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Guest Post: 4 Home Loan Fees to Be on the Lookout For

February 9, 2012 · Filed Under Random · 18 Comments 
Today’s post has been contributed by Sara Lennon on behalf of Merlin Insurance – the Quebec Insurance Broker.

For most people, buying real estate is something you do once or twice in your lifetime, giving you few opportunities to familiarize yourself with the process. You are swamped by mountains of paperwork to sign, a strange new vocabulary to deal with, and numerous fast-talking sales people – from real estate agents to mortgage brokers – who smile, point and tell you where to sign.

It’s an exciting time, but it’s all too easy to lose track of what you’re paying for and how much everything costs. Aside from the mortgage, there are numerous charges lumped into ‘closing costs’. Let’s look at four home loan fees to be on the lookout for; this may save you a few hundred dollars.

What are Closing Costs?

Closing costs are the several dozen potential expenses associated with purchasing and financing real estate. They are categorized as “recurring” and “nonrecurring.”

Recurring costs:

Recurring costs not only get paid at closing, but also on a monthly basis thereafter, and include real estate taxes, homeowners insurance, and, if you’re putting less than 20% down, private mortgage insurance (PMI). These expenses need to be paid in advance at the time of purchase, so put them in an account to cover next year’s obligations.

Nonrecurring costs:

Nonrecurring costs are also paid at closing. These include:

  • Application fee
  • Loan fees such as appraisal, credit report, and underwriting fees
  • Any lender-required inspections
  • Broker’s service fee
  • Federal Housing Administration (FHA) fees
  • Veteran’s Administration (VA) fees
  • Title charges
  • Land survey

Most Common Fees

The four most common home loan fees are:

  • Application fees
  • Appraisal fee
  • Private Mortgage Insurance
  • Prepaid Interest

How much should they cost?

The Federal Reserve Board provides some general guidelines for how much these fees should cost:

  • Application fees range from $75 – $300 (including the cost of a credit report for each applicant)
  • Appraisal fees range from $300 – $700
  • Private Mortgage Insurance can be up to 1.5% of the loan amount prepaid and between 0.5 – 1% of the entire loan amount annually.
  • Prepaid Interest varies depending on loan amount, interest rate and number of days that must be paid. $300 – $700 is not that uncommon.

How to Save:

  • Try and make a larger down payment to avoid PMI. If you can afford to make a 20% down payment, do so. PMI is hard to cancel, can be expensive, and offers no real benefits.
  • For lower appraisal fees, direct your loan officer to work with local appraisal companies. Local appraisers have a deeper knowledge of the surrounding neighborhood and will likely be more readily available for the home inspection, to speed your appraisal process.
  • Negotiate with the seller to reduce closing costs. They may be willing to pay your application or appraisal fee for a better deal.
  • Look for special deals on lenders websites. You might be able to apply for free or save on the cost of a credit check. Try to apply direct if possible, rather than going through a broker. You can compare deals online and go straight to a lender if there’s a particular deal you want to apply for. Don’t let a pushy salesperson force you into a bad deal.

Financial Peace University Lesson 12 – Real Estate and Mortgages

January 8, 2010 · Filed Under Financial Peace University · 8 Comments 

Keeping the American Dream from Becoming a Nightmare

In our second-to-last FPU lesson, Ramsey discusses his thoughts on the best ways to buy and sell a home.  As you might imagine, he’s not a big fan of 0% down, interest-only, 40 year mortgages (I know, shocking!).  If the concepts espoused in this lesson were followed by everyone, we might not be having nearly as  problems in our real estate market right now.

Tips for selling a home

Dave started off the class by laying out some tips for selling your home.  I didn’t find anything earth shattering in his list but they are good solid tips such as:

  • Think like a retailer -make your home into a model home with no evidence of cats, dogs, kids, nothing on the kitchen counters, take most of your clothes out of the closets, etc.
  • Pay attention to your home’s curb appeal – “71% of buyers buy from the curb”
  • Make sure your home is listed on the internet (77% search for houses on the internet) and in the Multiple Listing Service (MLS)

Buying a home

Ramsey is a big fan of home ownership for three main reasons:

  • Paying for your house is a forced savings plan
  • Owning a house is typically a hedge against inflation
  • Your house grows virtually tax-free

Obviously the real estate market in some places in the US has not been performing well for the past few years.  But that is a short-term trend resulting from a number of factors.  In the long-term, owning a house is still a good idea (besides, you need a place to live).

Baby Step 6: Pay off your home early

Tips for buying a home

Again, you have most likely heard Ramsey’s list of tips for buying a house.  These are suggestions such as:

  • Buy at the bottom of the neighborhood’s price range
  • Homes prices are based mainly on three things: location, location, and location
  • Buy a home that can be attractive from the street and has a good basic floor plan
  • Do NOT buy trailers or mobile homes – they go down in value faster than a car
  • Do NOT buy timeshares – there is typically no secondary market to resell them (my parents actually own a timeshare…they rented the same week at a timeshare for years and the owners eventually just gave it to them.  They didn’t even attempt to make my parents pay for it; in fact, they even paid the attorney fees to transfer the title!)

Mortgages

Now, we get into the crux of the lesson and I’m sure you can imagine that Ramsey’s suggestions will not mesh with all of the crazy mortgage options we’ve seen over the past decade.  He starts off this portion of the lesson by reminding us to hate debt and that the best mortgage option is the 100% down plan.  Seem crazy?  He states that 11% of second home buyers pay cash – so someone is doing it!

Do not buy a house and take on a mortgage until you are ready to do so – that means you are out of debt and have a fully-funded emergency fund.  There is nothing wrong with renting for a period of time to make sure your financial house is in order.

Ramsey recommends that you get a mortgage with a payment of no more than 25% of your take home pay on a 15-year fixed rate with at least a 10% down payment.  Now, this is a very conservative plan but I’m sure it is very effective.  Imagine for a moment if everyone in the US followed this advice over the past decade  – I would have to think that the foreclosure rate would be drastically lower than it has been over the past few years (home prices would not have inflated so drastically, people would not have over-extended themselves, all in all, it probably would have made for a much more stable market then and now).

Why choose a 15 year mortgage?  The reason is simple finances.  Certainly you will pay more each month but the interest savings over the term of the loan is substantial.  For instance, on a $225,000 mortgage at 6% APR, you will pay an extra $550 per month compared to a 30 year mortgage but after 10 years you will have about a $90,000 lower principal!

Ramsey recommends that you avoid these “horrible” mortgage options:

  • Adjustable rate mortgages – these transfer the interest rate risk from the lender to you
  • Interest-only mortgages – if I have to explain to you why Ramsey hates these, you really haven’t been listening!
  • Reverse mortgages – you are putting a paid for home at risk and the fees are typically large
  • Accelerated or Bi-Weekly plans – these are not bad ideas in themselves, but don’t pay a fee to set this up as you can easily do it yourself.

Yet another myth

Ramsey warns to not fall for the mortgage tax-advantage myth as a reason to not pay off your mortgage.  Think about this, if you are in the 25% tax bracket and pay $10,000 in mortgage interest in a year, you will save about $2,500 in taxes.  Someone might tell you that it’s a bad idea to pay off your mortgage because then you won’t save that money in taxes.  Is it really a good thing to spend $10,000 to save $2,500?  That math just doesn’t make sense.  This math makes a lot more sense and is a “win” for everyone (except maybe your bank): pay off your mortgage, then give $10,000 to your church or another charity and you’ll still get the $2,500 tax reduction (besides, would you rather give $10,000 to a bank or a charity?).

Patience is a virtue, so is self-restraint

Take your time, find a good house and get a good deal on it.  Make sure that you can afford to drop a sizable down payment and get a 15-year mortgage.  This is how Ramsey recommends that you buy a house and protect yourself from being in the unfortunate situation in which so many people currently find themselves.  “Real estate is a wonderful thing to buy, but move slowly.  Don’t buy until you are financially ready.”

Check out my previous FPU posts:

Guest Post: Factors Affecting your Monthly Payments on a Mortgage

November 10, 2009 · Filed Under Random · Comment 
Today’s guest post is provided by Diana Perkins. Diana Perkins is one of the financial writers who, with her in-depth knowledge and vast experience, has been able to leave a mark in writing and advising on all mortgage related issues.

The home buying process can be made less cumbersome if you plan out the course of action well in advance. An important factor that needs to be addressed when you take out a mortgage is to determine the monthly payments on mortgage. Why is it important to determine your monthly mortgage payments beforehand?

When you take out a mortgage, you are required to make payments each month. This payment will continue throughout the term of the loan. So, your payments should be affordable. And you should be able to continue making payments regularly without defaulting on the same. This is because you may have to lose your home in foreclosure if you miss your monthly mortgage payments.

What are the factors that impact your monthly payments on a mortgage?
There are various factors that determine the amount you have to pay each month for your mortgage. Some of the factors that affect your payments each month are as follows –

Principal amount
The principal amount of the mortgage loan is important. This is because the greater is your principal; the amount you pay each month will also be higher.

Rate of interest
Whether you are selecting ARM or adjustable-rate mortgage or FRM (fixed-rate mortgage) will impact your monthly payments on mortgage. For instance, if you opt for ARM, your payments initially will be much lower. But ARM changes according to the prevailing rates in the market. So, if the mortgage rates increase in the market, the monthly payments will rise too.

Loan term
Selecting the loan term will also impact your monthly payments on mortgage. If you opt for 15-year loan term, you will be paying more every month but the interest rate will be less. If the loan term you choose is 30 years, the amount you pay each month is less but the rate of interest your mortgage will attract is very high.

The best way to find out your monthly payments on mortgage is to use mortgage calculators that can accurately evaluate your financial condition. You must remember that you are settling for a deal that will affect your finances for the next couple of years. So, plan out your finances accordingly.

Coveting a Smaller Mortgage

May 22, 2009 · Filed Under Finances · 9 Comments 

I realized recently that I’ve been coveting quite a bit lately. I find myself driving through neighborhoods and looking at the different houses and often thinking to myself, I wish I had that house.

To be a bit more specific, the thoughts that go through my head are something like this, "hmmm, that house is smaller than ours, and I bet the people have lived there for a while which means they probably bought it before house prices started to drastically increase…..I bet their mortgage payment is a lot lower than mine."

That’s right, I’ve started coveting other people’s mortgage payment (or at least what I guess to be their payments with the underlying assumption that it is less than mine).

To be fair, I don’t have a ridiculous mortgage payment.  In fact, the entire payment (principal, interest, taxes, & insurance) is less than 26% of our take home pay (18% of our gross).  Those numbers are much smaller than most mortgage lenders were willing to lend three years ago when we bought it.  So, we didn’t go crazy when we bought our house, but I’d still like to be paying less each month for it (but who wants to be paying more for someting!).

A few things to remember when buying a house

You decide how much you can afford, not your agent or mortgage lender

When buying a house and deciding your price range, do not let the mortgage company tell you how much house to buy (unless it’s lower than you were planning, of course).  I feel that people sometimes think, "well, the mortgage company approved us for $X, so I guess that’s what we can afford."  No, No, NO!  Sit down before you start looking at houses and figure out exactly what you say can fit into your budget.  And make it a comfortable number that you can live with for 15 or 20 or 30 years.

Plan for contingencies

Remember that things may change in the future too.  If you’re married, you might eventually have kids and you or your spouse might want to stay at home and raise the kids.  I don’t like to say that this is no longer working (just ask a stay-at-home mom if it is a full-time job) but your income will drop drastically if you do this.  Or maybe you’ve always wanted to start your own business.  Make sure you can still afford the house if you decide to do this or make some other change.

Know your real monthly payment (all the other payments too)

Another thing to remember is that the costs of home ownership do not end with your monthly mortgage payment.  Besides the principal and interest portion of the mortgage payment, you will probably also need to pay into escrow for home owner’s insurance and real estate taxes.  This will most likely add thousands of dollars to your yearly expenses, so plan for them.

Beyond the mortgage payment, there are many other costs as well to keep up your house.  Stuff gets old and breaks, pipes freeze , work needs to be done…this can add up quickly so at least keep it in mind when deciding how much you can afford for your house.

Consider a shorter mortgage term

If possible, opt for a shorter mortgage term.  Of course, each monthly payment will be more (sometimes substantially) but over the long run a shorter mortgage can save you tens or hundreds of thousands of dollars!  Usually, shorter mortgages have lower interest rates as well.  Play around with a mortgage calculator to see the long-term difference this can make.  As a real quick example, consider a $250,000 house at 5.5% interest.  Even at the same interest rate, a 15 year mortgage will save you about $143,000 in interest payments!

I didn’t intend this to be a comprehensive list of all things to consider when purchasing a house…just a reminder of a few things.  In today’s market, mortgage lenders appear to be much more strict on the mortgages for which you can qualify and I think that is a good thing.  At the end of the day, though, you are still the one who must pay the mortgage and the upkeep and other expenses for your house , so go into the process with your eyes open and learn as much as you can before proceeding.

House poor

In today’s uneasy economy (with decreasing house prices, possible job losses, and general uncertainty), buying a house that you can’t afford can certainly show you the meaning of this verse:

The rich rule over the poor, and the borrower is servant to the lender.  Proverbs 22:7 (NIV)

Say you and your spouse bought a nice house a few years back that was a bit too expensive for you to afford (but hey, the value would keep increasing – it always does!).  Now you’re having a child and one of you wants to stay at home and devote yourself to raising that child.  Unfortunately, you can’t afford the house payment on only one salary and you currently have negative equity in the house because of the decrease in real estate prices.  Well, in that lamentable situation, your freedom is drastically limited by that mortgage debt.

House prices have been coming down recently, so you could argue it is a good time to be in the market for buying a house.  If you are, be smart, be realistic, and plan for some contingencies in the future.

Photo Credits: woodleywonderworks

Checkpoint: My Current Financial Situation

August 1, 2008 · Filed Under My Finances · 4 Comments 

Of course I had to do this – to lay out my current financial situation in general terms. Give me a break, this is a personal finance blog, right? And it is my blog, right? So, I get to lay out where I currently stand. 🙂 I wanted to do this early on in the life of BFN so that I have something to refer back to as times goes by. So here we go… Click here to continue reading…

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