Mortgage Financing Questions
What are closing costs?
Closing costs are all costs incurred by either the buyer or the seller of a home in conjunction with the closing of the purchase and sale of real property.
They include items that are payable in connection with the buyer's loan,
such as fees for loan origination, loan discount, appraisals, credit reports, lender's inspection, mortgage insurance, tax service, document preparation, and underwriting.
They also include title and closing charges, such as fees to the settlement agent, title search fees and title insurance premiums for Owners and Mortgages title insurance policies.
These costs include documentary stamps and intangible taxes imposed by state law on deeds, notes and mortgages, as well as the costs imposed by state law to record all the documents in the public records.
In addition to the above, closing costs may also include survey costs, pest inspections and other expenses or items incurred by the seller, buyer or lender in conjunction with the transaction
What are pre-paid items included in the closing costs?
Pre-paid items are those items which the lender requires are paid in advance, including interest from the date of closing until the last day of the month of closing, mortgage insurance premiums,
the first-year hazard insurance premium and the first-year flood insurance premium, if required.
In addition, although not generally thought of as a prepaid item, CDD assessments for a community are often required to be pre-paid at this time.
What is escrow?
Escrow is a deposit of money made by the buyer to the lender for the purpose of paying future items as they become due, specifically hazard insurance premiums, property taxes, CDD assessments, mortgage insurance premiums and flood insurance premium, if required.
The total amount of these items is calculated for the year then divided by 12 so that one twelfth of the amount can be added to the monthly payment made by the buyer to the lender.
The lender then deposits this money into an escrow account on behalf of the buyer where it is held until the time that the taxes or insurance payments are due. The lender pays these items directly for the buyer.
What is an Owner's Title Insurance Policy?
The charge for the owners to obtain title insurance protection, protecting the owners against losses due to title problems.
What is Homeowner's Insurance? Who does it protect? What does it cover? What is deductible?
Homeowner's Insurance covers loss or damage to the home itself resulting from fire or other peril.
The damage may occur on or around the home.
The policy protects the owner of the property from loss which might be suffered from such hazards, and at the same time it protects the lender since the lender has a substantial investment in the property
through the mortgage loan.
What is an ARM? Is it a good idea?
An ARM is an Adjustable Rate Mortgage. It is a loan in which the interest rate, and the payment, changes over the life of the loan. The interest rate is adjusted to match the rise and fall of a pre-selected index and the borrower's payments will increase and decrease accordingly.
Different ARMs are adjusted at different frequencies. Some ARMs have limits on how much interest rates and payments may change at each adjustment, as well as on the maximum interest rate.
The starting interest rate on ARM loans is usually low, which permits you to purchase a home that might otherwise be unaffordable with fixed-rate mortgage. However, there is always a risk of higher payments later on.
An ARM can be an attractive arrangement for people who plan on being in the home for five years or less, or if the buyer thinks that interest rates will be coming down.
What is a buy-down?
A buy down is a sum of money paid to the lender at closing to reduce the borrower's out-of-pocket monthly payment. A typical buy down is a two/one (2/1) which means the interest rate is bought down during the first year by two percentage points below the note rate, and during the second year by one percentage point. Starting with the third year, and continuing through the 30 year life of the loan, the rate will remain the same. A buy down can be very attractive to someone who needs a lower rate to qualify for the loan and may require lower payments the first few years. The negative side is that the cost for buy down is usually 2.5% of the loan amount, and the borrower ends up with a higher rate starting in year three than if they went with a fixed rate and used the 2.5% to obtain a lower rate.
What happens if the interest rate goes up or down?
If you have an ARM loan, your rate will go up or down based with fluctuations in interest. Since this is calculated on a predetermined margin (lender profit) which are added together to determine the new rate, your ARM rate may still increase in a declining interest market. Fixed rate loans do not change, regardless of changes in the market interest rates.
What is MIP? Who does it benefit?
MIP is Mortgage Insurance Premium and is required on all FHA loans. There is an up-front premium that can be financed and a monthly premium that is included in the total payment. The MIP is a payment for the government to guarantee the FHA loan to a lender in the event of a default on the part of the buyer.
What is PMI? Who does it benefit?
PMI is Private Mortgage Insurance and is on non-government or conventional loans. Like MIP, it is paid by the borrower and insures part of the loan (usually 22-25%) in case the borrower defaults. PMI can be avoided if a borrower makes a down payment of at least 20%. Prior to the use of PMI, all mortgages required at least 20% down payment.[Can vary check you area].
What is a VA funding fee?
This is similar to FHA's MIP, and is an insurance premium paid on a loan obtained by a veteran or qualified reservist to guarantee a portion of the loan in the event that the borrower defaults. Unlike the MIP, the funding fee decreases as the veteran puts more money down, but it does not totally disappear. Also, the funding fee may be financed.