Making sense of closing costs

By Sabrina Karl

Even if you’ve closed on a mortgage before, each time can be a confusing process. In addition to the endless forms and required signatures, you’ll also face a wide variety of fees that get lumped together in the nondescript phrase “closing costs”.

So what’s included in closing costs? The list varies widely since each state, and even some municipalities, have their own rules about certain fees. But in general, closing costs run two to five percent of a home’s purchase price.

Several of the costs are fees for required services: an appraisal to establish the home’s market value; a title search to determine if the deed is free and clear; an underwriting fee to cover the lender’s cost in deciding they’d lend to you; an application or loan origination fee to cover processing your application; recording fees to file the proper paperwork after the loan is complete; and any commissions to involved real estate brokers.

But closing costs also include installments for the ongoing costs of your mortgage, such as property taxes to cover a prorated portion of the year; homeowner’s insurance, generally for a full year; any points that your mortgage agreement involves; and, if you’re making a down payment below 20 percent, a prorated share of private mortgage insurance.

Because states and home mortgages vary so much, including what different lenders are willing to cover, several additional costs could appear in your closing, such as fees for a survey, for pulling your credit report, or for wire transfers. Some buyers will also pay at closing for their home inspection or an optional home warranty.

A short time before closing, you’ll receive a Closing Disclosure with the exact figures on everything you’ll be required to pay. Review this carefully and talk with your lender about any costs you don’t understand.

Should I refinance to pay for college?

By Sabrina Karl

If you’re like many parents with a college-bound child, what you hold in savings may not be enough to cover four years’ tuition. So as you contemplate how to cover the shortfall, should you consider tapping into your home equity?

Refinancing your mortgage or applying for a home equity line of credit can be tempting, since interest rates on these tend to be significantly lower than student, parent and personal loans. They’re also fairly easy to access as long as you have a decent credit score and more than 20 percent equity in your home.

But just because you can tap home equity for college doesn’t mean you should. The biggest argument against doing so is that taking any loan out against your home requires offering your house as collateral. Should you have trouble repaying that debt in the future, your ownership of the home can be jeopardized.

Contrast that to parent or personal loans, or student loans your child takes out. Although these will carry higher rates, they aren’t secured by your home. Some education-oriented loans also offer flexibility for repayment should you fall on hard times, with policies for temporarily deferring payments or even forgiving the loan.

If you still decide that tapping home equity is your best avenue for making college ends meet, note that a home equity line of credit may be better for families applying for financial aid, since a cash-out refinance can hurt your eligibility calculation. You can also run into financial aid ramifications with home equity lines of credit, if you don’t time your withdrawals carefully.

As with many tempting uses of your home equity, putting your house on the line can be a risky proposition. So you owe it to yourself and your future to carefully consider all of the available options.

What is a rate lock?

Whether you’re shopping for a new mortgage or simply refinancing, a rate lock is a useful feature to consider, allowing you to remove some risk and uncertainty from the home loan process.

Because mortgage rates fluctuate daily, the APR you’re quoted this week might not be available in three or four weeks when you close your mortgage. If it’s lower, lucky you. But what if it’s higher, and now your monthly payment has increased? Even worse is when that higher monthly payment means you no longer qualify for the same loan amount.

This is why rate locks exist, to protect homebuyers from market changes by locking in a rate that works for them, and knowing throughout the processing period that there won’t be any rate surprises.

Mortgage lenders typically offer locks for 30, 45 or 60 days, so the window for holding your rate and completing the closing isn’t unlimited. This means you won’t want to activate a lock too early in your house hunting process. A good time is when you have an accepted offer on a house.

Why not just ask for the longest rate lock possible? Because rate locks aren’t free. True, some lenders provide locks without charging a separate fee, but their cost of absorbing the risk is baked into their offered interest rate. Meanwhile, other lenders do charge an explicit fee. In either case, longer locks will cost you more.

So what if rates drop after you lock in? Though some lenders offer the option of a “float down” provision to take advantage of new lower rates, these also aren’t free, and can be expensive. It’s better to simply lock your rate at a comfortable level, rest easy that you’re protected, and not sweat the minor savings you’d have realized with a slightly lower rate.

Refinancing to lower your monthly payment

By Sabrina Karl

If your mortgage payment is feeling a little too hefty every month — either because your financial situation has changed or you took on too much when you signed the dotted line — refinancing can potentially lower your monthly burden. But it requires the right circumstances to be a good solution.

The most obvious opportunity is when current rates are lower than your existing APR. A common rule of thumb is that refinancing to at least a half percentage point below your current rate can be cost effective, and a lower rate means lower payments.

If a sufficient rate reduction isn’t in the cards, but you’ve acquired an inheritance, a large bonus or another windfall, you can lower your bill by refinancing with a bigger down payment. By applying your windfall to the new mortgage, you convert the cash to home equity and can refinance a lower amount.

You can also reduce your payment by refinancing to a longer loan or an interest-only mortgage. These are better left as last resorts, though, since they’ll either stretch out how long you’re on the hook for a mortgage or leave you in worse financial shape in the end. But if you’re in dire straits to make ends meet, it’s an option that may keep you out of hotter water.

Note that if you’re currently paying private mortgage insurance and have built up at least 20 percent equity, refinancing isn’t necessary to lower your payments. Simply contact your lender to request the PMI charges be terminated.

In all cases, refinancing will require having a decent credit score. And if you’re several years into your current mortgage, refinancing can add years to your repayment period, which may not be desirable. As always, research the costs and trade-offs carefully to decide your own best option.

Do I have to buy private mortgage insurance?

By Sabrina Karl

Usually when we buy insurance, we’re protecting ourselves against an otherwise devastating financial loss, such as the cost to replace a home or vehicle, or the cost of medical bills should we become seriously ill or injured. But for homeowners buying private mortgage insurance, it’s not about protecting yourself.

Often called PMI, private mortgage insurance is actually an insurance policy for mortgage lenders, even though homeowners pay the premium. It financially protects the lender from losing money should the homeowner default on their mortgage. And for certain homebuyers, it’s not optional.

Any buyer who takes out a conventional mortgage with a down payment of less than 20 percent is required to hold PMI. That’s because mortgage statistics show that the less equity a homeowner has in their property, the higher their risk of default. Once equity surpasses 20 percent, the risk of foreclosure drops significantly.

Private mortgage insurance is most commonly handled as a monthly premium bundled with the mortgage payment. However, some lenders offer an option to pay for PMI in one lump sum at closing, or in a combination of upfront and monthly payments.

PMI costs vary based on two main factors: the borrower’s credit rating and the amount of their down payment. Costs typically range from 0.5% to 1.0% of the original loan amount per year. So for a $200,000 mortgage, PMI would likely cost $1,000 to $2,000 annually, or $83.33 to $166.66 a month.

To avoid this monthly add-on, some homebuyers will save longer before buying so they can swing a 20 percent down payment, while others opt for FHA or other non-conventional mortgages that don’t require PMI. But these mortgages can carry higher rates, and waiting to purchase isn’t always desirable. So PMI offers homebuyers an option that they can weigh against the alternatives.