Just How Much Does Getting A Mortgage Cost?
If you’ve read our previous two publications, “The American Dream. Can You Afford It?”, and “Brokers vs. Banks”, you are already in the know that there is an abundance of data to process when it comes to getting a mortgage. How much can you afford? Who do you talk to about how much you can afford? What question should I be asking next?
How Much Is This Going to Cost?
There are technically two answers to this question. There is the up-front cost, also known as closing costs, and there is the amount you will pay throughout the life of the loan, commonly known as the finance charge. For now, we’re going to focus on the closing costs. These are the fees that are associated with obtaining a mortgage and are disclosed to the borrower twice. The first time they are disclosed by way of the Loan Estimate, which is included in your initial loan disclosures. The second time is by way of the Closing Disclosure. This document is issued prior to closing for the borrower to review with their bank or broker. Both documents are broken down into the following categories:
- Loan Costs – This section discloses the fees charged by the lender and are commonly known as Origination Charges. Origination charges include points paid to the lender as well as lender underwriting fees. (Points will be explained in more detail shortly.) If you are using a mortgage broker, this is the section where their origination and/or processing fee would also be disclosed.
- Services Borrower Did Not Shop For – This section displays the services that are not open to being shopped by the borrower. Appraisal Fees, Flood Determination and Tax Certification Fees can be found here.
- Services Borrower Did Shop For – This is where you find the costs associated with services that can be shopped by the borrower. It mainly consists of the fees associated with title work and document preparation fees, as well as closing and notary fees.
- Taxes and Other Government Fees – This is the home for recording fees. If the mortgage is for a purchase, it is here where you will find the transfer tax for both county and state. Transfer tax is typically split 50/50 between the buyer and the seller.
- Prepaids – Here is where you will find a list of fees that need to be paid up-front at closing such as Homeowner’s Insurance Premium (typically 12 months), Mortgage Insurance Premium (for FHA Loans), and any up-front property taxes that need to be paid.
- Initial Escrow Payment at Closing – This section will list the cost associated with establishing the escrow associated with the mortgage. Up-front escrow withholdings are required for Homeowner’s Insurance, Mortgage Insurance, Property and School Taxes. There are also withholdings for county tax. In most cases, withholdings are anywhere from 6 to 12 months.
- Other – Yes there is a section labeled “Other”. These are miscellaneous fees that include current county/township taxes, current school taxes, HOA fees, and real estate agent or broker commissions (when purchasing).
Who Pays All of These Fees?
This depends on if this is a purchase loan, or if it is a refinance. If it is a purchase loan, most of the fees fall on the buyer, while there are certain fees that fall on the seller’s side of the closing disclosure. We should also mention that other additional costs that apply to purchases are General and Pest Inspections. These are done in addition to the appraisal. If it is a refinance, all the fees are the homeowner’s responsibility. However, when refinancing, there are certain fees that are not associated such as transfer tax and realtor commissions. In addition, with refinancing, the closing costs are typically rolled into the loan. The borrower does not incur any out-of-pocket expenses.
Points – To Pay or Not To Pay
Simply put, points are prepaid interest. Points are calculated as a percentage of the principal loan amount. 1 Point = 1%. Paying points enables the borrower to get a lower interest rate, and in turn, a lower payment for the life of the loan. This can save you money over time. However, if you are on a 3- or 5-year plan with the home, then paying points may not be the way to go. When deciding on whether to pay points, you need to look at the monthly P & I (Principal and Interest) payment. Let’s look at an example of how paying points can be beneficial, or not.
By paying 2 points (2% of the $400,000 loan amount which equals $8,000) you will be able to save $155.75 on your monthly mortgage payment when compared to a payment with zero points. Now, that is only part of the equation. The rest of the equation is how long will it take you to recuperate the $8,000 of interest that you paid up front. To find out how long it will take, you simply divide the amount paid in points ($8,000) by the monthly savings ($155.75). This will tell you (in months) how long it will take. In this example, it will take about 4 years and 3 months to recover the money paid in points. If this is just a two-to-three-year stopover, then paying the points may not seem to be worth it. If, however, you are planning on being there for the next 20 years, then it could be worth paying the points. Afterall, saving $155.75 a month for 240 months equals out to $37,380. It’s safe to say you’d recuperate your money that was paid out for points.
What’s the Total?
Closing costs are dependent on, but not limited to, three main factors, the principal loan amount, taxes, and if you decide to pay points or not. The higher the loan amount, the higher the downpayment, the higher the cost of title insurance. The higher the taxes, the more it will cost to establish your escrow. Another factor is the type of loan that is being obtained, such as conventional, FHA, VA, or USDA. Now do you see why we said, “but not limited to?” Using the example above, let’s assume it is a purchase loan. The estimated closing costs would be $18,083.92 for origination, title insurance, underwriting etc. Now, let’s say that taxes are $6,000 a year and homeowner’s insurance is $2,000 a year. You need to in turn add $8,000 to the closing costs, which brings the total to roughly $26,004.92. Don’t forget about the down payment of $100,000. That gives you a grand total of $126,004.92 that is needed at closing.
Is Escrow Required?
In some cases, the borrower does have the option to waive escrow. Now, before you get too excited about a way to potentially reduce your closing costs, take note that you must meet certain criteria to obtain an escrow waiver. A few basic criteria are your Loan-to-Value (LTV), the type of property and its location, and the type of loan that is being obtained. For a deeper dive into escrow and escrow waivers, see our publication, “Waiving Escrows – Is It An Option?”.
Obtaining a mortgage is expensive. If you are currently in the purchase market, be sure to ask your mortgage broker or bank about ways to get assistance with closing costs. If you’re in the refinance market, while your closing costs are financed into the loan, you still need to be aware of what it is costing, and you need to be sure that you can recuperate those costs over time. If you’re looking for broker in Pennsylvania, please feel free to fill out one of our forms by clicking here for purchases, or here for refinances. A licensed loan officer will get back to you at your convenience for a Mortgage Consultation.