FTB11 - The Total Cost of Home Buying
Carlos Camargo, Ph.D.
????? Retired REALTOR? | American Studies Scholar/Educator, Tech Professional & Development Boss ?????
KNOW BEFORE YOU OWE
Buying your home involves a cost greater than just the purchase price of your home. As we have discussed, the home buying process requires the performance of many various services, which of course cost you money. Recall the activities of your lender, real estate agents and agencies, title and insurance companies as well as credit and appraisal agencies. Listed below are descriptions of various fees that should be anticipated with these services.
Finance Charge
The finance charge, including the interest expense, represents the major cost beyond the purchase price of your home, and is specifically the money that you pay to obtain the funds to purchase your home and the ability to pay that principle back over time. The APR that you receive from your lender, along with other fees charged by your lender, will determine the amount of your finance charge. Federal law requires both of these be disclosed in a truth-in-lending statement presented to you before the closing of your loan. As described before, the major portion of your monthly mortgage payments contributes to paying back the principle (the purchase price of your home) you borrowed and paying your lender the finance charge.
Escrow Account Deposits
Your mortgage servicer may deposit part of your monthly payments into an escrow account, which is an account set up specifically to hold monies used to pay debts as they become due. Setting aside this money each month ensures you will have funds to cover expenses such as hazard insurance, private mortgage insurance and property taxes when they are due.
Insurance Policies
Your lender may require you to hold hazard insurance, otherwise known as homeowners’ insurance, to minimize the financial loss to both you and your lender in the event of property loss or damage due to a fire, storm or other natural disaster. In addition to hazard insurance, some lenders may require specific kinds of natural disaster insurance, such as flood or hurricane insurance. Some lenders or state governments may also require that you maintain title insurance, which protects you against loss caused by defects of title. In other words, if it were discovered that another party has a claim, such as a lien, to your home or property after you have purchased it, you would be protected against loss up to a specified amount. Title insurance is paid in a one-time fee at closing. Even if it is not required, title insurance may be a wise protection for your investment. If you are going to enter into a mortgage to purchase your home, you may want to consider mortgage insurance. There are several different types of mortgage insurance, all serving different purposes. If you are interested in a low down payment on a conventional loan, your lender will require you to carry private mortgage insurance (PMI) to protect it from financial loss in the event that you default on your mortgage. Mortgage disability insurance (MDI) and mortgage life insurance (MLI) provides insurance in the event that you become disabled or die.
Settlement and Closing Costs post TRID
General Information - Closing, or settlement, the term used for the process that finally makes you the official owner of the house you've purchased should be an exciting event. You have made an offer on the house, the seller has accepted the offer, you have been approved for a mortgage and taken care of other obligations necessary for purchase (homeowner's insurance, etc.), and all that remains is to sign dozens of papers and pay your settlement, or closing, costs. Closing costs refer to the costs associated with purchasing and selling a property. It's the closing costs that dampens buyer's excitement at closing. This is largely due to the fact that people do not have a clear idea of what closing costs are or why they have to pay them. When you understand the individual fees, know the whys and wherefores of the fees, closing can again become an exciting event. A lender's Loan Estimate provides you with the fees that you are likely to pay at closing. The lender will give you a Loan Estimate within three business days of receiving your loan application, as required by TILA-RESPA.
When buyers have confidence in the business practices of their lender, then the faith is strong because they know there will be few surprises at closing. The fact remains that the Loan Estimate is only an estimate, and actual fees may differ from the estimate at closing. To know exactly how much money you need to close, you will receive a Closing Disclosure (CD) at least three days prior to closing as required under TILA-RESPA. The closing costs/cash to close on this document should be as accurate as possible, but changes may occur before/at closing if information is received that was not previously known. Make sure to compare your last disclosed Loan Estimate to the Closing Disclosure you received to see what changes may have been made between the two documents. You’ll notice that they are very similar documents which makes for an easy comparison!
- Loan discount - an amount payable to the lender which represents pre-paid interest, allowing the lender to offer a lower interest rate on your loan. This enables you to pay a lower monthly mortgage payment. These are also referred to as discount points, where again each point is one percent of the loan amounts.
- Sales/broker’s commission - the fee paid to a real estate broker when he or she fulfills the terms of his or her contract. Usually this entails a seller’s broker selling a home or a buyer’s broker finding a home that is purchased. Most often the seller pays this fee, but if you hired a buyer’s broker you may pay his or her fee. This fee is commonly a percentage of the home’s selling price.
- Loan origination fee - covers the lender’s administrative and processing costs including the loan officer’s compensation. The amount of this fee varies from lender to lender, but is most often expressed as points, which as we have said, are a percentage of the loan. The buyer generally pays this fee.
- Mortgage broker fee - If you use a mortgage broker to obtain your loan, they may charge fees for various services. Consult your mortgage broker to find out what they need to do to receive payment and exactly what fees coincide with certain services. For example, some mortgage brokers may charge a fee for being able to offer a loan at a stated interest rate. In this case, even if you chose not to use the broker or close the loan, the broker has fulfilled his or her obligation, and is due payment if he or she finds a loan and offers it to you with that interest rate.
- Appraisal fees - If your lender had an appraiser assess the value of your home and property, you would be liable for that cost. Note that the appraisal fee and credit report fees are both commonly paid at the time of application or included in the application fee. Check with your lender to find out which fees are taken care of at the time of application so you don’t end up paying for the same fee twice.
- Credit report fee – If a credit report was required to determine how much you would be allowed to borrow, you would be liable for this fee in addition to any amount you may have paid for a personal copy of your credit report.
- Lender’s inspection fee - In addition to any appraisal or inspection that you had performed on your property, the lender may want to have additional inspections done for their benefit. Inspections are most important in newly constructed homes, because everything must be built according to codes, but you will also want to make sure that older houses are in sturdy condition. A lender my request specific inspections such as pest inspections and lead-based paint inspections be performed for your safety and their protection. You typically pay these fees.
- Assumption fee - a fee paid by a buyer when taking over the duty of paying off a seller’s existing mortgage.
- Survey fee - The lender may require that a survey be conducted on the property. This protects the buyer as well as the lender. Usually you will pay this fee but sometimes the seller may pay it.
- Title fees – These cover a variety of services performed by title companies and others. These may include charges such as an abstract of title search, a title examination and a title insurance binder. The following charges may accompany the title of your home/property:
- Title settlement or closing fee - paid to the settlement or escrow holder, the responsibility for this payment can be negotiated between you and the seller. Document preparation fees - additional fees that lenders or title companies may charge to cover the cost of legal preparation of the mortgage papers, note or deed.
- Notary fee - A licensed notary public charges a fee to witness the signing of the mortgage and title documents by all parties involved in the transaction. Attorney’s fees - may be charged if the lender enlisted legal services during your loan process, for example, to examine a title binder.
- Government recording and transfer charges - may be imposed when the title is legally transferred from the seller to you. These fees can be paid by you or the seller, but are traditionally paid by the buyer.
- Prepaid Expenses - Your lender may require you to pay some expenses at the closing before they are actually incurred. For example, at the time of settlement you must pay the interest that will accrue from the settlement date until the date of the first monthly payment. Some lenders will also ask you to pre-pay up to a year of hazard or other kind of insurance at the time of closing.
Carlos F. Camargo, Ph.D. | Realtor #01988431 | 510.798.5016
