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Consumer's Guide To Mortgage
Settlement Costs in Metro Denver Colorado.
Of all the steps in buying a home or refinancing
a loan, the mortgage closing or settlement probably causes more
confusion and uncertainty for the borrower than any other.
A settlement may involve several people, and a
variety of documents and fees. Once you understand what is
involved, you may find the entire closing process far simpler than
you might have imagined. While this brochure focuses on
settlements in home purchases, much of the information also will
be useful if you are refinancing a mortgage.
Let's start with two important facts.
Fact Number 1: Many buyers may think of
settlement as the last step to becoming the legal owners of their
new home. But it's a process that begins weeks or even months
before, and follows an outline set largely by a buyer's original
offer to the seller of the house. That offer becomes the sales
contract, once it's signed by the seller, and it covers many of
the key elements of the settlement or closing.
Fact Number 2: Practices differ from one
locality to another regarding who pays what closing costs. Across
the country, however, buyers and sellers are free to negotiate
certain fees. In some cases, certain costs can be shifted, it may
affect the sale price of the property. In most states, costs can
also be cut by shopping around among providers of the settlement
services.
The point is this: The more you know about the
process, the better your chances are for saving money at
settlement time.
There are three basic categories of charges
and fees in settlement or closing transactions:
- Charges for establishing and
transferring ownership.
These include title search, title insurance, related legal
fees, and fees for conducting the settlement.
- Amounts paid to state and local
governments.
These include city, county and state transfer taxes,
recordation fees, and prepaid property taxes.
- Costs of getting a mortgage.
These include survey, appraisals, credit checks, loan
documentation fees, notary charges, loan origination,
commitment and processing fees, hazard insurance, interest
prepayments, and lender's inspection fees.
Let's examine them one by one.
When someone buys or sells a car, proving
ownership is relatively easy. The owner has a certificate of title
issued by the state in which the car is registered. When it comes
to houses, providing clear title is not so simple. Moreover, your
lending institution will not give you a mortgage loan on a house
unless you can prove that the seller owns it. The proof comes in
the title search.
How the title search is carried out depends upon
where the property is located. In many parts of the country,
public records affecting real estate title are spread among
several local government offices, including recorders of deeds,
county courts, tax assessors, and surveyors. Records of deaths,
divorces, court judgments, liens, and contests over wills (all of
which can affect ownership rights) also must be examined.
In a few localities, property records are fully
computerized and the job can be completed fairly quickly. In the
majority of localities, however, title search must be performed to
establish the seller's clear title. This means examining public
records, in courthouses and elsewhere, to assure both you and your
lender that there are no claims against the property that you are
buying.
The title search may be carried out by an escrow
or title company, a lawyer, or other specialist.
In addition to a formal title search, your
lender is likely to require a title insurance policy. The policy
guards the lender against an error by whomever searched the title.
(In some cases, the title insurer might arrange for or conduct the
title search.) Let's say, for example, that a long-lost relative
of the seller turns up with indisputable evidence that the
relative - and not the seller - holds legal title to the property.
Though it should have been found in the public records, the
relative's claim was missed somehow. Errors are rare, but they do
occur.
When this happens, the lending institution finds
that it has loaned the homebuyer thousands of dollars to buy a
house from someone who did not own it. To avoid such problems, the
lender will insist on title insurance prior to settlement. The
cost of the policy ( a one-time premium ) is usually based on the
loan amount, and is often paid by the purchaser. There's nothing,
however, to keep you from asking the seller, during your
negotiations, to pay part or all of the premium.
The title insurance required by the lender
protects only the lender. To protect yourself against unforeseen
title problems, you may also want to take out an owner's title
insurance policy. Normally the additional premium cost is only a
fraction of the lender's policy, but this can vary from area to
area.
Some final advice on keeping title insurance
costs low: if the house you are buying was owned by the seller for
only a few years, check with a title company. If you can obtain a
re- issue rate, the premium is likely to be significantly lower
than the regular charge for a new policy. If no claims have been
made against the title since the previous title search was done,
the seller's insurer may consider the property to be a lower
insurance risk.
Finally, shop around. Not just for the premium
(which can vary depending on how much competition there is in a
market area), but for coverage as well . Generally, you should
look for a policy with as few exclusions from coverage as
possible. The exclusions are listed in each policy. Some policies
have so many exclusions - that is, situations under which the
insurer will not pay for your title problems - that you end up
with little coverage for your premium dollar.
In some parts of the country, the transfer,
recordation, and property taxes collected by local and state
governments may be among the heftiest charges paid at settlement.
While there is no way to avoid paying these
taxes, you may be able to lessen your share of the bill. Try
shifting some or all of the cost to the house. But remember, you
must do this when you make your offer to purchase the property.
The costs of getting a mortgage may be
imposed by your lender as early as when you apply for your loan.
Mortgage-related closing costs include:
- Application Fee.
Imposed by your lender, this charge covers the initial costs
of processing your loan request and checking your credit
report.
- Appraisal Fee.
This fee pays for an independent appraisal of the home you
want to purchase. The lender requires this opinion or
estimate of the market value of the house for the loan.
- Survey.
At a minimum, the lender will require an independent
verification from a surveying firm that your lot has not
been encroached upon by any structures since the last survey
conducted on the property. Alternatively, the lender may
insist upon a complete (and more costly) survey to ensure
that the house and other structures legally are where you
and the seller say they are.
- Loan Origination Fees and Discount
Points.
The origination fee is charged for the lender's work in
evaluating and preparing your mortgage loan. Discount points
are prepaid finance charges imposed by the lender at closing
to increase the yield to the lender beyond the stated
interest rate on the mortgage note. One point equals one
percent of the loan amount. For example, one point on a
$75,000 loan would be $750. In some cases - especially with
refinances - the points can be financed by adding them to
the loan amount.
- Mortgage Insurance.
Buyers who make down payments less than 20 percent (and in
some cases 30 percent) of the value of the house may be
required by lenders, and by law in some states, to take out
mortgage insurance. The policy covers the lender's risk in
the event the buyer fails to make the loan payments.
Premiums are typically paid annually from an escrow or
reserve account, or in a lump sum at closing. A buyer, whose
mortgage is insured by FHA or guaranteed by VA, will have to
pay FHA mortgage insurance premiums or VA guarantee fees.
- Homeowner's & Hazard Insurance.
A form or protection against physical damage to the house by
fire, wind, vandalism, and other causes. Your lender will
expect you to have a policy in effect at closing.
Depending upon the location and type of
property, and extra services you or your lender request, you may
also have to pay some of the following at closing:
- An assumption fee is charged when you are
taking over or assuming an existing mortgage on the house.
The size of the fee will depend on the lender, but it may
range from several hundred dollars to 1 percent of the loan
amount.
- Home inspection fees for an analysis of the
structural condition of the property by an engineer or
consultant, and for termite inspections.
- Adjustments for various types of expenses
prorated between the seller and the purchaser. Some of the
adjustments may involve large amounts. Local property taxes,
annual condominium fees and other lump-sum service charges,
for instance, may be split between you and the seller to
cover your respective periods of ownership for the calendar
year or tax period.
Settlements are conducted by lending
institutions, title insurance companies, escrow companies, real
estate brokers, or attorneys. In most cases, whoever conducts the
settlement is providing a service to the lender. You may be
required to pay for related legal services provided to the lender.
You can also retain you own attorney to represent you at all
stages of the transaction including settlement.
With such a long list of potential charges
at settlement, it is important to know what to expect. To enable
you to do that, Congress passed the Real Estate Settlement
Procedures Act (RESPA). Your mortgage lender is required to
supply you with a Good Faith Estimate of all your closing
costs within three business days of your application for a loan,
together with a special information booklet called Settlement
Costs - A HUD Guide. In addition, a statement of your actual
costs should be given to you at or before settlement. Within the
same three days, the lender is required, under the Truth in
Lending Act, to provide you with a disclosure estimating the
costs of the loan you have applied for, including your total
finance charge and the Annual Percentage Rate (APR). The
APR expresses the cost of your loan as a yearly rate. This rate is
likely to be higher than the stated interest rate on your mortgage
because it takes into account discount points, mortgage insurance,
and certain other fees that add to the cost of your loan.
Because customs vary significantly from area
to area, it is difficult to provide estimates for closing costs
that fit everywhere. One rule of thumb for buyers is to figure
that at least an additional 3 percent will be added to the price
of your home through settlement expenses. In some relatively
high-tax areas of the country, 5 to 6 percent is more common.
On the page below, is a sample range of closing
cost charges for specific services on a $75,000 home purchase with
either a 10 percent down payment or a 20 percent down payment.
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