Bottom Line at Closing $3,850 Off

This is the kind of headline that makes people want to put brokers in jail. Actually the estimate for closing costs was accurate to within $10. Other very legitimate factors influenced the bottom line for this refinance to be $3,850 less than originally quoted. You ask how could this possibly happen?

When a refinance takes place, the first thing which happens is the payoff of the existing loan. The payoff is composed of the balance plus interest to the date of the payoff. If a loan closes later than originally scheduled and the borrower makes an additional payment, then the payoff can be considerably less than originally projected. In this case, the borrower made a payment and we ended up closing closer to the first of the month (lower balance and less interest from the first of the month to the date of payoff) so the borrower's payoff of their existing loan was $450 less than originally quoted. Savings $450.00

At closing there is an adjustment called the aggregate adjustment. In this particular case it was $850.00. You may rightly ask why didn't the loan officer know about this upfront. This is a huge amount. No one knows what this figure is going to be until the lender's closing department performs the calculations right before closing. They estimate the receipts and disbursements in the escrow account and under federal law, the lender is not allowed to hold more than a two month reserve in any particular month. The excess over two months is what is credited back to the borrower at closing. Savings $850.00

When a borrower refinances their mortgage, a new mortgage is written with new escrow accounts. These escrow accounts must be funded with enough money to pay the tax and insurance bills when they come due. Therein lies the quandry. In North Carolina the tax bills come out in September / October but they are not late until the end of December. Some lenders consider them due in the fall, others not until December as they like to hold money as long as possible. They do not rush to pay them. This makes a huge difference in the amount withheld. The lender in this particular case withheld 3 months less than originally projected for a savings of $1,800.00. Savings $1,800.00.

At closing prepaid interest is collected from the date of closing to the end of the month for the new loan. Originally closing was estimated to be mid month with 15 days of interest. Closing was moved to the beginning of the next month and a short first credit was used. What this means is that the lender credits interest back to the borrower and the first payment comes a month earlier. The savings was 18 days of interest. Savings $750.00

Total savings $3,850.00

Are these real savings? The answer is "no" but to a borrower at closing these are huge amounts. These are all timing issues and every loan is different and there is no way to standardize these figures because of the different due dates and closing dates. A borrower at the end of the day will pay the same total but they may pay more or less at closing and get a smaller or larger refund of their current escrows or their first payment may come sooner or later than originally projected. A closing date changed can have a dramatic effect on the bottom line but the real closing costs and the costs over time will remain the same.

Additionally it makes no difference whether you are dealing with a mortgage broker, mortgage company or a bank. Timing will affect the bottom line but not the real costs.

Comparing Closing Costs

I have often seen other closing costs estimates which vary considerably for the same loan program. The irony is that the more expensive estimates may be cheaper because they may be more encompassing and present realistic costs. How do you compare? Here is an article which I wrote for the Chapel Hill News recently.

Comparing Closing Costs

Ring, ring, ring. Hi, I am having difficulty comparing closing costs from different lenders. The numbers vary considerably and I am not sure what to believe. How do I make a valid comparison?

You are not alone in having difficulty comparing closing costs as Good Faith Estimates can be difficult to understand. In fact recent studies have found that consumer confusion leads to higher closing costs. On the other hand, some estimates which are higher may be more accurate as they encompass all costs and provide realistic estimates. Adding to the confusion are different disclosure rules between banks and brokers.

At this point many people start to roll their eyes and they say just tell me how much to write the check for. The good news is that there is a way to compare costs between programs so you can make an informed choice.

Rather than focusing on individual fees in the beginning, let’s look at where the fees are going. The best way to compare costs is to group them into three separate categories of where they go. There are bank / broker fees, 3rd party fees, and prepaids and escrows for interest, taxes and insurance.

Let’s work backwards and start with the prepaids and escrows. These monies are going to pay the initial interest on the loan during the first month and put enough in a reserve account so taxes and home owner insurance can be paid when due. At the outset no one knows exactly what these numbers will be because they are dependent upon the property’s taxes, insurance costs, and the day of the month of closing. None of these expenses has anything to do with the loan. These charges will be what they are so this section must not be used for any comparison. If the figures are very different, it would be a good idea to ask how they were calculated.

Third party fees should be reviewed next. These are fairly straight forward and should be within the same range irregardless of the lender. As an example, attorney, title, appraisal, survey, inspection etc. fees represent the costs of the services and do not vary by lender. The only exception would be if the lender or seller paid them in-full or in-part. These fees are for outside services and their costs will be what they are. In many cases, the borrower will even be picking the service provider.

The last grouping of broker / banker fees is where there could likely be some big differences. Origination, points, broker, lender, application, credit, commitment are some of the more common fees which are encountered. The best approach is to add all these fees up and discuss them with your loan representative so you can understand and compare them. Since you have already taken out the 3rd party fees and prepaids and escrows, comparing the real costs of the loan has become much easier.

Many borrowers are confused when they get to the line which contains the yield spread premium (YSP). This is paid to the broker by the lender typically to compensate the broker for originating and processing the loan. This is not an added expense for the borrower as the lender pays it. Banks do not have to disclose this fee since they are originating, processing and funding the loan themselves. They are, of course, still earning it.

Is this fee a concern? It should only be an issue if your interest rate is high. As interest rates rise, this fee also rises. The bottom line is to get the best competitive rate with low closing costs then the fee paid to the broker will be reasonable and in-line with what the banks are earning and not disclosing.

Breaking closing costs up into these three separate categories makes them more understandable and manageable for comparison purposes. Any discrepancies or omissions can easily be spotted so true loan costs can easily be compared.

Good luck with your financing choices as traditional good solid loan programs remain at still very competitive rates.

New NC Contracts will affect time deadlines

Ring, ring, ring. Hi, I have heard that many changes have taken place with the North Carolina Offer to Purhcase & Contract Form. I am being told that there are more steps and time deadlines to be met.

You are right. A lot of work has been put into the new form to address issues that have routinely been coming up. As of November 1^st, all offers must be written on the new form. The North Carolina Real Estate Commission states, “Many of the changes in the new contract relate to setting deadlines within which the seller and buyer must respond to each other and specifying the consequences of failure to act within the stated time frame.” These changes are clearly evident with respect to buyers obtaining their financing. Paragraph 5 in the contract has been greatly expanded with new obligations and rights.

Over the years contracts have favored either the seller or the buyer. For the past couple of years the buyer has been favored at the expense of the seller. Financing requirements as outlined in the contract were loose and the buyer could claim unavailability of financing almost to the last minute and still get their earnest deposit back. This would put the seller at a particular disadvantage since they would have had their property off the market and might have missed a favorable marketing window. The pendulum has now started to swing back towards the seller. Paragraph 5 as rewritten seeks to strike a balance by setting more time deadlines when certain parts of the financing must be completed.

The new contract emphasizes TIME BEING OF THE ESSENCE by putting it in bold, capitalized, and italicized letters. The EFFECTIVE DATE can be viewed as the starting line for the run to the closing table. This is the date of the last signature and acknowledgment by everyone.

There are now two dates which must be completed in the financing section of the contract. The first is that loan application must be made and the second is loan approval must be received so many days from the effective date. The new contract stresses the importance of the buyer making loan application and getting approval within a timely period.

These dates must be realistic and reasonable and made in consultation with your lender. Fortunately the new contract states “WARNING: Buyer is advised to consult with Buyer’s lender to assure that the number of days allowed for the Buyer to obtain the Loan is sufficient to allow Buyer’s lender time to take all reasonable steps necessary to provide reliable loan approval.” This is excellent advice. If too short a time is allowed, the seller can keep the buyer’s earnest deposit.

Underwriting has taken a step backwards as a result of the mortgage meltdown and now, more than ever, is requiring strict adherence to all the program guidelines. The problem is that no one knows for certain what the guidelines are since they are changing day by day. In fact lender representatives often say to ignore the posted guidelines as they may not be current. I tell my customers that during this period common sense and logic don’t apply. It’s not worth the time, effort and energy in being aggravated. The focus has to be on what will be approved today and not what would have been approved yesterday.

A buyer today must be more prepared than ever before. Not only must they go to their lender well in advance, but they must have every piece of documentation ready to go. This includes documentation that has not even been requested but might be requested. You have to ask yourself is the documentation which you have thorough and complete and will it trigger any follow-up questions. The good news is that if you get everything out on the table in the beginning, your lender will be able to select a program that best fits your qualifications and financial goals. In fact there are still many programs where income and assets can be stated or not documented at all to simplify and ease the documentation burdens. The loan has to make sense, though. Going down the right path in the beginning is a much better choice than having to change direction in mid-stream, especially when the contract has a loan approval date looming.

The mortgage market is improving with jumbo loans returning to the market place with better pricing and many other types of loans being more available. Congress is working on revamping FHA but what form it will take is still unclear. Even though many lenders have shut their doors and others have cut staff and offices, good mortgages are being written which are fairer and have more reasonable terms. Just remember to see your lender well-in-advance, put realistic time frames in the contract and move quickly on any requests and you should be on your way to a smooth and easy closing. Happy Financing!

David Field creates Sound Mortgage Solutions with Carolina Home Mortgage. He can be reached at 919-869-8204 or david@carolinahomemortgage.com

Aggregate Adjustment at Closing - Is it real Money?

“Ring, ring. Hi, I just looked at my settlement statement, and I am $900 richer. The only thing it says is ‘Aggregate Adjustment $900.’ While I am thrilled to have $900 more in my pocket, what happened and where did it come from?”

The first response is to say “Wow,” that’s fantastic and feel as though you have won the lottery. But is this really extra money appearing in your pocket? There has been so much press recently about closing costs and extra charges appearing out of nowhere. As a result, buyers are skeptical and distrustful of any changes, no matter how valid they may be.

The aggregate adjustment is a perfect case in point. Remember that a settlement statement is composed of closing costs, pre-paids and escrows. The aggregate adjustment relates to escrows and is more of a timing issue than a sudden windfall. A buyer will have to pay now or later.

The aggregate adjustment grew out of a ruling to limit the amount of escrow monies that lenders were allowed to hold. Lenders had been criticized for withholding excessive amounts. The rules now state that no more than a two months reserve can be held at any one time. These are the rules used to prepare the good-faith estimate at the time of application.

A loan application is processed using these estimates and the closing documents are sent to the attorney’s office, where all the final numbers are put together in the settlement statement. The attorney must fax this statement to the lender for approval.

At this point several interesting things happen. The lender does an escrow analysis projection of receipts and disbursements for the next 12 months. If in any month the projected balance is greater than the two-month reserve permitted, these monies must be credited back to the borrower at closing. The lender instructs the attorney to issue an aggregate adjustment.

Fortunately, this adjustment is always a credit to the bottom line so there is never a nasty surprise. Sometimes the buyer hits a home run and it is more than a thousand dollars or sometimes it is a strike out and nothing. How much the adjustment is just depends upon the timing of closing, the escrow receipts and payments.

The question that always is asked is why this is done at the last minute. And why can’t a more accurate estimate be done upfront? It’s a good question. The answer that the lenders give is that the formula is too complex for a straightforward calculation and will vary considerably based upon many factors. If any one item changes during loan processing, the adjustment will change accordingly. Lenders want to calculate this number only once at the last minute when they can be assured that there will be no further changes to any of the variables. Furthermore they would rather lower the bottom line at closing than come back and say, "Oops, that will be a thousand more."

The good news is that these are not costs per se. The lender is maintaining a reserve account to pay for taxes and insurance. The aggregate adjustment is just an adjustment to how much is collected upfront to be deposited into this reserve account. It can be a welcome surprise.

Speaking of good news, the sub prime mortgage mess is resulting in lower rates. As the economy appears to be cooling with the job losses in August, we are seeing better rates across the board, especially for fixed rate loans under $417,000. Some guidelines are a little tighter but there are still many great programs for sound mortgage solutions! Wishing you good luck with your buying or refinancing decisions!

David Field is a home mortgage loan consultant with Carolina Home Mortgage. He can be reached at 919-869-8204 or david@carolinahomemortgage.com.

I am able to shine a light on people's finances so they can say, "Now I get it!" There is a velocity of money and it can either be put to work for you or against you. The key is to balance one's life goals with one's finances. Once the direction is clear, the steps are easy.