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April 2015

Understanding Closing Costs

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Understanding Closing Costs

Home buyers are generally responsible for making a down payment on a home as well as paying closing costs. These closing fees typically run between 2% and 5% of the home purchase price. Understanding more about what makes up these fees, will help you to compare rates and fees across lenders as well as minimize costs.

Closing costs have three different categories of fees. These include lender fees, third party fees and escrow fees.

Lender fees are costs the bank charges for underwriting the loan. Third party and escrow fees are not expenses the lender controls. Be aware that negotiating fees, could result in an increase in interest rate. If you only intend to stay in the home a few years, minimizing fees is the strategy that will save you the most money. If you plan to stay in the home for an extended number of years, then the lower interest rate is more valuable than lower fees.

Lender Fees that are common include:

  • Origination fee is generally 1%. This fee can be negotiated but the rate will adjust to accommodate any adjustment. A par interest rate includes 0 points and a 1% origination.
  • Discount points. This is the most negotiated fee. When you add discount points you are said to be “buying down the rate.” You can choose to have higher closing costs in order to secure a lower fixed rate. This can be a profitable strategy if you plan to stay in the home for a long time.
  • Mortgage application fee. Sometimes the credit report fees are rolled into the application fee.
  • Credit report fee is charged for gaining access to the three credit bureau reports
  • Appraisal Fee is a third party fee, but lenders generally order the appraisal and you are not permitted to choose your own appraiser.

Third Party Fees are costs that are charged by someone other than the bank. You have the ability to compare prices among vendors, which gives you the ability to find the lowest cost.

Third Party Fees that are common include:

  • Attorney Fees. Most loans must close with an attorney.
  • Inspection Fees of the property. Common inspections include a home inspection which helps the buyer and bank evaluate the condition of the home and a pest inspection which looks for termites. This is generally required by the lender, but you can select your own inspectors.
  • Survey which shows exactly where your property lines are. This may or may not be required by the lender, but is highly recommended to prevent property line disputes.
  • Title insurance which protects the lender in the event there are issues with the title and is required by most lenders.
  • Title search and filing fees. In addition to attorney fees you will be charged by the attorney for the title search, to ensure clean title, and filing fees which are paid to the city/county to record the deed in your name and secure the lien for the lender.

Escrow Fees

Escrow is a separate account that is established by the bank to pay your annual property taxes and home insurance. When the account is established they will generally collect money up front to establish the escrow and upfront payments.

Home Insurance is often paid a year in advance and then monthly payments are collected each month so when the next bill comes around there is enough in the account to cover the payment. You are able to compare rates among insurers and select the company you want to work with.

Property Taxes. The seller will be responsible for paying for the months they own the home and you will pick up the difference. The escrow account will collect a few months upfront and then will collect payments monthly to cover the taxes as they become due.

A base amount is collected at closing to establish the account. Lenders want several hundred dollars in the account above and beyond actual expenses because the amounts will fluctuate from year to year. Even if you have a fixed rate mortgage, the escrow payments may adjust depending on current rates.

If you choose not to establish an escrow account, most lenders will charge you a fee for waiving escrow.

Ways to Reduce Closing Costs

Ask the Seller To Pay. When negotiating the price of the home, you can request that the seller pay part of the closing costs. This can increase the sales price of the home, while reducing the amount you must have for closing.

Lenders will sometimes add the closing costs to the loan amount. To be successful the appraisal must be adequate to cover the sales price and closing costs, or have a large enough down payment.

A no closing cost mortgage is another option. In this case the lender will offer a higher interest rate, in exchange for closing costs. It will reduce the amount you need to close the loan but will cost you more in interest payments over the long run.

When you make an offer on a home, you must receive a Good Faith Estimate (GFE) within three days. As you look over the fees consider what numbers you have control over and which ones you don’t. This will help you more accurately compare rates across lenders and ensure you have enough funds available to close the loan.

Should You Purchase A Second Home?

By | Life Coach, Loan Talk | No Comments

Should You Purchase A Second Home?

Finishing residency and starting your practice is a very exciting time, and often a time physicians begin looking to purchase a home. After years of schooling you are finally earning a respectable income and with that comes the perks of being able to borrow against that income for a home, or two. Living in an area with a modest cost of living might afford you the ability to purchase a primary residence and possibly qualify for a vacation home as well. But should you take on a second home?

A few questions to consider before buying a second home:

Will it be a vacation home or an investment? This is perhaps the most important question. If you want to treat the home as a second home and not rent the property out, then you will be responsible for the ongoing maintenance and utilities when it is not in use. There will be monthly expenses that will need to be in the budget to cover the costs of home ownership including both maintenance and repairs.

For an investment property, time will need to be spent finding a management company that will take care of the property and find active renters. The advantage to this strategy is that the property will both produce income and become a tax deduction. You will be able to reduce your taxable income through depreciation, even though you will be receiving ongoing income from the property. Depending on the location and the market, the rental income may be able to cover most or all of the costs of owning the home. The downside is that you must coordinate any time spent in the home with the property management company and you must follow the IRS rules for an investment property in order to take advantage of tax deductions.

What will the long term costs be? Owning a home, especially a vacation home, will have monthly expenses beyond the mortgage payment. A few of the most common costs include utilities, cable or satellite, and internet. Many vacation homes are located in resorts with resort amenities. These are generally covered through homeowner’s dues. The cost of insurance can vary widely and will depend on the location. Properties may require flood insurance if the property is located near water. Rental properties must also be maintained and money should be set aside for frequent upgrades, as styles and renter needs change.

If you choose to rent the property there are ongoing expenses for cleaning the unit between renters and having a maintenance person who can take care of any breakdown or emergency. Renters will use the property more and costs for missing and broken items need to be included in the budget. Lastly is the cost of management, if you choose to rent the property. While they generally charge a percentage of the weeks rented, the percentage can be as high as 50%.

Adding the costs of keeping up the property with and without rental income, will help you determine if purchasing a second home is the right thing to do. If you only use the property a few days a year, that money may be better spent on other investments, and you can rent someone else’s place out when you are ready for a worry free vacation.

On the other hand, second homes, used as investment property can create a deduction due to the depreciation expense, even while you are receiving income. This has the potential to reduce your taxable income and can be a significant advantage to owning and renting real estate.

Creating a strategy with an accountant or tax advisor is the best way to evaluate all of the benefits and costs of such a venture. It is generally wise not to buy a second home, just because you can get the loan. Well thought out financial investments will provide the strongest returns.

Finishing residency and starting your practice is a very exciting time, and often a time physicians begin looking to purchase a home. After years of schooling you are finally earning a respectable income and with that comes the perks of being able to borrow against that income for a home, or two. Living in an area with a modest cost of living might afford you the ability to purchase a primary residence and possibly qualify for a vacation home as well. But should you take on a second home?

A few questions to consider before buying a second home:

Will it be a vacation home or an investment? This is perhaps the most important question. If you want to treat the home as a second home and not rent the property out, then you will be responsible for the ongoing maintenance and utilities when it is not in use. There will be monthly expenses that will need to be in the budget to cover the costs of home ownership including both maintenance and repairs.

For an investment property, time will need to be spent finding a management company that will take care of the property and find active renters. The advantage to this strategy is that the property will both produce income and become a tax deduction. You will be able to reduce your taxable income through depreciation, even though you will be receiving ongoing income from the property. Depending on the location and the market, the rental income may be able to cover most or all of the costs of owning the home. The downside is that you must coordinate any time spent in the home with the property management company and you must follow the IRS rules for an investment property in order to take advantage of tax deductions.

What will the long term costs be? Owning a home, especially a vacation home, will have monthly expenses beyond the mortgage payment. A few of the most common costs include utilities, cable or satellite, and internet. Many vacation homes are located in resorts with resort amenities. These are generally covered through homeowner’s dues. The cost of insurance can vary widely and will depend on the location. Properties may require flood insurance if the property is located near water. Rental properties must also be maintained and money should be set aside for frequent upgrades, as styles and renter needs change.

If you choose to rent the property there are ongoing expenses for cleaning the unit between renters and having a maintenance person who can take care of any breakdown or emergency. Renters will use the property more and costs for missing and broken items need to be included in the budget. Lastly is the cost of management, if you choose to rent the property. While they generally charge a percentage of the weeks rented, the percentage can be as high as 50%.

Adding the costs of keeping up the property with and without rental income, will help you determine if purchasing a second home is the right thing to do. If you only use the property a few days a year, that money may be better spent on other investments, and you can rent someone else’s place out when you are ready for a worry free vacation.

On the other hand, second homes, used as investment property can create a deduction due to the depreciation expense, even while you are receiving income. This has the potential to reduce your taxable income and can be a significant advantage to owning and renting real estate.

Creating a strategy with an accountant or tax advisor is the best way to evaluate all of the benefits and costs of such a venture. It is generally wise not to buy a second home, just because you can get the loan. Well thought out financial investments will provide the strongest returns.

Impact Interest Rates Have on Mortgage Payments

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Impact Interest Rates Have on Mortgage Payments

With the Federal Reserve indicating they are ready to increase interest rates, it’s time to take a serious look at your loan options, if you are considering a home purchase in 2015. Rising interest rates increase the cost of housing and can impact the loan amount you will qualify for.

Interest rates have held at all-time lows for over three years. Now that the economy is showing greater stability, there is less of a need to keep rates low. Rising short term interest rates will impact long term mortgage rates along with any variable rates, like credit cards and other lines of credit. As borrowing costs rise, you may find you have less discretionary income, impacting home buying and monthly mortgage payments.

Qualifying For a Mortgage

Debt to Income and Interest Rates are two of the key factors lenders evaluate when determining how much they are willing to lend for a home mortgage.

Debt to Income. This ratio takes your current or expected income and then divides it by current bills, plus the new mortgage payment. Income will be based on the employment contract, W-2’s, or recent tax returns. Current bills will be determined by debt that appears on your credit report. These include car, student loan, and credit card payments. Then they calculate the new mortgage payment including principle, interest, taxes, insurance, and mortgage insurance. This ratio will help determine the loan amount you can be approved for.

Interest Payments. Lower interest rates will result in lower payments and higher loan approval amount. Long term interest rates fluctuate daily, but have remained around 4% or even lower, depending on the day. At 4%, for every $100,000 borrowed you can expect a payment of around $477.42 for a 30 year loan. This means a $500,000 loan would result in a principle and interest payment of around $2387.10 and an $800,000 loan would have an estimated payment of $3819.36.

If the interest rates rise to 5%, then the cost of borrowing $100,000 goes up to $536.82. A nearly $60 increase for every $100,000 borrowed. On a $500,000 loan the increase is almost $300 a month more. These calculations are estimates and based on the loan amount, not the purchase price. Any down payment made would be subtracted from the amount borrowed. The calculation only includes principle and interest and does not add in the taxes and insurance payments (escrow) or any mortgage insurance payments that might be due, depending on the loan.

Ways to Lower the Mortgage Payment

Trying to time interest rates is not a very effective way to get the lowest rates because they change every day. Mortgage companies are very competitive and with rates widely available online, finding a lender you can trust and one that is easy to work with is more valuable than a 1/8th of a percent rate difference.

Effective ways to lower interest rates include changing the term. A shorter term, say 15 years, will have a lower rate than a 30 year loan, although the payment will be higher.

Another option is to consider a variable rate or interest only, instead of a 30 year fixed. If you only plan to be in the home for a few years these options offer a lower rate than the 30 year fixed and can either reduce your payment or provide a higher loan approval amount.

Consider the property taxes where you are looking to purchase. Sometimes buying in a neighboring county can save enough in annual taxes to make the commute worthwhile.

Choosing a loan program that does not require PMI (private mortgage insurance) with a smaller down payment can also be a way to increase the loan approval amount. Loan programs that do not increase the interest rate for jumbo loans are also an option.

Lastly, consider how large a home you need, versus what you will qualify for. Rising interest rates may cause you to reconsider the need to carry a larger mortgage. It may also require more thought and strategy, in order to purchase a home at a specific price point or to buy in a particular neighborhood you are seeking.

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