Closing Costs: A Fee Extravaganza, Part II

You may remember slapping your car salesman in last month’s newsletter. (If not, check it out at flchfc.usu.edu, under the Newsletters tab on the left.) Recall that in order to avoid fits of frustration, it’s best to anticipate all the lovely fees that are associated with closing on your home loan. Get a jump on what to expect by perusing the extensive list below!

Note: There are three different types of fees at closing: costs of getting a loan, charges for establishing and transferring ownership, and government costs.

Costs of Getting the Loan:

• Origination or application fees: These are fees for processing the mortgage application and may be represented by a flat fee or a percentage of the mortgage.
• Credit report: Lenders will require that the borrower’s credit be checked. They use this information to assess the risk of lending to the borrower. The fee for checking the credit report can sometimes be a part of the origination fee.
• Discount Points: A point is a unit of measurement equal to 1% of the loan value. Dis-count points can be paid when the loan is approved in order to buy down, or reduce the interest rate. These are not required.
• Document preparation fees: There will be an array of papers ranging from the application to the closing documents. Lenders may charge for these, or they may be included in the application and/or attorney fees.
• Preparation of amortization schedule: Some lenders will prepare a detailed amortization schedule for the full term of the mortgage. This more likely done for fixed mortgages than for adjustable rate mortgages.
• Appraisals: Lenders want to make sure the property is worth at least as much as the mortgage. Professional property appraisers will project an estimate of the home's value by comparing it to similar properties in the community. This is typically $400-450.
• Land Survey: At a minimum, the lender may require an independent verification from a surveying firm that the lot has not been encroached upon by any structures since the last survey conducted on the property.
•  Private mortgage insurance: For conventional loans, if the down payment is less than 20%, many lenders will require that private mortgage insurance (PMI) be purchased by the borrower. This insures that the lender will recover his/her money if the buyer defaults on the loan. Insurance payments will continue until the equity in the home reaches 20-22% of its value.
• Inspection: In many rural areas, lenders will require a water test to make sure the well and water system maintain an adequate supply of quality water to the home. A lead based paint inspection might be required as well.
• Prepaid interest: The first regular mortgage payment is usually due about 6—8 weeks after closing. For example, if you close in August, your first regular payment will probably be in October. The October payment covers the cost of borrowing money for the month of September, but interest costs start as soon as closing is completed. The lender will calculate how much interest is owed for the fraction of the month in which the borrower closes.
• Title Search and Title Insurance: Lenders require a title search to ensure that the seller is the owner of the property and that the title is clear of any liens or judgments. A clear title means that there are no encumbrances on the title, such as liens filed by creditors in an attempt to collect unpaid bills. The buyer usually pays for the title search. Title insurance gives the buyer a marketable title which means that the insurance company will protect the lender or owner if there is a flaw in the title after the property has been purchased.

Charges for Establishing and Transferring Ownership:

• Homeowner’s (hazard) insurance: Most lenders require that the borrower prepay the first year’s premium for homeowner’s insurance. Proof of payment is typically required at closing.
• Real estate agent’s commission: The seller usually pays the commission to the real estate agent.

Government Costs:

• Transfer taxes: A tax is sometimes required to transfer the title and deed from the seller to the buyer.
• Recording fees: These fees pay for the county clerk to record the deed/mortgage and change the property.
• Other state and local fees: These can include mortgage taxes levied by states as well as other local needs.

Now that you have a little heads up on what to expect, closing may end up being a positive experience for you (especially if the title company gives you a nice pen to keep). Just keep this list in mind, particularly as you shop around for lenders, and no one is going to pull the wool over your eyes!

America Saves: Credit History and Saving

April was Financial Literacy month and America Saves wants to make sure you understand the importance of your credit history and how this ties into successful saving. It is important for all Americans to have savings. Having a savings account allows you to pay for emergencies, gives you financial freedom, and can help you avoid credit problems that could hurt credit scores.

Having a strong credit history, reflected in good credit scores, allows you to qualify for lower interest rates and fees. This helps you to free up additional money to set aside for emergencies, retirement, and other smaller unexpected expenses.

The connection between successful savings and good credit plays an important role in your financial life. Not only is it essential for obvious things like qualifying for a loan or getting a credit card, but also for less obvious things like getting cellular telephone service, renting a car, and perhaps even getting a job.

Want to learn more about the importance of credit history and successful savings? 

Download the Importance of Credit History and Successful Savings packet (http://americasaves.org/images/newsletters/creditscore.pdf) which includes information on: 

• What is a Credit Report and Score?
• Why is Saving So Important?
• How do I Start Saving?
• What Savings Options Are Available to Me?
• Why is Good Credit Management so Important? 
• 5 Tips for Building Good Credit.
• Frequently Asked Credit Questions.
• FDIC Model Safe Accounts.

What are you waiting for?

Set a Goal.

Pay down debt, save automatically, and assess and improve your credit history. Go to www.annualcreditreport.com

Make a Plan.

Improve your credit history by making the minimum payment on all bills, keeping balances low on sources of credit, and applying for credit wisely.

Save Automatically.

In order to have good credit scores you must demonstrate a habit of good credit management over a long period of time. Set up direct deposit or put part of your check into a savings account automatically each month to pay down debt and ensure you have enough money for emergencies.

Are you ready to take charge of your financial future?

America Saves is here to help. America Saves can help you develop your goals and take action. When you join as a saver, you’ll receive the following benefits:

• Free subscription to the quarterly American Saver newsletter
• Free monthly e-mail newsletters with savings advice from national experts
• Free access to the members-only Savers Tracking Tool to help you reach your goals

{This month’s post was brought to you by guest author Katie Bryan, America Saves Communications Manager}

One Punk Number You CAN Control

Brace yourself: unfortunately, there is no quick fix for repairing credit. When you’re trying to lose weight, you know it took some time to put those extra pounds on in the first place; it’s going to take some time and energy to get them back off again. Improving your credit standing is a similar process. And just like  improving your physical health, a healthy financial lifestyle will prove to be well worth the effort.

Credit is a vast topic. One little newsletter couldn’t begin to delve into the depths of it, but here are some pithy dos and don’ts to consider, as you begin to tackle the task of improving your credit score.

• Pay your bills on time. Ok, this one sounds obvious. But this is the biggest component of your score, and nothing will help you more than consistently paying every bill on time, every month. If you’ve been late in the past, make every effort to get current and stay current. The more time you put between you and a late payment, the less it is affecting your score.

• Pay down balances. This is easier said than done, but if you carry high balances on, say, your credit cards, it can be hurting your score. You certainly don’t want to be maxed out, so keeping your balances at about 30% of your available credit limit will be optimal for your score. 

• Check your credit report. People underestimate the value of this one. The stats differ on this, but suffice it to say that the credit bureaus make plenty of mistakes in calculating your score—sometimes big enough mistakes that you get denied credit. So pull your free report one time per year from each of the 3 bureaus (that’s 3 times a year total) from annualcreditreport.com, and check it for accuracy. If there is a mistake, you should dispute it with the bureau. 

• Don’t close old accounts. Say you’ve had this American Express card for years, you’ve always paid it on time, but you don’t use it any more. It might be tempting to close it—but freeze. One of the components that make up the credit score is the length of time you’ve had credit. By closing that old account, you’d actually be hurting your score. Friends don’t let friends close good-standing, old accounts.

• Don’t apply for a lot of new credit. We mentioned checking your own free credit history each year—and note: doing this does not hurt your credit score. What will ding your score is when you
  apply for new credit, allowing the lender to pull your report. So when you went and applied for an
  Old Navy charge card, a Home Depot card, an AmEx card, a car loan from your credit union, and a
  mortgage from a broker, all in one week—you really weren’t doing your score any favors. Lenders
  see massive increases in credit availability as a risk, and each time you apply for credit, your
  score takes a little dive.

• Have different types of credit. It will help your score if you have both revolving credit (such as a credit card, where the balance can fluctuate each month), and installment credit (such as a car loan, where the balance is paid off over time). Don’t go apply for credit willy-nilly just because you think it will help your score, though—be wise and calculating in the credit you take on. 

While this list is by no means exhaustive, it will certainly get you going in the right direction. Much of improving and maintaining good credit is patience and consistency. You are capable of taking the reigns over your finances—don’t let your life be run by some punk 3-digit number!

If you find you need assistance with any of these items, the Family Life Center is here to help you, as always!