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This has to be the largest problem area in lending! How many times have you heard about people going
to escrow only to find that the costs are higher or the loan program was not what was represented?
What are Closing
costs? Bottom line is that all costs associated with the loan are 'a cost of closing', but you have to define whos costs when
speaking to the broker, escrow company or actual lender.
Some of the costs are used to compute A.P.R., or Annual Percentage
Rate which we will describe later. A mortgage broker site may feel comfortable showing you their closing costs but not mention
escrow and related costs because it is 'not their responsibliity' at that time.
A lender is supposed to send a Good
Faith Estimate of closing costs (called a GFE in the industry) within 3 days of taking an application. That is easy if you
and the broker already know the exact type and terms of the loan. If you have no idea, the government wants the broker to
estimate a program that is average for your type of credit situation. The costs are supposed to be an average of the charges
from the broker and other companies involved. You can see that the GFE in that case is really worthless until we know the
program that you accept.
How we do it: Upon receiving your easy web application we will contact you to determine the
best program. At that point we will generate a G.F.E. We can fax, e-mail or mail it to you. If faxed or e-mailed, one will
also be mailed for your signature.
If you call us on the phone before an application, we will do the same. Some people
want a G.F.E before they apply - that is understandable. If you compare our cost estimate to another lender and ours has more
items -- call the other lender and ask why they don't show them.
Common fees can include:
Escrow
Title
Insurance
Appraisal
Credit Report
Wire Transfer
Tax Service
Recording
Reconvey Deed (Refi's-commonly
absent in GFEs)
Lender Underwriting/processing
Broker processing
Flood rating certificate
Title policy riders
(Commonly absent in GFEs)
Fire insurance policy
Pro rated property taxes
Points. They are described in two ways:
'Loan Origination Fees' if from the broker, and "Discount Fees' if from the actual lender. One point equals one percent of
the loan amount.
It is not uncommon for lenders to advertise their best 'basic' rate. It is not actually illegal,
but at that point you don't know that there can be rate or fee 'add-ons' for the loan amount being under a certain amount,
the loan to value ratio being over a certain percentage, your credit score, etc., etc. The mortgage pricing process is too
complicated to rely on generic advertising! To obtain an accurate lockable rate you MUST call a mortgage specialist and discuss
your situation. This is not a game!
A.P.R., or Annual Percentage Rate. This was the governments idea to try and express
the complete costs of the loan as an interest rate figure so the consumer could easily compare programs. It is not reliable!
Lenders are not regulated enough to insure that they have correctly included all the costs that should be a part of the A.P.R.
Go to our 'Mortgage101' page and look up A.P.R. for a better description. Bottom line is this--compare the rate and the total
costs. That is accurate and will not confuse you. It is my opinion that one should not depend on A.P.R.
SOME
NOTES ON TITLE INSURANCE:
Title insurance is something of a mystery for many consumers.
Title insurance
is a unique type of insurance. Unlike most insurance that covers specified future events and charge an annual premium, title
insurance is designed as a safeguard against loss arising from hazards and defects already existing in the title. And its
cost is a one-time payment at the time the home is purchased, or when its being refinanced.
Another interesting point:
Normally, title insurance doesnt protect new homeowners who pay for it. It protects the bank or other mortgage lender. The
searcher (with the title company) checks on details such as making
sure there isnt a lien against the title, or that the
person selling the home really owns it.
That searcher, incidentally, should be licensed and bonded. If a mistake is
made during the searching process, the lender might collect on the value of the mortgage from the title company while the
homeowner continues making payments on the mortgage -- on a home he may no longer own.
There are two types of title
insurance -- a lenders and owners policy. While the lenders policy doesnt name the buyer and the buyer is not a third-party
beneficiary of that policy, it does provide much indirect protection.
For example, in a total failure of title, an
uninsured owner would not have his or her equity protected. But the owners lender would be paid off and the owners obligation
under the (mortgage loan) note would be
cancelled as well. Without the lenders title insurance, the buyer would continue
to be obligated to the lender under the note. Partial title failures would have a similar impact.
Consumers can sometimes
save money with a limited lenders policy, requiring less title work. This, of course, must be acceptable to the lender and
is usually for secondary financing under $50,000.
In cases of refinancing a home, the owner does not have to obtain
a new owners title insurance policy since the original policy is good for as long as the owner (and owners heirs) has an interest
in the property, but they do have to provide a new LENDERS policy which is one of the largest fees in the closing costs.
Some
short-term rates can save as much as 20 percent off a normal rate. Usually a short term rate is available if there has been
title action within the last 3 years by the same borrower/owner.
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