 and one deposit of $1200.  Obviously, this $1200 deposit is unusual and must be explained to be used for closing. 

 

1.     Down Payment  – should be the LAST item to structure.  The down payment is the difference between the Sales Price  and the Mortgage Amount.  Unless you have a ton of cash to work with, the down payment should be the last item to structure.

2.    Points

Each POINT represents 1% of the mortgage amount.  One point on a $100,000 mortgage equals $1000 ($100,000 x 1%).  Three points would be $3000.

The amount of points paid should be determined by how long you plan on staying in the home.  You should choose between "0" and "4" points. 

NOTE:  Not every mortgage program is available at zero points.

Unless there is a credit  problem or you opt for a special mortgage program, 3 to 4 points should be the most you should. 

Points  are pre-paid interest and will buy down the interest rate .  Here is how to determine whether or not you should pay points. 

First, do you have enough assets (money in the bank) to pay for the points.  Remember, one point equals 1% of the mortgage amount. 

NOTE:  Read SELLER CONCESSIONS on this web site.  You will find that the seller can help you pay most or all of your closing costs, including Points.

Second, determine how much the points will cost you and compare that with what the monthly savings will be and when you will recapture the point cost, for example...

Assume a $100,000, 30-year loan.  The rate  is 9% for "0" points and 8% for 3 points.

The payment at 9% is $804.62; the point charge is $0.00

The payment at 8% is $733.76; the point charge is $3000

You will pay $3000 to save $70.86 per month.  Is it worth it?

 

To find out, ask yourself how long you intent to live in the home.  The average homeowner will stay in the home for 7 years.  How many years will it take for the $3000 to pay for itself?  The answer is almost 3 1/2 years (42.34 months).  Just take the $3000 point investment and divide it by $70.86. 

This means that after 3 1/2 years, the $3000 will pay for itself and you will save $70.86 per month, every month thereafter.  If you stay for the full 30 years (another 26 1/2 years), you will save $22,533 ($70.86 X 12 months X 26.5 years).  In this case, paying 3 points would be smart.

Again, each point represents 1% of the mortgage amount.  Points  are used to buy down the interest rate .  The more the points, the lower the interest rates.  On the other hand, the lower the points, the higher the interest rate. 

A Mortgage Company will make a profit from these points.  Points  are upfront money.  Points are "prepaid  interest."  In a purchase transaction, ALL the points are tax deductible the first year; however, points on a refinance  are tax deductible over the course of the loan. 

NOTE:  I am not an accountant nor an attorney.  Tax advise should only be taken into consideration after speaking to an accountant.

Origination Point:  This is usually a 1% fee based on the BASE loan amount of an FHA loan.

Discount Points :  These fees are used to buy down the interest rate. 

 

 3.    Closing Costs … 

are defined as: application fees , appraisal  and credit  report fees, transfer taxes, attorney's fees, surveys, title  insurance , and any other fees associated with the mortgage closing.  Financing costs are defined as: discount points, loan fees, commitment  fees, origination fees and/or any other similar fees.  The following are estimates only and will be detailed on the "Good Faith Estimate ".    The Good Faith Estimate is used to show you what costs "could" be expected in the loan process.  They are only estimates.

               -Attorney fee (your)      $600  (not needed on refi)

              -Title  Search..................$250

              -Title  Insurance..............$525  (generally $5.25 per $1000)

              -Recording Fees...........$310   Recording of the Deed and Mortgage

              -Commitment Fee .........$595 

              -Termite..........................$ 60   *Termite report is good for 45 days.

              -Tax Service Fee……...$ 82   (one time fee to set up tax escrow account)

              -Application Fee............$395  (paid at application)

              -Appraisal    ..................$300   ($375 for FHA )

              -Credit  Report...............$3-$60

              -Flood Certificate ………$ 25  (required on all loans)

             

         TITLE SEARCH (or PRELIMINARY REPORT)- Every buyer needs to obtain Title  Insurance to protect the buyer.  ALL lenders require title  insurance  and condition for it on the commitment .  The title company must search the public records (local, county and state) to prove that there is "clear" title to the property.  The search includes a search for Judgments , Federal Tax Liens , status of real estate taxes, etc.  The Title Company will issue a title report to the buyer’s attorney.  Liens, judgements, etc. must be removed prior to the time that the title passes from the seller to the buyer.

 

     TITLE INSURANCE a one-time fee (generally about $5.25 per thousand) is required for Insurance on the title .  Once the Search is completed, the title should be clear and the property can be transferred to the new owner with no liens attached.  However, the applicant must take out Title  Insurance in case, after the loan closing, something shows up on the title.  All lenders require title insurance  prior to closing.  The lender requires the insurance because it is the lender who is holding the mortgage on the property.  There is a Lenders  policy that guarantees the lender that the property is free of liens and judgment  and the Owners Policy that guarantees the lender that the Customer is free of liens and judgments. 

The following story may help you understand Title  Insurance.

Let’s jump back 150 years.  Assume your great Grandfather had a piece of property and sold it to my great Grandfather for $50,000 and the note to that property was recorded, placed in a box and then forgotten.  Now jump back to present day.  If you found this note as you cleaned out the attic of your grandfathers house , what would you do?   You would come to me and demand payment or foreclose.  However, if I had Title  Insurance I would refer you to the title  company because that is what I paid title insurance  for.    A normal title search will only go back about 20-60 years.  Title Insurance  is purchased just in case something like the above happens to you.

 

COMMITMENT FEE is a legal fee (in New Jersey ) that is charged when a commitment is issued (normally collected at closing).  

TAX SERVICE FEE is a one-time fee paid by you to set up the Tax/Insurance escrow account.

 

 

4.  Pre-paid Items  (to be paid at closing)

a.      TAXES are paid in quarters (if you live in New Jersey ).  ¼ every 3 months.  Depending on the date of closing, there may be taxes either due or reimbursed for the tax quarter.  Tax quarters are as follows [Jan, Feb, Mar], [Apr, May, June], [July, Aug, Sept], [Oct, Nov, Dec].  Taxes  are due no later than Feb 1st,  May 1st, Aug 1st, Nov 1st for that quarter.

      Most of the time, TAXES are included in the payment.   You will be required to pay for taxes in         advance so that money will be available to pay when the quarter is due.  You can expect to have 3 months of MONTHLY taxes taken at closing.

b.  INSURANCE ….....12 months of home owners (Hazard) Insurance must be paid up for one year.  Underwriting also needs a copy of the Declaration page (with enough insurance to cover at least the loan amount) and a copy of the paid receipt to show proof of payment.

c.  Interim Interest :   Interim Interest , also known as “daily interest.”   The first mortgage payment is due on the first day of the next month following the date of closing.  In other words, the closing is on June 15th, the first payment is due August 1st.

However, you will pay Interest  only  from the day of the closing to the end of that month.  If the loan closes on June 1st, then 30 days interest will be deducted.  If the loan closes on June 25th, then 5 days interest will be deducted and the first payment will be due August 1st. 

An easy way to figure out the Interim Interest  would be to take the mortgage amount, multiply it by the interest rate , and then divide it by 365.

QUESTION #1: What would be the DAILY Interest  on a  $120,000 Mortgage with an interest rate  of 9%?

ANSWER:    $120,000 x 9% =  $10,800 divided by 365=  $29.59 daily interest per day.

   

QUESTION #2: If you close on June 15th.  How much INTERIM INTEREST would you pay at closing?

ANSWER:  You would pay $443.84 of INTERIM INTEREST at the closing. 

($29.59 x 15 days left in the month = $443.84)

 

 5.    Escrows   -

Escrows are held by bank in case of loan default or if there is an increase in taxes/insurance , this escrow account is used to meet the increase.

                 -Tax Escrow …............…  2 months

                 -Insurance Escrow ….....  2 months (in addition to 12 months pre-paid)

                 -PMI  Escrow …..........….  1 months (if applicable)

 

As you can see, there is a lot of items that need to be taken into consideration when buying or refinancing a home.

For more information, please call DAN PALUMBO at 1-800-817-8743.

 Dan is the published author of the Mortgage Loan Officer Training Manual.  You may order one by visiting www.mortgagetrainingmanual.com
 

 

Licensed Mortgage Banker - New Jersey Department of Banking and Insurance; Licensed by the Pennsylvania Department of Banking; Virginia Licensed Mortgage Lender