Closing Costs vs. No Closing Costs

Read Part 1 - What Fees Are Included In Closing Costs? Can You Avoid Them?

As we already discussed in the Part 1, closing costs can not be avoided, and customer always pays closing costs. There are no such programs as “No Closing Cost, No Points”. The correct name is the hidden closing costs. You should consider with your broker what is the best way to pay your closing costs when refinancing or purchasing a property.

You can choose the following options:

1)   Closing costs can be paid out of your pocket. Advantages: Lower interest rate and monthly payments; lower debt-to income ratio; as a result, it is easier to obtain financing. We recommend this option for customers who are planning to keep a property for a long run, and when interest rates are low. Disadvantages: This could not be attractive to borrowers who can earn high returns on their free cash, or those who don’t have enough free cash. Usually, full closing costs are around 3%-6% of your loan amount, besides down payment and reserves required by a lender. Owners who are planning to refinance or sell within a few years shouldn’t pay full closing costs, since they wouldn’t hold their original loans long enough to recoup their up-front costs.2)  Closing costs can be added to your loan amount when refinancing a property. Advantages: You need less money for refinancing. Disadvantages:  Financing closing costs can be very costly. The larger loan increases the cost of the mortgage.  For example, suppose financing $9,000 in closing costs on a $300,000 (80% LTV) will increase Loan-to Value (>80% LTV). As the result: you will pay higher rate because of LTV adjustment, higher monthly payments because of higher rate, higher loan amount, and PMI (Private Mortgage Insurance). Also, your debt-to-income ratio will increase, and it can be a bad choice if you don’t have enough income.

3) Closing costs can be covered by seller’s concession when purchasing a property. When you negotiate the purchase price, you can ask a seller to cover your closing costs instead of lowering the price.  it is a good idea, especially if you are purchasing and only have a designated amount of money to put toward the down payment and other expenses.

 4)  Closing costs can be covered by the higher interest rate – hidden costs – or as advertised “no closing costs”. Lender will increase your initial rate to cover your closing costs fully or partially.
Close to Par Rate + Markup (add on to the rate) = Final Rate resulting in YSP (yield spread premium) which covers closing costs. 
Advantages: don’t need to bring free cash for closing; your balance will not be increased. This option can be the right choice if you are going to keep your property for a short period of time (1-3 years); or if interest rates go down, and you are planning to refinance again and again on the way down. When interest rates are high, paying full closing costs doesn’t make sense because borrowers are very likely to refinance after rates dropped. Disadvantages: your final rate can be much higher than your initial rate; your monthly payments will be higher, the overall interest paid for the life of mortgage will increase substantially.

5)  Combination of the above.

With a variety of different closing costs option, it is important to choose the one that will best suit your needs and save you money on a long run. Be careful with no closing costs option. Ask your broker to calculate different options for you.

How a Low Score Can Increase Your Cost of Living

We all know a low credit score will make everything in the world of finance more expensive because of higher interest rates from lenders due to being considered a greater credit risk (i.e. higher interest rates on cars, homes and credit cards). While this may be considered common knowledge by some, it’s truly devastating effects are understood by few. In addition to paying more for a car, home and credit cards, a low credit score will most likely have you paying more for the following as well:
1.) AUTO INSURANCE. As many as 92% of the 100 largest personal automobile insurers use credit information to underwrite new insurance premium, according to a study by Conning & Co., an insurance-research and asset-management firm.
2.) HOMEOWNERS INSURANCE. It’s thought many insurance companies see a correlation between low credit scores and increased property insurance claims. Therefore, a low score will result in the higher rates.
3.) LIFE and HEALTH INSURANCE. Customers who are unable to pay their monthly insurance premium will increase cost to the insurance company that stuck with the bill (resulting in a loss for the company). Since customers who pay without lapse are more profitable it is felt by many that a low credit score now even affects a monthly life and/or health insurance premium negatively.
4) EMPLOYMENT. One of the more shocking areas where a low credit score will cost you is in the area of employment. It’s estimated as many as 42% of employers now do credit checks on applicants before hiring them (according to a survey by the Society for Human Resource Management).
While many employers claim they only do it to verify information on your application (such as where you live and where you have worked etc.), we can both assume they are taking the liberty to have a peek at how you handle your financial affairs as well.

For more information you may visit the “CREDIT SECRETS BIBLE” that has been in print since 1994 and is published by Consumer Publishing Group. This e-book can help you to improve your credit history.

Introducing Super Conforming and Changes to Standard Conforming Loans with an LTV > 80%

I. Introduction of Super (Jumbo) Conforming

Banks are pleased to announce Phase I of the Super Conforming loan program utilizing the new 2009 loan limits established in accordance with the Housing and Economic Recovery Act. 

The new Super Conforming loan limit for 1-Unit properties in most areas is $625,500.

The Super Conforming products that are initially available are 30 Year Fixed, 15 Year Fixed, and 5/1 LIBOR ARM (5/2/5). 
Please ask your broker the Program Guidelines for complete information.  A future release with expanded eligibility is anticipated as more complete production information becomes available. 

II. Changes to Standard Conforming Loans with an LTV > 80%

Effective for loans locked on or after Monday, November 17, 2008, some banks will release the following changes for loans with an LTV (Loan-to-Value) greater than 80%:

-Eliminated the additional reserve requirements when the LTV is greater than 80%. Reserves are still required per loan program and transaction type – usually, 2 months PITI (principal, interest, tax, insurance).
-Maximum DTI (Debt-to-Income ratio) can be increased up to 55% on Interest Only products.
-Minimum FICO Score of 680 is required. Additional FICO requirements apply in Declining Markets.
-Maximum 31%-41% DTI on 2-Unit Primary Residence Purchase and No Cash Out transactions.
-Cash-out is restricted to 1-Unit Primary Residence, no longer available on 2-Unit Primary Residences or Second Homes.
-Construction-to-Perm financing is permitted only on 1-Unit Primary Residence Purchase and No Cash Out transactions, no longer available on Cash Out transactions and Second Homes.
These changes apply to Standard Conforming loans with an LTV greater than 80%. Please review with your broker Maximum LTV’s / CLTV’s and Loan Limits of the Program Guidelines for complete information.

We still have banks that have: a Conforming Jumbo up to $750K with no bump to rate, no bump for cash-out, up to 90% LTV, no reserve requirements, 1 day off MLS, minimum FICO of 650; or Jumbo up to $900K with low adjustment.

Read High LTV Mortgages On Today’s Market

What Fees Are Included In Closing Costs? Can You Avoid Them?

All closing costs are spelled out in the brokers/lenders Good Faith Estimate (GFE). GFE gives an estimate of any fees associated with your loan. Most fees are standard but amounts will fluctuate depending on the loan program, the value of your home, or lender used. Fees you will see on a Good Faith Estimate are:

Bank Fees:

Loan Origination/Discount Points – Paid to the bank to lower your interest rate. It is your option. Example:  $300K loan amount, 30 years fixed at 6% interest rate – your monthly payment is $1,798.65. Let’s assume, you are paying 1 point discount fee. 1 point = 1% of loan amount ($3,000). Your rate became lower approximately by 0.25%. $300K at 5.75% – monthly payment is $1,750.72. The difference is $47.93. Does it make any sense?

Appraisal fee - For single family residence usually $350 paid directly to the appraiser to determine the current market value of your property.

Credit Report – Joint credit report is approximately $16.

Mortgage Broker fee – Paid to the broker to find the best lender for your loan, to negotiate with the lender (especially on today’s market), to respond to underwriting conditions and stipulations, to contact and work on your behalf with bank attorney, insurance companies, title companies and other parties to this transaction.  The Mortgage Broker fee may vary, so it is important to discuss this fee with your broker. Usually, it is 2%-3% of your loan amount.

Processing fee – Paid to the broker (negotiable) to collect and process all required info and docs (employment, income, assets, debt). It is approximately $250.

Underwriting fee – Paid to the lender for underwriting your loan application – not negotiable, and usually $600-$700.

Application fee – Paid to the broker to process your application. Negotiable, approximately $350.

Other Lender’s fees (Flood Certification, Wire Transfer, Tax Service Fee…) - Paid to the lender and not negotiable

Title Fees:

Closing/Escrow fee – Departmental searches and closing of the loan (≈$250)

Attorney fee – Paid to the lender’s attorney to review your final docs and to close your deal (≈$500)

Title Insurance- Indemnity insurance against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. You pay approximately $2.75 per each $1,000 of your loan amount.

Miscellaneous Fees:

Recording fees – To record your deed and mortgage in  the municipality (≈450).

Prepaid interest – Mortgage interest from closing date till the 1st day of the next month.

Insurance/Tax reserves for escrow- Items such as real estate tax, hazard insurance, PMI – if required- that are paid in advance.

 
Bank Fees are determined by the lender. The title and miscellaneous fees are fees determined by third party title and escrow companies. These are set fees that won’t vary much from lender to lender. Other fees may be incurred depending on the state of residence or if the transaction is a new purchase or a refinance. Property inspections and appraisals are other out of pocket costs paid by borrowers that should be figured in, though they are usually paid prior to closing the loan.
Closing costs must be considered when refinancing or purchasing a new home, especially if you are purchasing and only have a designated amount of money to put toward the down payment and other closing costs.
I believe, now you understand that closing costs can not be avoided, and customer always pays closing costs no matter that they are paid out of your pocket,  added to your loan amount or covered by the higher interest rate. In NY State, for example, brokers can not advertise “No Closing Cost Programs” because no such programs exist.

Read our post Closing Cost vs. No Closing Cost

Declining Real Estate Market – High/Low Risk States

Currently mortgage products and guidelines change almost daily with regards to the high risk Real Estate market. Guidelines became more strict and demanding. Due to declining property values or oversupply, some banks do not originate loans in the high risk States or Counties. Some banks might impose additional overlays or restrictions (such as, but not limited to: maximum Loan-to-Value ratio, maximum Debt-to-Income ratio, minimum Credit Score, loan amount limitations, documentation age, Home Equity loans and simultaneous transaction requirements) – especially for Cash-out refinance, Interest-only payment feature, 2-4 unit properties, Investment transactions. Lenders might provide different rates and adjustments for different States.

Market Classification Levels

 

Lower Risk	Moderate Risk	Higher Risk
Colorado	Arkansas	Arizona
Delaware	Connecticut	California
Idaho	Hawaii	District of Columbia
Kentucky	Indiana	Florida
Maryland*	Mississippi	Illinois
Massachusetts**	New Jersey	Michigan
Minnesota	Ohio	Nevada***
New Hampshire	Pennsylvania	New York
Oregon	South Carolina	Rhode Island
Utah	Tennessee	Virginia
Washington	West Virginia
Wisconsin

 

 

 

 

Exceptions:

*Maryland – High risk:  Calvert County, Charles County, Frederick County, Montgomery County, Prince George’s County

**Massachusetts – Moderate risk:  Barnstable County, Bristol County, Worcester County

***Nevada – Low risk:  Carson City

 

10 Best And 10 Worst U.S. Housing Markets

Fixed Rate vs. Adjustable Rate

Mortgage Programs:

-Fixed Rate Mortgage Programs (40, 30, 20, 15, 10 years) – The interest rate and your mortgage monthly payments remain fixed for the period of the loan. The shorter the term of a loan, the payment is higher because the principal amount of debt is amortized over the shorter period of time. The payments on fixed rate fully amortizing loans are calculated so that at the end of the term the mortgage loan is paid in full. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. If you are going to keep your property more than 5-7 years, you should consider getting fixed rate program. You will be protected if rates go up, and can refinance your mortgage if rates go down. Usually, fixed programs have an interest rate higher than adjustable rate programs. The higher rate, the higher monthly payment. If you are planning to stay in your property less than 5-7 years, you should consider adjustable programs. But on December, 2008 fixed rates are lower than adjustable rates. We can not explain this phenomenon.
-Adjustable Rate Mortgage Programs (ARM) - Frequencies of payment/rate adjustments dictate how often the rate can change. How the interest rate can change is a function of the index added to the margin. The index of an ARM is the basis of future interest rate changes.  The Index is regularly published in a source accessible to the public. The margin is set by the lender and is the amount above the index that the interest rate can adjust at the time of adjustment. The result of the index plus margin formula is the new interest rate. Rates and payments may go down if rates improve, but it is more risky because it is potential for high payments if rates go up. This program can be good for a short period of time. The better choice will be combined mortgage programs.
-Combined Mortgage Programs (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM) – A combination of fixed and ARM loans with 30-year amortization period. With such type of loans homeowners can enjoy from three to ten years of fixed payments before the initial interest rate change. At the end of the fixed period, the interest rate will adjust annually. The advantage of these loans is that the interest rate is usually lower than for a 30-year fixed (the lender is not locked in for as long so their risk is lower and they can charge less) but you still get the advantage of a fixed rate for a period of time.
-Fixed (30 years) or Combined Programs with Interest Only Option (I/O) – A loan that doesn’t require a set payment each month up to 15 years. You get two payment options to choose from each month: your lender sends you a monthly statement offering an interest-only payment (1) and 30-year amortized payment – principal and interest (2). If you are going to pay off your mortgage during 10 years making large prepayment of principal, your actual rate can be decreased from 6-7% to 2-3% by using this program. For our customers we make special plan with math calculations how to save money with I/O 30-year amortized program instead of 10-year amortized fixed program. 
-First Position Home Equity Line of Credit (HELOC) – When you don’t have the 1st mortgage, you can obtain Equity Line up to 75% of the property value and up to $350K limit amount. Current HELOC rate is lower than the 1st mortgage rates and it is based on the prime rate that is 3.25% on today’s market. HELOC rate is always adjustable. With HELOC you can enjoy interest-only payments.

Availability of specific programs, Loan-To-Value ratios, Interest Rate depend on middle FICO credit score, type of documentation provided, type of occupancy, type of financed property and type of transaction.

Property Types:
SFR, 2-4 Family Houses
Condominiums, PUDs, Cooperatives

Credit:
From Excellent to Problematic
FICO Credit Scores from 620+

Documentation Type:
Full Income Full Assets (full docs)
Stated Income Full Assets
Stated Income Stated Assets

Occupancy:
Owner Occupied Properties
Second Homes
Investment Properties

Transactions:
Purchase
Rate & Term Refinance
Cash Out Refinance

Mortgage Structure:
First Mortgage Only
First & Second Mortgage
First Mortgage & HELOC
Second Mortgage Only
HELOC Only

High Loan-To-Value Mortgages On Today’s Market

Mortgages with Loan-To-Value (LTV) higher than 80% are considered high LTV mortgages. Most lenders generally require mortgage insurance when LTV is over 80% due to a higher risk. Private Mortgage Insurance (PMI) is provided by a private mortgage insurance companies which protect lenders against loss if a borrower defaults. Recently PMI became tax deductible.

There are few ways PMI is paid:
1)  Borrowers will pay mortgage insurance premium in addition to a regular payment (principal, interest, real estate tax, hazard and flood insurance if required).
2)  LPMI – lenders will pay borrower’s mortgage insurance for them.  With LPMI, the lender pays a borrower’s mortgage insurance by rolling the cost into the interest rate or by adjusting the fee. It means your rate on the mortgage will increase from 0.375% to 0.675%.
3)  Lenders do not require a mortgage insurance premium. From our knowledge and experience though the lender doesn’t require PMI, they will still increase your interest rate. 
High LTV loans are still available up to 90-95% for full documentation loans.

Before the financial crisis there was a technique to cover LTV over 80% to obtain a second mortgage or a home equity line of credit (HELOC) that cost was less than PMI. These days 2nd mortgages or HELOC for high LTV loans are not longer available due to a high risk.

Unfortunately, on today’s market high LTV programs described above are not available for borrowers who require stated documentation programs(no income verification). For those who need a loan based on stated income, another option exists. There are lenders on the market who will permit 90% CLTV (combined 1st and 2nd LTVs). They will give you the 1st mortgage  up to 60% LTV and allow the seller’s second mortgage  up to 30% LTV with a reasonable interest rate. Many sellers agree to give you a mortgage in order to sell their houses on today’s market.

Read Changes to High LTV Conforming Loans

Advantages and Disadvantages of Mortgage Programs

Years you plan to stay in the house	Recommended program
1-3	3/1 ARM, 1 year ARM or 6 month ARM
3-5	5/1 ARM
5-7	7/1 ARM
7-10	10/1 ARM, 30 year fixed or 15 year fixed
10+	30 year fixed or 15 year fixed

 

Loan Programs	Advantages	Disadvantages
Fixed Rate Mortgages
40 year fixed 30 year fixed 20 year fixed 15 year fixed 10 year fixed	Monthly payments are fixed over the life of the loan. Interest rate does not change Protected if rates go up Can refinance if rates go down	Higher interest rate than ARM program*  Higher mortgage payments Rate does not drop if interest rates improve
Adjustable Rate Mortgages
10/1 ARM – 10y. fixed period 7/1 ARM – 7y. fixed period 5/1 ARM – 5y. fixed period 3/1 ARM – 3y. fixed period 1 year ARM 6 month ARM 1 month ARM	Lower initial monthly payment than fixed rate programs*  Lower payment over a shorter period of time Rates and payments may go down if rates improve May qualify for higher loan amounts	More risk Payments may change over time Potential for high payments if rates go up
Interest Only (I/O) Option Programs
30, 40 year fixed programs 3/1, 5/1, 7/1, 10/1 ARMs	Lower initial monthly payment during the I/O period  More flexibility Two payment options are available up to 15 years: fully amortized (principal and interest) or interest-only.	Payments will be  higher at the end of the initial I/O period Higher interest rate than the same program without I/O option
High Loan-to-Value (LTV) Programs
	Lower down payment LTV can be up to 97%	May be subject to income and property value limitations May be subject to PMI (private mortgage insurance) Higher rates Higher payments
Stated Income Programs
Not available on today’s market	Don’t need to verify income	Higher rates Higher payments  Higher down payment      Subject to Loan-to-Value limitations
No point, No fee Programs
	Hidden closing costs Less money required to close	Higher rates Higher payments
Imperfect Credit Programs
	Potential for reestablishing credit if you pay your mortgage on time. When used for debt consolidation, you may be able to reduce your monthly debt payment	Higher rates Terms may not be as favorable Harder to get long term fixed loans Loans may have prepayment penalties
Home Equity Line of Credit
1st position up to 75% LTV 2nd position up to 80% CLTV	You only borrow what you need Pay interest only on what you borrow Flexible access to funds Interest may be tax deductible	Rates can change. The maximum interest rate is normally high. Payments can change Harder to refinance your first mortgage
Home Equity Fixed Loan
2nd position up to 80% CLTV	Fixed payments Interest may be tax deductible	Higher interest rates than on 1st mortgages Harder to refinance your first mortgage

*On today’s market (December 2008) ARM rates are higher than fixed rates! Sorry, we can not explain this phenomenon.

10 Tips How To Maintain Your Credit

A good credit history with high FICO scores (>680) is crucial to obtain any type of credit.

If your middle FICO score is lower than 740, most likely that for each 10-20 points lower you will have credit score adjustment to your interest rate.  The higher credit score, the lower payment. Let’s say you purchase a house and obtain a $200,000 30 year fixed mortgage at 8% interest rate instead of 6% (because of your credit score); that 2% is going to end up costing you an approximately $100,000 over a 30-year term. Now, think about how many extra years you’ll have to work to pay off $100,000 because of an extra 2% in interest?

You should know how to maintain your credit:

1)   It is important to see a copy of your credit report from each credit bureau (Equifax, Experian, Trans Union) and FICO credit scores at least 2-3 months before you apply for a mortgage.  You’ll have plenty of time to correct any error and improve your score. Errors in credit reports are not uncommon. According to the Public Research Interest Group (PIRG) as many as 79% all credit reports contain errors, 25% of which are serious enough to cause the denial of credit (according to a 2004 report). If you find any error, notify the credit-reporting company immediately. Make a dispute online, by phone, or by mail. It’s free and takes about 15 min.

2)   If you have multiple errors, how many disputes should you send at one time?
I would have sent one dispute at a time to each bureau and wait for the results.  You will typically get a response in 30 to 45 days. Sending multiple disputes at one time may trigger the credit bureau to “red flag” your account that you’re using of a credit repair company.

3)   Protect your identity. Don’t be a victim of ID theft. You can spend many hours cleaning up your credit. We advise you to check your credit report regularly.

4)   Don’t be late on your payments, especially on your mortgage. If you have late credit card  payments, lenders can disregard them after 1 year. If you have late payment on your mortgage, it can be a big problem. Many lenders will not accept your application if you have just 1 late mortgage payment during the last 12 months. If you are in a situation when you are not able to make a payment on time, don’t hesitate to call your creditors and try to negotiate with them before they report your late payment to the credit bureau. So target your new late-pays by telling them you are making an immediate payment, and you’ll be surprised how many will drop the late-pay fee as a matter of good business.

5)   Maintain a credit card balance no more than 30% of credit limit. If you have credit card balance more than 50% of high credit, it can decrease your score by 20-30 points. For example, the credit card limit is $8,000. Advisable to have the balance no more than $2,400 (30%) without hurting your score. Don’t consolidate your cards if the combined balance is more than 30%-50%. Another example, you have one credit card with $5,000 balance and $6,000 credit limit and the other credit cards with low balances and high limits. Try to spread the over-balance $3,200 among them. It can help to increase your score. Also, increase your line of credit, but don’t open credit cards you don’t need.  Your line of credit is the sum of all the credit limits on your accounts.  A high credit limit helps raise your FICO score.  If you have a good track record with a credit card company, you can call them, and ask for a higher credit limit.  But don’t open a lot of new credit cards just to raise your credit limit.  New accounts will lower your “average account age”, which will actually lower your FICO score.

6)   What if a creditor doesn’t report a credit limit but reports a high balance?
This is not sufficient for the account to be scored correctly because the company does not report the high credit limit, just the high balance. The only thing you can do is to contact the creditor and ask them to report your credit limit.

7)   Don’t close your paid credit card accounts. It can lower your score.  Even if you have any paid charge-offs, why remove them?  Any type of paid account shows some level of responsibility. Removing any type of paid account can have a net score lowering affect. For example, let’s say leaving the paid charge-offs on your report might only be hurting your score by 5 points. However, getting the account deleted might lower your score by 25 points.

8)   You should have minimum 4-6 open and active trade lines. Active! A perfect credit report is not always the highest scoring. Some people have many open trade lines but not active. You should use credit cards (responsibly) or have other active trade lines such as mortgage, car loan, student loan… Inactivity of your trade lines might give you a lower credit score. Keep low balances on credit cards, but don’t pay them off. Credit card companies want you to run a balance on your account; after all they make their money on your interest payments.  So, don’t pay off the entire balance each month.  Leave a relatively low balance to demonstrate to new potential lenders that you can handle credit in a responsible way.  Your FICO score will thank you for it.

9)   Multiple inquiries for credit can lower your score substantially (inquiries older than 12 months old has no effect). If you have tons of credit and you don’t want any more pre-approved credit offers, you can opt-out by calling the credit bureaus.  If you are building your credit, you want to receive pre-approved offers, so opting-in is to your advantage.

10)   What’s the best way to get credit reports and scores? Be aware that not all credit scores you can buy on the internet are FICO. Lenders use middle FICO score. You can get a free copy of your reports once a year by calling the Annual Credit Report Service at           877-322-8228           or you can order both your credit reports and scores from each credit bureau. You will get each bureau’s “standardized” report. You can have instant access to your 3-in-1 credit reports and scores online. I would order them from www.myfico.com or www.equifax.com.

 

For more credit tips you may visit the “CREDIT SECRETS BIBLE” that has been in print since 1994 and is published by Consumer Publishing Group.