Whether you are purchasing a home,
refinancing your existing home loan for a lower interest rate, or
consolidating your bills, mortgage-secured loans come in six basic
types:
VA (qualified military veterans)
guaranteed loans - One of the most popular loan types used
locally, due to our many military personnel, both active and
retired, in the area, VA loans feature 100% financing with
no money down. VA loans carry a Funding Fee charge of up to 3%
of the loan amount in addition to all other closing costs.
This fee can be added to the loan amount, taking the loan up
to 103% of the purchase price. The maximum loan limit is
typically $144,000.00 to $203,000.00 (depending on certain
factors), there is no pre-payment penalty, and the monthly payment will
include taxes & insurance.
FHA (HUD) guaranteed loans. Good for
1st time homeowners, it requires only a 2.5% down-payment in
addition to all other closing costs, and a large up-front
charge, which like the VA funding fee, can be financed into
the loan amount. Also, a small monthly loan guaranty charge
is paid with the monthly payment. The loan limit is a maximum
$121,296.00, with no pre-payment penalty, and a monthly payment
including taxes & insurance.
CONVENTIONAL (private mortgage
insurance or PMI) guaranteed loans. Requires a minimum 5%
downpayment, in addition to the normal closing costs. The
loan guaranty charge is usually a small monthly charge paid
with the monthly payment. However, with a 20% or more
downpayment, there is no guaranty charge, making the
Conventional loan one of the most attractive and cost
effective loan options. It assures "instant"
equity in the property (purchase price minus loan balance),
and means a lower monthly payment, and lower interest
expense over the life of the loan. The loan limit is
$252,700.00, with no pre-payment penalty, and a monthly payment
including taxes & insurance.
NON-CONVENTIONAL loans. These loans
are generally in-house bank loans (with greatly lowered
closing costs, but higher down-payment requirements), and
are available from your local bank. It helps here to have a
good banking relationship. These loans are also sometimes
called "bridge" loans, because they are usually
made for short, temporary terms (such as 5-15 years), and
may carry a balloon payment (loan balance must paid off by a
certain date, usually 3 years). There is the loan limit on amount,
and typically no pre-payment penalty, but the monthly payment does not
normally include taxes & insurance.
NON-CONFORMING loans. When you
can’t qualify for or obtain any of the above (VA, FHA,
CONV, IN-HOUSE), you can still get a mortgage loan, albeit a
non-conforming type. These loans are for those people who
don’t fit into the "cookie-cutter" mold required
to qualify for the more conventional loan types. They
generally come with higher closing costs, higher interest
rates, and higher down-payment requirements. While there is
no practical limit on the amount of loan, there is often a
pre-payment penalty if paid off during the first five years.
Interest rates generally range from 9% to 14%, and the monthly
payment does not normally include taxes & insurance.
CONSTRUCTION loans. This is a
special, short term (usually 6 months) loan specifically for
the construction of a new home. The interest rate is usually
1% higher than conventional rates, and is paid off with a
VA, FHA, or CONV long-term loan when the house is completed.
The loan money is loaned out in stages (called
"draws") as the construction progresses. Special
rules apply to construction
of a new home on undeveloped
property, so careful planning is a must. Normally, the
loan is for only 80% of the value of the property (as
estimated by an appraiser), so the owner must have the land
already paid for or have some additional funds to cover the
difference. Also, you must be pre-approved for your
permanent (long-term) loan before you can get a construction
loan, because there must be a guaranteed source of funds to
pay-off the construction loan. There is no pre-payment
penalty, and monthly payments normally consist of interest only.
What
kind of interest rate is best?
There are two types of interest rates: fixed
rate and variable (or adjustable) rate.
FIXED RATE The interest rate and
monthly payment (not including taxes and insurance) does not
change over the life of the loan. This is the most common
type of long term (15-30 years) loan.
ADJUSTABLE RATE (ARM) The interest
rate and monthly payment (not including taxes and insurance)
are subject to change many times (usually each year) over
the life of the loan. The advantage is that the starting
interest rate is lower, typically 1-2% lower, than a fixed
rate loan, and hence the monthly payment is lower. The
disadvantage is that the rate can surpass a fixed rate loan
in just a couple of years, and this means an increase in the
monthly payment accordingly. There is usually a
"cap" or ceiling on the maximum rate that can be
charged, normally 6% over the initial interest rate. So if
an adjustable rate loan starts at an attractive 6.75%, it
can quickly go to 12.75% in just three years, several points
higher than an 8% fixed rate loan. Many ARM loans provide for a conversion to a fixed-rate
loan at some time in the future, based on a formula.
However, you will not know what that formula will yield as a
fixed rate at the time of the conversion. You can only hope
that the rate will be reasonable at that time.
A 30-year loan
or a 15-year loan?
A 30-year loan will result in the lowest
monthly payment, but with a very heavy price tag. Over the life
of the loan, most of your monthly payment is applied to the
interest, so very little of your payment goes toward paying off
the debt. Even after ten years, only a small amount of the loan
balance has been paid off, and you will have built almost no
equity into the home. The only real advantage is that the
monthly payment is low.
A 15-year loan, however, results in a
marginally higher (typically only $100-150 higher) monthly
payment, but over the life of the loan far more of the monthly
payment goes toward payment of the debt. From the very
beginning, a large amount of the monthly payment goes toward the
principal balance, and that is just like putting money in the
bank. You will get it all back when you sell the house. In a
way, it is like a savings account in your house.
The LOAN
CALCULATOR will give you an approximation of the monthly
payment you can expect on a fixed rate 30-year vs. 15-year loan,
with the resulting interest savings.
Should I
"shop-around" for the best deal?
Shopping for the "best" overall loan
is not nearly as easy as it sounds. While it seems quite easy to
call several lenders and compare their interest rate offerings,
the interest rate is not the only factor that must be
considered. When comparing
lenders and their offerings, you must be comparing "apples
to apples" (technically speaking, comparing the
"APR" to the "APR" of the various lenders).
This means getting from each lender all of the costs of the
loan, including the cost of the origination fee (some charge
less), the discount points (if any), the appraisal, the credit
report fee, the loan guaranty fees (VA, FHA or PMI), the
"miscellaneous" fees (such as underwriting, tax
service, delivery, broker fees, document prep., etc.), whether a
new survey is required, termite inspection, insurance
(homeowners, flood & windpool) & tax escrow
requirements, pre-paid interest, etc. Many lenders vary from as
low as $125.00 in the miscellaneous fees to $500.00 or more.
Many out-of-state lenders (non-local) inflate many of these
fees, so that, in the long run, what might seem like an
attractive interest rate is more than made up in higher
fees. Your best bet is to select a local
lender with a good reputation, that provides quality service,
and avoid one that makes "lowball" interest rate
offerings. The actual APR (not just the interest rate) takes all
of these fees into account, and the lender with the lowest APR
is usually the best bargain.
Also be wary of the "bait &
switch" routine that some unscrupulous lenders practice.
This involves advertising or soliciting an interest rate or APR that is substantially less than normal rates, getting you
in the door, and then "switching" you to a much higher
rate at the time of closing. They know that at closing, you are
under a great deal of pressure to "go through with the
deal", and you are in a "take it or leave it"
situation. They also know that most people under those
circumstances end up taking it. They then "sell" the
loan to an institutional loan purchaser (called the
"investor") at a high premium, thereby making even
more money off the deal.
One way to avoid this trap is to be wary
of an interest rate offer that is much lower than other
lender’s offerings. Also, make sure you get a
written loan commitment which includes a "lock-in"
provision that locks-in the interest rate quote for a specified
period of time, at least 45 days. The length of time for this
lock-in is very important since it typically takes 4-6 weeks for
a normal loan to be processed and finally close. The
unscrupulous lender will offer a relatively short (30 days or
less) lock-in, or "drag their feet" in the loan
approval process, and not have to honor their written
"lock-in" after it expires.
These are some of the reasons why quality and
good reputation are far more important than shopping for the
"best deal". You can’t go wrong with a good, quality
lender. The ones to avoid are usually the ones who make
"the deal" sound too good to be true. Remember the old
maxim "Buyer Beware!".
Should I get a
"lock-in"?
A "lock-in" is a written promise by
your lender that the loan terms (rate, costs, etc.) will not
change due to market conditions for a limited period of time. In
almost all cases, if you are reasonably satisfied with the
interest rate and terms your lender is offering you, get those
terms locked-in, in writing, at the time of your loan
application, for at least 45 days or longer. Many people make
the mistake of "riding" the interest rate
roller-coaster after applying for the loan hoping for a lower
rate near the time of closing. Since the pressures for interest
rates to go up are always much stronger than for them to come
down, rates very seldom come down, and then, not for very long
at all. Trying to time this is pure gambling at best; foolish
(and expensive) at worst.
The purpose of a rate lock-in is to protect
you from the pressures for rates and costs to increase.
Since interest rates are very sensitive to all types of economic
news, any piece of "bad" news causes an instant rise
in interest rate costs. Since Wall Street seems to thrive on
"bad" news, it is always just around the corner,
usually about the time for your loan to close. Our advice: get a
lock-in, in writing, for at least 45 days, and don’t worry
about the interest rates; you’ve locked-in a good deal.
The
Typical Mortgage Closing
Many
buyers are nervous going into a real estate closing simply
because they do not know what to expect.At Southeast Louisiana Title (SELA Title), we want you to
feel comfortable about this process.In an effort to do that, we have put together this booklet to
help you better understand our processes.Since types of closings and lenders vary somewhat, this
process too may vary.The
following is intended to merely give you a brief idea of what to
expect.
Documents for the Buyer/Borrower:
1.Promissory note - indicatesthe amount of
the mortgage loan, interest rate, term of loan, and amount of
monthly payment. (Note: payments usually begin on the first day of
the second month after closing).
2.The Mortgage - the legal document to be recorded
at the courthouse that establishes a lien against the property
and secures the promissory note.
3.Truth-In-Lending Disclosure - discloses the
“Annual Percentage Rate” (“APR”) of the mortgage loan
over the term of the loan.The APR takes into account not only the interest rate,
but also the points, broker fees and certain other fees that you
have to pay.
4.Loan Application - shows all personal &
financial information that the borrower provides to the lender. Signing it verifies you acknowledge this information reported to the
lender is correct.
5.Payment Letter -
tells the buyer the breakdown of the monthly payment to be made;
the amount of the first payment; when it is due; and where it is
to be sent. This breakdown shows the monthly amount of principal
and interest plus the escrow amount for homeowners insurance,
taxes, and Private
Mortgage Insurance. PMI protectsthe lender against the buyers default when there is less
then 20% owners equity in the home.
6.Name Affidavit - lists the variations of a
person's name and states that they are the same person.
7.Property Survey - shows the boundaries of the
property and marks the location of the house and other
improvements, such as, the subdivision it is in.
8.Flood Acknowledgment - indicates if the property
is located in a flood zone, if such were indicated by the flood
elevation done by the surveyor.
9.Termite Inspection Certificate - evidences that a
licensed pest control inspector has visited the property and
certifies that the property is free of active infestation from
wood destroying insects.
10.Depending on the type of mortgage, one of the following
forms is used:
a.For Conventional Financing, a private mortgage
insurance application from (sometimes referred to as Premium
Authorization Form);
b.For an FHA insured loan, a form known as the
Certificate of Reasonable Value which must be signed by
borrower at the time of closing;
c.For VA insured financing, a form which must be executed
by theVeteran
and spouse at the time of closing.
11.Escrow Settlement Agreement - reflects all of
the items being set up in an “escrow account” such as the
hazard insurance premium, flood insurance premium, private
mortgage insurance premium and real estate taxes, if any.
Documents
for the Seller:
Inchoate
Lien Affidavit -
declares that for a period of 90 days prior to closing the seller has not had any work done on his
property that would give rise to a mechanic's lien and also
that no parties, other than the seller, is entitled to possess
the property.
Documents
for Both the Buyer and the Seller:
1.Act of Sale - the instrument by which the
ownership of the property is transferred from the sellers' names
into the buyers' names.It
is signed and executed before the notary public and two
witnesses, the original is recorded at the courthouse where it
remains forever. In Louisiana, this instrument contains a
declaration of the full and completemarital
status of the parties, a legal description of the real estate
being transferred and the sale price. (It may also contain an
"as is" rider by which the buyer releases the seller
from any liability attributable to defects in the construction,
flooding, wiring, plumbing, roofing, etc.)
2.HUD Settlement Statement - specifies all costs and
expenses of the transaction, the purchase price, the amount of
the loan,the
source of all funds used by the buyer/borrower,and the net proceeds due to the seller, after deducting:
(a)The expenses of sale (including the real estate
commission, points being paid for borrower, seller's closings
costs, etc.);
(b)The payoff of the seller's outstandingmortgage
(c)Any tax pro-rations
(d)The cost of home owners warranty (if seller has agreed to
furnish one)
(e)The cost of furnishing a termite certificate.
The
HUD Settlement Statement must reflect all details of the
transaction accurately and completely. It must be absolutely
exact as to where the funds come from (i.e., lender, buyer,
employer, etc., as well as who receives the proceeds).
Our
Processing Procedures
1.Set Up File upon receiving the purchase agreement.
2.Prepare an application for Title Insurance.
3.Assign a notarial secretary to coordinate the
closing.
4.Gather the following information concerning the
transaction:
a.Copy of the titles containing the Legal Description of
the property.
b.Full legal names of the purchasers and the sellers along
with marital status and any divorce information.
c.New Mortgage Lender and Loan Officer.
d.Existing Mortgage Lender and Loan Number.
5.Begin the Abstract and Examination process.(The Clerk of Court compiles all public records that affect
real property. Their office is where the actual research and
examination of the title property occurs.)
6.Order tax
researches to determine if taxes are current or what taxes are
owed.DELINQUENT
TAXES create a LIEN on REAL PROPERTY.
7. Perform
Title Search by examining the current
owners instrument of acquisition. Then the chain of title is
formed by compiling all transfers on this property prior to the
present owner for a minimum of 50 years back. Instruments which
will be found in these records are:
a.Cash Sales
b.Mortgages
c.Release of Mortgages
d.Credit Sales
e.Assignments
f.Servitudes
g.Restrictions
h.Counter Letters
8.
Check owners, past owners and the purchasers of the property
are checked in the Mortgage and Conveyance Index to determine if
any of the following have been filed of record, and could affect
the title to the property:
a.Judgments or Lis Pendens
b.Federal Tax Liens
c.Divorces or Legal Separations
d.Wills
e.Powers of Attorney
f.Consent of Spouse Agreements
g.Marriage Contracts
h.Successions
9.Obtain
copies of all documents affecting the
title to the property.
10.Title Examination - All title examinations are done by
attorneys.A Title
Examiner receives the file containing copies of all the
documents affecting the property.It is the Title Examiner's responsibility to review and
evaluate these documents to determine the legal owner and the
status of the title, as well as any requirements necessary to perfect the title.
11.
Write aTitle Report report of the Title
Examiner's evaluation of the title.
12.
Forward the file to the Notarial Secretary to prepare
the Final Closing Documents.TheNotarial Secretary
implements the buyer, seller, and lender's instructions,
prepares the closing papers and disburses all funds according to
everyone's instructions. The transaction will not close until all
instructions or requirements are met.
What
will happen at "closing"?
All closings will be handled by an insured Notary Public in the following
manner:
1.
HUD1 will be reviewed, explained and signed. 2. The Seller
and Purchaser will sign an Act of Cash Sale transferring the
property for cash.
3. The purchaser will sign the Truth- in-Lending after explanation.
4. The Purchaser will then sign a mortgage and note to the
lender.
5. Various affidavits required by the lender will be signed.
6. Checks will be received from the Purchaser and disbursed to
the Seller and Realtors.
After
the documents are signed, is the transaction
"closed"?
No, a function called Banking
must be performed.
1. The notarial
secretary will package the papers for recording at the
Courthouse. Simultaneously, she will forward a package with
copies of signed documents to the Lender for inspection.
2. Upon
inspection and approval, the Lender will send the loan check to
SELA Title in exchange for the Mortgagee's Title Policy.
3. After recording,
the new
owners will then receive their papers with the
instructions on how to file their homestead exemption. Their
Owner's Title Policy if ordered will be sent at this time.
4. At this
point, the file has been "BANKED" and the transaction
is "CLOSED".
What
closing costs should I expect to pay?
There
are many out-of-pocket expenses inherent to all real estate
sales and purchases. As a general rule, cash sales not involving
loan financing are generally the least costly; loan financing
through an in-house bank loan have middle-of-the-road overall
costs; long-term mortgage loans have higher associated costs.
All purchases share
similar costs, such as insurance, taxes, settlement fees, title
insurance, survey, etc.
There
are certain costs the seller of the property normally pays, such
as:
·Sales commission
·Loan & lien payoff(s)
·Property taxes pro-rated to closing date
·Termite inspection fee (& treatment, if
necessary)
·Some financing costs in the case of VA loan to
buyer
·Some recording fees
-City of New Orleans
document transfer tax
There
are certain costs the buyer of the property normally pays, such
as:
There
are certain costs that can be paid by either seller or buyer
(and hence must be negotiated), such as:
·Appraisal
·Attorney’s and Settlement Agent’s (that’s
us!) closing fees.
·Lender Title Insurance
·Homebuyer’s warranty
How
much money can I expect to spend in closing costs?
Typical "closing costs"
for buyer and seller will run several thousand dollars. Why so much? Because "closing costs"
is all of the money you or your seller
will have to spend to get your loan processed, closed and
recorded. This can represent the fees of several companies not
just one. Typical closing costs are:
·Rea
Estate agent commission (typically 6% of the first $100,000 of
the purchase price and 4% of the rest. ·Loan Origination Fee (typically 0-4%% of the loan
amount)
·Discount Points (typically 0-2%, depending on
market conditions)
·Appraisal Fee (approx. $300-$500)
·Credit Report (approx. 0-$50)
·Lender Inspection Fee (approx. $75)
·Miscellaneous Fees (average $125-500)
·Pre-paid Interest (up to 30 days, from $0-1000 or
more)
·Loan Guaranty Charges (VA Funding, FHA-MIP, PMI
ins.)
·Broker Fee (non-conforming loans, up to 0-6% of loan
amount)
·Homeowners Insurance ($400-1200 depending on
the condition of House)
·Flood Insurance (if required, $150-500)
·Windstorm Insurance (if required, $500-1000 or
more)
·Tax & Insurance Escrow (usually months of
reserves)
·Settlement or Closing Fees (here we are! $400-650)
·Title Insurance (based on loan amount, $300-$1000
depending on loan amount)
·Recording Fees ($25-50)
·Overnight Delivery Fees ($25-75)
·Notary Fee ($6)
·Survey (if required, typically $200, as high as
$400 or more)
·Termite Inspection Certificate ($50)
All
of the above costs can easily exceed $3,000-$4,000, and they do
not vary much from loan to loan, lender to lender, and it
doesn’t matter if the loan is a VA, FHA or CONV type. These
costs are pretty much built-in to the mortgage loan industry,
regardless of loan type.
You
may also incur additional costs for the pro-rated Seller’s
property taxes, appraiser required repairs, termite treatment
& repairs (if required), loan payoffs, back taxes, other
liens, debts, etc., all of which are charges to the Seller.It is easy to see, then, that the money that will be spent
(whether by the buyer/borrower or seller) for the ultimate
closing is going to be substantial. So it is best to know these
costs, prepare for them, and accept them for what they are - the
costs of buying or borrowing money on a home.
Typical
closing cost schedules:
TYPICAL
CLOSING COST ON A $100,000 SALE
($95,000/8% CONVENTIONAL 30-year LOAN)
SOUTHEAST LOUISIANA TITLE &
LAND, LLC
