Closing Costs - Gouging at the Table

What closing costs can you expect when you close on your mortgage loan?

You will find that when refinancing a mortgage or purchasing a new home your closing costs can vary from several hundred dollars to a few thousand dollars. Bear in mind that even a so called no closing cost loan may require considerable out of pocket expenses. Reviewing the HUD-1 statement from when you purchased your home (HUD-1 details every penny of the mortgage transaction) will show you the closing costs and the pre-paid items which together make up the total settlement charges. While there are programs that offer no closing costs there do not offer loans with no settlement charges. Prepaid expenses are things such as prepaid interest (for the period of time between the closing date and the end of that calendar month), prepaid real estate taxes and insurance (up to 6 months worth in some cases) and Private Mortgage Insurance (PMI). Even if you roll all these expenses into the loan amount, settlement charges can come as a surprise at the closing table; doubly so in states such as New York which have very high property taxes as well as a refinancing tax.

The rest of your closing costs are origination points and title insurance; both of these are based on the mortgagee loan amount. With the origination points you can rest assured that you are getting something for your money; namely a lower interest rate. Title insurance offers no benefits to you whatsoever and can be expensive depending on the size of the loan. Title insurance protects lenders from loss due to a defective title; however as a homeowner you pay for this insurance policy. Title insurance does not protect the homeowner. You may purchase homeowner coverage also; however, most homeowners do not purchase this type of insurance The remaining closing costs relatively small by themselves, although they can add up to a significant amount. These costs include: processing and underwriting fees around $500, attorney fees also $500, recording fees, courier fees, flood certificates, and a title search. Bear in that the attorney fees paid are the fees for the lender attorney though you are paying the fee. The good news is in most cases when refinancing, the closing costs and pre-paid items can be rolled into the loan amount; you will not be required to fork over the cash at the closing table.

About Home Equity Loans

Borrowing money from the equity in your home is becoming an increasingly popular source of consumer credit. Many lenders are offering home equity loans in a variety of different ways. As a homeowner, you may discover that most of these loans come with variable interest rate; some loans come with low introductory interest rates, and very few come with fixed interest rates. You also may also discover most home equity loans have large one time upfront fees, some have large closing costs, and others have ongoing costs, such as annual fees. You will find home equity loans with large balloon payments, and others with no balloon payments but with higher monthly payments. There is not one mortgage or home equity loan that is right for every homeowner. Your challenge in getting the best loan for your situation is to contact as many different lenders as possible, compare their offers, and choose the best home equity credit line for your needs. Be sure to review the loan contract carefully before signing it. Ask questions about the loan terms and stipulations. Consider the following before borrowing:

Is a home equity loan the right thing for you?

If you must borrow money, home equity loans can be a useful source of credit. Initially they may offer large amounts of cash at low interest rates, and easy access to your equity. Some may even offer tax advantages you could not get with other types of loans.The down side is this type of loan requires you to use your home as collateral on the loan. This could put your home and the well being of your family at risk if you cannot make the monthly payments. Home equity loans with large balloon payment may cause you to borrow more to make the balloon payment; this could further place your home in jeopardy if you cannot secure the loan. Should you decide to sell your home, most home equity loans require you to pay off your loan when you sell. Also, because this type of loan offers easy access to cash, you may borrow money when you do not really need to. Keep in mind, there are other ways to borrow money. You might consider a second mortgage loan. This type of loan adds another mortgage to your home; second mortgages are loaned as a lump sum, instead of a series of cash advances on your equity. Second mortgages typically have fixed interest rates and fixed payment amounts offering a degree of safety not found in home equity lines of credit. You could also consider other avenues of credit that do not require using your home as collateral. These are signature type loans available with your credit.

How much can I borrow?

Depending on your credit history and your income, along with how much outstanding debt you have, a lender may let you borrow up to 85% of your home value. Check with the lender about the terms of the loan, whether or not there is a minimum withdrawal amount, and how you access your money; you may withdraw money using checks, credit cards, or even both.

How much interest will I pay?

Interest rates vary for each type of loan, so it pays to do your homework when shopping for a mortgage loan. Compare the percentage rate you pay annually for each loan, this will tell you how much you pay on an annual basis. Realize that the advertised rate for a home equity credit line is based on just the interest paid. For an actual comparison of the costs involved, compare all charges and fees, like the closing costs and up-front points; these expenses add to the cost of your home equity line of credit. This comparison is extremely important if you are comparing a home equity loan with a second mortgage loan. Also, be sure and inquire about the type of interest rates on the home equity loan. Most loans of this type have variable interest rates. These variable interest rates offer lower payments in the beginning; however, the rest of the repayment period may change and could be much higher. Fixed interest rates, may be slightly higher in the beginning; however, you do not have to worry about them going up over the term of the loan. If you are considering a variable rate, check and compare the loan terms. Compare the periodic cap, which is a limit on rate changes at one time. Know if there is a lifetime cap, which is the limit on rate changes over the lifetime of the loan. Inquire as to which index is used and when and how much it can change. An index (like the prime interest rate) is used to determine how much interest rates will change. Be aware of the margin; the amount added to an index that determines the interest rate you pay.

Lastly, ask whether you can convert your loan to fixed interest rate down the road. Every now and again, a lender will offer a temporarily discounted mortgage interest rate; this rate is unusually low and offered only during introductory period. During this time, the monthly payments on the loan are lower too. After the period ends, the interest rate and payment amount are increase to the regular interest rate. Be sure to ask if the rate you are offered is a discount rate, and if it is ask how your interest rate will be calculated when the discount period ends.

Loan to Value Ratio and Your Mortgage Interest Rate

What is the Loan-to-Value ratio? Loan-to-Value ratio (LTV) is a term often thrown around by mortgage professionals because it is a key factor in deciding the maximum loan amount and the interest rate. The LTV is the ratio of the loan amount to the value of the property. For example, if a property is valued at $150,000 and the loan amount is $100,000 then the LTV is 66%. For any mortgage program there is a maximum value of LTV. If the mortgage you are looking at has an 80% maximum LTV and you want to borrow $250,000 against a $300,000 property, you will have to find a different loan. All things being equal, the higher the LTV, the higher the interest rate will be if you can qualify for the loan. For example: a mortgage lender has a loan offering 80% LTV that requires a 620 credit score. The same lender may require a 720 credit score for a 100% LTV.

What determines the interest rate you pay for your mortgage? Economic factors determine whether interest rates are high or low; however, there are other factors which influence the interest rate for given individual. The main factors are:

1. Loan programs: fixed rate mortgages have higher rates than adjustable rate mortgages (ARM) and 15 year interest rates are lower than 30 year interest rates.

2. Credit score: The better your credit score the lower interest rate you will get.

3. LTV: As mentioned before, the higher your LTV ratio, the higher your interest rate will be.

4. Documentation: The more documentation your can provide, the lower your interest rate will be. There are mortgage programs that allow you to provide no documentation at all. These programs are great for people that need them; however, you will pay a premium interest rate.

5. Points: Many homebuyers are attracted to mortgages with zero points. If you take one of these mortgages you will pay a higher interest rate. A good rule is if you are planning to stay in the home for more than 4 or 5 years, you should pay at least two points in order to get a better interest rate.

6. Property type - Interest rates are typically lower for a primary residences as opposed to second homes and investment properties.

Next Up: Closing Costs

Mortgage Refinancing - My Nightmare

Before I outline my mistakes to you in my attempt to save money with my monthly mortgage payments, I would like to share with you the helpful information I have found freely available on the internet. There are a number of helpful sources available online; I will share them with you later.

The first question you should ask yourself is: Should I refinance my Mortgage? There are a number of reasons that you may be considering refinancing your home:

1. To lower your interest rate; this will reduce your monthly payments.
2. To shorten the term of the loan and save thousands of dollars in interest.
3. To cash out equity in your home to pay off other higher interest debts.
4. Other reasons such as buying a second home, remodeling, or paying for college.

Obviously, the reasons that you have for refinancing will change what you need to consider before making your decision. If you are trying to lower your payment you should first determine how much the loan will cost you, what your new monthly payment will be, and how much you will save each month. Many homeowners forget to consider the potential savings; however, if the closing costs for the new loan are for example $3,000 and you will save $200 each month, you would be wasting your time refinancing the mortgage unless you would be staying in the home for at least 20 months.

As a general rule, the new interest rate should be at least 1.5% - 2% lower than your original mortgage interest rate in order to refinance and realize a savings. If you want to shorten the term of your mortgage you may not need to refinance the loan. Say you took out a 30 year mortgage loan when you purchased the home; but it turns out you have the cash on had and would like to pay off the mortgage loan sooner. In most cases you will not need to refinance unless you are also trying to lower your mortgage interest rate. Simply pay an additional amount each month in addition to your regular monthly payment and this will lower the principal balance and reducing the amount you owe. This is often referred to as making bi-weekly mortgage payments. You can use a mortgage calculator to see how much you can save simply by making bi-weekly mortgage payments. One of the websites I discovered has an excellent free mortgage calculator that will show how much you will save paying bi-weekly mortgage payments. This site will show the amortization tables for your current payments vs. bi-weekly payments.

To calculate how much extra to pay if you want to pay off your loan on a specific date, use a free mortgage loan calculator such as RefiAdvisor.com (http://www.refiadvisor.com) to figure out the monthly payment for the loan that you would like. Refiadvisor is an excellent resource for free information about mortgage refinancing. If your mortgage balance is $120,000 and you would like to pay it off in 7 years, enter this along with the interest rate into the loan calculator and you will be able to see your monthly payments If you are looking to take cash out equity to pay off other debts or to purchase a large ticket item then the interest rate may not be the most significant factor for you. If you want to pay off high interest credit card debt it may be worth refinancing even if the mortgage rate is slightly higher.

Next Up: Understanding Your Loan Requirements and the Loan-to-Value Ratio

My Mortgage Refinancing Nightmare

Over the coming days I will share with you the horrors I experienced refinancing my home mortgage loan, and the solution I found.