Guidance on Mortgage Charges Paid to Third Parties

Mortgage transactions are unusual in the large number of parties you will have to pay for services connected to the mortgage. The professor’s objective is a) to save you money on the third party services that are shoppable by providing competitive options ; and b) to provide as much hard information as possible about the other services that you can’t shop so that you know what to expect.

Shoppable Charges

Lender Title Policy: You are required to purchase a title insurance policy that will cover the lender for the amount of the loan. But you need not buy this policy from the title agency recommended by your Realtor or lender.

Note that the agent writing the title policy will often be providing the closing services as well, and the focus of their pricing is the sum of the two charges. That should be your focus as well. Shop the sum of the title policy and the closing services posted by Boston Financial on this site, and compare them to those selected by your Realtor or lender.

Closing Services: These services are provided by the title agent in title agent states, and by an attorney in attorney preference states, but that should not affect your shopping strategy of combining the two. Note that the Good Faith Estimate (GFE) that you receive from the lender within 3 days of submission of your application, also combines the two into "Title Services and Lender s Title Insurance."

Owners Title Policy: This is an optional add-on to the lender’s policy, which covers only the amount of the loan. For example, if you pay $200,000 for a home and take a $160,000 mortgage, the lender’s policy covers title-related losses up to $160,000. To protect $200,000 you have to buy an owner’s policy which is available for a small additional premium.

If you want an owner’s policy, you should shop for the complete package covering the lender policy, closing services and owner policy.

Private Mortgage Insurance(PMI): On a conventional (non-FHA, non-VA) mortgage, you are required to purchase PMI if you put less than 20% down on a purchase, or have less than 20% equity on a refinance. Because the insurer is selected by the lender, PMI has never been shoppable – until now. You can shop premium rates from MGIC on this site to compare against the premium quoted by the insurer selected by the lender.

The MGIC quotes are for both monthly premiums and single premiums financed in the mortgage. The professor’s decision support will show which type is less costly for you.

NOTE: Your lender is not obliged to accept MGIC, but you are not obliged to accept the lender.

Homeowners’ Insurance: You are required to have a homeowner’s policy that protects your home against fire and most hazards other than floods. You should have such a policy, even if it were not required. You can shop for homeowners’ insurance [XXXXXXXXXX].

Flood Insurance: If your home is on a flood plain, the definitions of which can change over time, you will be required to purchase floor insurance. If you don’t know that your house is on a flood plain, you will receive the bad news in the appraisal. You can shop for flood insurance [XXXXXXXXX].

Non-Shoppable Charges

Appraisal: Lenders require appraisals on most mortgages to make sure that the purchaser is not overpaying, or that a refinancing borrower has the equity (value less loan balance) that is required. The appraisal company is selected by the lender and paid by the borrower. The fee generally ranges from $300 to $600.

Recording Fee: This is a fee paid to a local governmental entity to record the mortgage and title documents in an official registry. The fee is whatever the entity charges. While it varies from jurisdiction to jurisdiction, it is never negotiable. The fee on your transaction is shown on XXXXXX courtesy of Boston Financial.

State and Local Transaction Taxes: These taxes vary greatly from jurisdiction to jurisdiction, but are never negotiable. The taxes on your transaction are shown on XXXXXX courtesy of Boston Financial.

Escrows: Lenders generally require that an escrow account be established with funds the borrower provides at closing, from which the lender makes payments for property taxes and homeowners insurance as they come due. Lenders usually get to keep the interest on escrow accounts. Borrowers can usually opt out of this requirement if they pay a special fee, called "waiver of escrow".

Since lenders have an incentive to make the escrows as large as possible – they keep the interest on the account -- HUD has imposed a ceiling on the size of escrow accounts, which in turn limits the amount the lender can ask the borrower to deposit at closing. If you know your property taxes and insurance premium, you can calculate the required escrow at closing by following the procedure at How Do I Figure Escrows?

Daily Interest: Because mortgage payments are due on the first day of a month, regard less of when the loan is closed and funded, borrowers must pay interest for the period between the funding date and the first day of the following month. The amount of daily interest due at closing is calculated by dividing the annual rate by 360 to get a daily rate, multiplying this by the loan amount to get the daily interest, and multiplying that by the number of days for which interest is due.

For example, the loan is for $200,000 at 5% and it is funded on April 16, which requires an interest payment for the 15 days until May 1. The daily interest is thus .05/360 x 200,000 = $27.78 x 15 = $416.70.

Why 360 rather than 365? It is a self-serving convention of the industry that has never been challenged because the amounts involved have been so small. Using a 365 day year in the example, the amount comes to $410.96.

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