In today’s busy Silicon Valley real estate market with crowded probate courts and high estate taxes, the living trust has become a common way to hold title to real property. Understanding the title insurance requirements when property is conveyed to the trustee of a living trust can help streamline your transaction and avoid delays. What is a Trust in Real Estate? A trust is a legal agreement between a trustor and a trustee. The trustee holds title to and manages the designated assets of the trustor, including real property, for the benefit of one or more beneficiaries. In Silicon Valley, many homeowners use trusts to protect assets and simplify transfers. Can a Trust Acquire or Convey Real Property? A trust itself cannot hold title or convey interests in real estate. Only the trustee, acting on behalf of the trust, can own and transfer property titles. The trustee’s powers, including conveyance rights, must be specifically granted by the trust document. Title Company Requirements for Trust-Owned Properties in Silicon Valley: When a trustee holds title to real estate as part of a living trust, the title insurer in Silicon Valley typically requires a certification of trust that includes: The date the trust was executed. Identification of the trustor and trustee(s). Powers granted to the trustee(s). Identification of any person authorized to revoke the trust. Signatory authority for trustee(s). Instructions on how title should be vested. A legal description of the property interests held in trust. A statement confirming the trust has not been revoked, modified, or amended in ways that affect the certification. These requirements ensure the title insurance policy accurately reflects ownership and protects both buyers and lenders during property transactions in Silicon Valley. Privacy Considerations in Trust Documentation: If your trust contains confidential financial details, such as charitable donations, you may request to omit or redact certain pages when providing documents to the title company. Most Silicon Valley title insurance companies accept certifications or redacted copies, balancing privacy with legal verification. Signing Authority and Trustee Powers: If there are multiple trustees, usually all must sign documents unless the trust explicitly allows otherwise: A trustee can grant power of attorney only if explicitly authorized in the trust. If all trustees are deceased or unable to act, courts in Silicon Valley may appoint a successor trustee per trust or probate laws. Notary acknowledgments of trustee signatures must clearly state the trustee’s capacity in accordance with title insurance standards. How would the Deed do the Sample Deed Wording for Trust Ownership in Silicon Valley: Example wording on a deed conveying property to trustees typically reads: “John Doe and Mary Doe, as trustees of the Doe Family Trust under Declaration of Trust dated January 1, 1992.” Limitations on Trustee Authority in Silicon Valley Real Estate: Trustees must act within the powers granted by the trust agreement. California probate codes provide general trustee powers focused on sale, conveyance, and refinancing, which title insurers in Silicon Valley rely upon to issue policies confidently.
What is Title Insurance? Newspapers refer to it in the weekly real estate sections and you hear about it in conversations with real estate brokers. If you’ve purchased a home you may be familiar with the benefits of title insurance. However, if this is your first home, you may wonder, “Why do I need yet another insurance policy?” While a number of issues can be raised by that question, we will start with a general answer. The purchase of a home is one of the most expensive and important purchases you will ever make. You and your mortgage lender will want to make sure the property is indeed yours and that no one else has any lien, claim or encumbrance on your property. The Land Title Association, in the following pages, answers some questions frequently asked about an often misunderstood line of insurance - title insurance. What is the difference between Title Insurance and Casualty Insurance? Title insurers work to identify and eliminate risk before issuing a title insurance policy. Casualty insurers assume risks. Casualty insurance companies realize that a certain number of losses will occur each year in a given category (auto, fire, etc.). The insurers collect premiums monthly or annually from the policy holders to establish reserve funds in order to pay for expected losses. Title companies work in a very different manner. Title insurance will indemnify you against loss under the terms of your policy, but title companies work in advance of issuing your policy to identify and eliminate potential risks and therefore prevent losses caused by title defects that may have been created in the past. Title insurance also differs from casualty insurance in that the greatest part of the title insurance premium dollar goes towards risk elimination. Title companies maintain title plants, which contain information regarding property transfers and liens reaching back many years. Maintaining these title plants, along with the searching and examining of title, is where most of your premium dollar goes. Who needs Title Insurance? Buyers and lenders in real estate transactions need title insurance. Both want to know that the property they are involved with is insured against certain title defects. Title companies provide this needed insurance coverage subject to the terms of the policy. The seller, buyer and lender all benefit from the insurance provided by title companies. What does Title Insurance insure? Title insurance offers protection against claims resulting from various defects (as set out in the policy) which may exist in the title to a specific parcel of real property, effective on the issue date of the policy. For example, a person might claim to have a deed or lease giving them ownership or the right to possess your property. Another person could claim to hold an easement giving them a right of access across your land. Yet another person may claim that they have a lien on your property securing the repayment of a debt. That property may be an empty lot or it may hold a 50-story office tower. Title companies work with all types of real property. What types of policies are available? Title companies routinely issue two types of policies: An “owner’s policy” which insures you, the Homebuyer, for as long as you and your heirs own the home; and a “lender’s” policy which insures the priority of the lender’s security interest over the claims that others may have in the property. What protection am I obtaining with my Title Policy? A title insurance policy contains provisions for the payment of the legal fees in defense of a claim against your property which is covered under your policy. It also contains provisions for indemnification against losses which result from a covered claim. A premium is paid at the close of a transaction. There are no continuing premiums due, as there are with other types of insurance. What are my chances of ever using my Title Policy? In essence, by acquiring your policy, you derive the important knowledge that recorded matters have been searched and examined so that title insurance covering your property can be issued. Because we are risk eliminators, the probability of exercising your right to make a claim is very low. However, claims against your property may not be valid, making the continuous protection of the policy all the more important. When a title company provides a legal defense against claims covered by your title insurance policy, the savings to you for that legal defense alone will greatly exceed the one-time premium. What if I'm buying a property from someone I know? You may not know the owner as well as you think you do. People undergo changes in their personal lives that may affect title to their property. People get divorced, change their wills, engage in transactions that limit the use of the property and have liens and judgments placed against them personally for various reasons. There may also be matters affecting the property that are not obvious or known, even by the existing owner, which a title search and examination seeks to uncover as part of the process leading up to the issuance of the title insurance policy. Just as you wouldn’t make an investment based on a phone call, you shouldn’t buy real property without assurances as to your title. Title insurance provides these assurances. The process of risk identification and elimination performed by the title companies, prior to the issuance of a title policy, benefits all parties in the property transaction. It minimizes the chances that adverse claims might be raised, and by doing so reduces the number of claims that need to be defended or satisfied. This process keeps costs and expenses down for the title company and maintains the traditional low cost of title insurance. STANDARD (CLTA) coverage handles such risks as: Forgery and impersonation Lack of competency, capacity or legal authority of a party Deed not joined in by a necessary party (co-owner, heir, spouse, corporate officer, or business partner) Undisclosed (but recorded) prior mortgage or lien Undisclosed (but recorded) easement or use restriction Erroneous or inadequate legal descriptions Lack of a right of access Deed not properly recorded CLTA policies cover all of the big worries a home buyer has nightmares about, like a forged deed, some type of title fraud or unpaid claims that have not been recorded. If these turn up, a CLTA policy will take care of the issue and make you whole financially. However, CLTA policies routinely exclude boundary disputes including easement or encroachment issues. An EXTENDED (ALTA) coverage policy may be requested to protect against such additional defects as: Off-record matters, such as claims for adverse possession or prescriptive easement Deed to land with buildings encroaching on land of another Incorrect survey Silent (off-record) liens (such as mechanics' or estate tax liens) Pre-existing violations of subdivision laws, zoning ordinances or CC&R's. ALTA title policies are issued by the American Land Title Association, and are referred to as "Lenders' Policies." They are regularly used to protect the bank or other lender's interests in the property. This type of policy offers more protection than the basic CLTA policy, including many types of unrecorded property matters like easements and unrecorded liens. Needless to say, the ALTA is more expensive. If a seller of commercial real property is required to provide the buyer a title policy, it often provides the CLTA Standard Owner’s Coverage policy. A buyer who wants the ALTA Extended Coverage Policy must pay the difference herself to upgrade protection. A land contract can be helpful for those who need time to establish or improve their credit rating. There are only small closing costs, and payment can help establish a good mortgage payment record. This can help establish an overall good credit rating, and it is possible for the buyer to later refinance the land contract with a conforming loan. On the other hand, there are risks associated with land contracts. Land contract purchases are not necessarily recorded in the public record, and there are no guarantees that the seller will be able to transfer a clear title to the buyer upon fulfillment of the land contract. There also is no lender assuring that the purchase price for the property is justified, and no inspection of the property’s condition. Another alternative to a non-conforming loan is assuming the seller’s mortgage. By assuming a mortgage, if the mortgage is assumable, it is possible to save on closing costs, and may allow you to obtain a favorable interest rate.
Lower interest rates have motivated you to refinance your home loan. The lower rate may save you a tremendous amount of money over the life of the loan, but you should also expect to pay the lender the typical closing costs associated with any new loan, including service fees, points, title insurance protection and other expenses. Why do I need to purchase a New Title Insurance Policy on a Refinanced Loan? To the lender, a refinance loan is no different than any other home loan. So, your lender will want to insure that their new loan is protected by title insurance, just as the original lender required. Therefore, when you refinance you are buying a title policy to protect your lender. Why does a Lender need a Title Insurance? Most lenders generate loans and then immediately sell those loans to secondary market investors, such as FannieMae. FannieMae, in order to protect its security interest in the loan, requires title insurance coverage. Even those lenders who keep original loans in their portfolio are wise to get a lenders policy to protect their investment against title related defects. When I purchased my home, didn't I also buy a Lender's Policy? Perhaps. Who pays for the lender’s policy on a purchase loan varies regionally and by the terms of individual contracts. However, even if you did buy a lender’s policy when you purchased your home, the lender’s policy remains in force only during the life of the loan that was insured. If you refinance, the old loan is paid off (the “life” of the loan expires) and a new loan is issued for which the lender will require a new title insurance policy. What about my original Title Insurance Policy? When you bought your home, you purchased a Homeowners title policy. The Homeowners’ policy stays in force as long as you or your heirs own the home. When you refinance, your lender will often require that you purchase a new lender’s policy to protect their new security interest in the property. Thus, you are buying a policy to protect your lender, not a new Homeowner’s policy. What could possibly have happened since I purchased my home which warrants a New Lender's Policy? Since the time that the original loan was made, you may have taken out a second trust deed on the house or had mechanic’s liens, child support liens or legal judgments recorded against you - events that could result in serious financial losses to an unprotected lender. Regardless if it has been only 6 months or less since you purchased or refinanced your home, a myriad of title defects could have occurred. While you may not have any title defects, many Homeowners do. The only way for a lender to adequately protect itself is to get a new lender’s policy each time you purchase or refinance your home. Are there any discounts available for Title Insurance on a Refinance Transaction? Yes. Title companies offer a refinance transaction discount or a short-term rate. Discounts may also be available if you use the same lender for your refinance loan and your original loan. Be sure to ask your title company how they can save you money.
Title Insurance: As a homebuyer, the term is probably familiar - but is it understood? What is your dollar actually paying for when you purchase a title policy? Title Insurers, unlike property or casualty insurance companies, operate under the theory of risk elimination. Title companies spend a high percentage of their operating income each year collecting, storing, maintaining and analyzing official records for information that affects title to real property. Their technical experts are trained to identify the rights others may have in your property, such as recorded liens, legal actions, disputed interests, rights of way or other encumbrances on your title. Before closing your transaction, the title company will proceed to clear those encumbrances which you do not wish to assume. This theory is different from that of most other insurance where, for example, rates and anticipated losses are based on actuarial studies and premiums are pooled on the assumption that a certain number of claims will be made. The distinction is important: title insurance premiums are paid to identify and eliminate potential risks and claims before they happen. Medical and casualty insurance premiums, for example, are paid to insure against an unpredictable future event, knowing that risks exist and claims will occur. Furthermore, title insurance involves a one-time premium, paid when you close the real estate transaction, while property, casualty and medical insurance require regular renewal premiums. The goal of title companies is to conduct such a thorough search and evaluation of public records that no claims will ever arise. Of course, this is impossible -- we live in an imperfect world, where human error and changing legal interpretations make 100% risk elimination impossible. When claims arise, professional claims personnel are assigned to handle them according to the terms of the title insurance policy. As in all competitive business environments, rates vary from company to company, so you should make comparisons before deciding on a particular title company. Your real estate professional can help you do this. In addition, there are many helpful customer services provided by title companies which you and your real estate professional may find helpful to your transaction. The issuance of a title insurance policy is highly labor-intensive. It is based upon the maintenance of a title plant, or library of title records, in many cases dating back over a hundred years. Each day, recorded documents affecting real property and property owners are posted to these title plants so that when a title search on a particular parcel is requested, the information is already organized for rapid and accurate retrieval. This investment in skilled personnel and advanced data processing represents a major part of the title insurance premium dollar.
Buying a home or taking on a new mortgage later in life can look very different than it did earlier in your career. If you’re approaching retirement or already there it’s especially important to think carefully about how a mortgage fits into your long-term financial picture. Many homeowners in their 60s and 70s are still working full time and may qualify easily for a loan. But even so, planning ahead is essential, particularly if your income will decrease once you retire. Understanding how lenders evaluate senior borrowers—and what options are available—can help you make a confident, informed decision. How the Mortgage Process Works for Seniors: When it comes to mortgage approval, age itself is not a deciding factor . Federal law, including the Equal Credit Opportunity Act, prohibits lenders from denying or discouraging borrowers based on age. A 67-year-old borrower is evaluated using the same criteria as someone decades younger. What lenders focus on instead are the fundamentals: Income and assets Credit history and credit score Overall ability to repay the loan In short, the key question isn’t how old you are—it’s whether the mortgage will be sustainable now and in the future. That’s where thoughtful planning becomes critical. Seniors should consider how their finances might change over time and account for potential challenges, such as healthcare costs or reduced income after retirement. Qualifying for a Mortgage after Retirement: Once retired, borrowers typically no longer rely on W-2 income. Instead, lenders look at ongoing income sources , which may include: Social Security benefits Pension payments Distributions from 401(k)s or IRAs Trust income or dividends Interest income from investments Guidelines from organizations like Freddie Mac and Fannie Mae allow lenders to consider these income streams when determining eligibility. However, if income is coming from assets with a limited duration—such as retirement accounts—lenders will evaluate whether those funds are likely to last for several years. The goal is to ensure the borrower can continue making payments throughout the life of the loan, even as income sources change. Key Considerations Before Taking Out a Mortgage in Retirement: One of the biggest questions seniors should ask is whether a mortgage will support—or strain—their retirement lifestyle. Living within your means becomes increasingly important as you age, especially as people are living longer and healthcare costs continue to rise. Mortgage payments can take up a large portion of a fixed income, leaving less flexibility for other expenses. In some cases, carrying mortgage debt may limit your ability to enjoy retirement or force you to rely on other forms of debt. Additionally, tax benefits associated with homeownership have changed over the years. Recent tax laws reduced the amount of mortgage interest that can be deducted, making that as important as to weigh the financial advantages carefully. Refinancing and Home Equity Options for Seniors: For homeowners with significant equity, refinancing or tapping into home equity can seem appealing—especially if steady income is a concern. Refinancing may help secure a better interest rate or adjust loan terms, but it also resets the clock on repayment and comes with closing costs. A cash-out refinance, in particular, allows homeowners to access equity but results in a larger loan balance and long-term payments. Home equity loans or lines of credit (HELOCs) can provide access to cash as well, but they require monthly payments and put the home at risk if those payments aren’t made. Before choosing any of these options, it’s important to consider how long you plan to stay in the home and whether the added debt aligns with your retirement goals. The Bottom Line: Mortgages for seniors aren’t about age, they’re about strategy, sustainability, and long-term planning . Whether you’re considering buying, refinancing, tapping into equity, the right decision depends on your income outlook, lifestyle goals, and overall financial health. Before moving forward, it’s wise to speak with a trusted real estate professional, mortgage advisor, or financial planner who understands the unique considerations that come with this stage of life. The right guidance can help ensure your home continues to support and not complicate your retirement years. 👇 Related Resources👇 Contact me if you are looking for some trusted lenders to help you.
In the olden days, when someone wanted a home loan they walked downtown to the neighborhood bank or savings & loan. If the bank had extra funds lying around and considered you a good credit risk, they would lend you the money from their own funds. It doesn’t generally work like that anymore. Most of the money for home loans comes from three major institutions: Fannie Mae (FNMA - Federal National Mortgage Association) Freddie Mac (FHLMC - Federal Home Loan Mortgage Corporation) Ginnie Mae (GNMA - Government National Mortgage Association) This is How it Works: You talk to practically any lender and apply for a loan. They do all the processing and verifications and finally, you own the house with a home loan and regular mortgage payments. You might be making payments to the company who originated your loan, or your loan might have been transferred to another institution. The institution where you mail your payments is called the servicer, but most likely they do not own your loan. They are simply servicing your loan for the institution that does own it. What happens behind the scenes is that your loan got packaged into a pool with a lot of other loans and sold off to one of the three institutions listed above. The servicer of your loan gets a monthly fee from the investor for servicing your loan. This fee is usually only 3/8ths of a percent or so, but the amount adds up. There are companies that service over a billion dollars of home loans and it is a tidy income. At the same time, whichever institution packaged your loan into the pool for Fannie Mae, Freddie Mac, or Ginnie Mae, has received additional funds with which to make more loans to other borrowers. This is the cycle that allows institutions to lend you money. What Freddie Mac, Ginnie Mae, and Fannie Mae may do after they purchase the pools is break them down into smaller increments of $1,000 or so, called mortgage-backed securities. They sell these mortgage-backed securities to individuals or institutions on Wall Street. If you have a 401K or mutual fund, you may even own some. Perhaps you have heard of Ginnie Mae bonds? Those are securities backed by the mortgages on FHA and VA loans. These bonds are not ownership in your loan specifically, but a piece of ownership in the entire pool of loans, of which your loan is only one among many. By selling the bonds, Ginnie Mae, Freddie Mac, and Fannie Mae obtain new funds to buy new pools so lenders can get more money to lend to new borrowers. And that is how the cycle works. So when you make your payment, the servicer gets to keep their tiny part and the majority is passed on to the investor. Then the investor passes on the majority of it to the individual or institutional investor in the mortgage backed securities. From time to time your loan may be transferred from the company where you have been making your payment to another company. They aren’t selling your loan again, just the right to service your loan. There Are Exceptions: Loans above $333,700 do not conform to Fannie Mae and Freddie Mac guidelines, which is why they are called non-conforming loans, or “jumbo” loans. These loans are packaged into different pools and sold to different investors, not Freddie Mac or Fannie Mae. Then they are securitized and for the most part, sold as mortgage backed securities as well. This buying and selling of mortgages and mortgage-backed securities is called mortgage banking, and it is the backbone of the mortgage business.
Have These Items Ready When You Apply For a Loan: It used to be that lenders mailed out verifications to employers, banks, mortgage companies, and so on, in order to verify the data supplied by borrowers. Nowadays, the interest is often in speed and getting answers quickly so alternate documentation has become more widely used. Alternate documentation means that underwriting answers can be obtained with information supplied directly from the borrower instead of waiting around for verifications to come back in the mail. The following is required for most standardized loans as part of alternate documentation processing. Items may differ according to whether your loan is a conforming (Fannie Mae or Freddie Mac), non-conforming (jumbo) loan, government loan, or a portfolio loan. Verifications are still mailed out, but usually as part of quality control procedures. These are the things you need to supply to your lender to get a quick approval using alternate documentation Income Items: W2 forms for the last two years Pay stubs covering a 30 day period Federal tax returns (1040s) for the last two years, if: You are self-employed Earn more than 25% of your income from commissions or bonuses Own rental property Or are in a career where you are likely to take non-reimbursed business expenses Year-to-Date Profit and Loss Statement (for self employed) Corporate or partnership tax returns (if applicable) Pension Award letter (for retired individuals) Social Security Award letters (for those on Social Security) Asset Items: Bank statements for previous two months (sometimes three) on all accounts. All pages. Statements for two months on all stocks, mutual funds, bonds, etc. Copy of most recent 401K statement (or other retirement assets) Explanations for any large deposits and source of those funds Copy of HUD1 Settlement Statement on recent sales of homes Copy of Estimated HUD1 Settlement Statement if a previous home is for sale, but not yet closed Gift letter (if some of the funds come as a gift from a family member) Gifts can also require: Verification of donor’s ability to make the gift (bank statement) Copy of the check used to make the gift Copy of the deposit receipt showing the funds deposited into bank account or escrow Credit Items: Landlord’s name, address, and phone number (for verification of rental) Explanations for any of the following items that may appear on your credit report: Late payments Credit inquiries in the last 90 days Charge-offs Collections Judgments Liens Copy of bankruptcy papers if you have filed bankruptcy within the last seven years Other: Copy of purchase agreement (if you have already made an offer) To document receipt of child support (if you desire to show it as income) Copy of Divorce Settlement (to show the amount) Copies of twelve months canceled checks to document actual receipt of fund FHA Loans: Copy of Social Security Card (or other documentation of social security number) Copy of Driver’s license VA Loans: Copy of DD214 Refinances: Copy of Note on existing loan Copy of HUD1 Settlement Statement on existing loan Name, address, phone number, loan number of existing loan/lender
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Your First Step Toward Buying a Home: When preparing to buy a home, the first thing many homebuyers do is look at the real estate ads in newspapers, magazines and listings on the Internet. Some potential buyers read how-to articles like this one. The next thing you should do - before you call on an ad, before you talk to a REALTOR®, before you shop for interest rates - is look at your savings. Why? Because determining how much money you have available for down payment and closing costs affects almost every aspect of buying a home - including how you write your purchase offer, the loan programs you qualify for, and shopping for interest rates. Mortgage Programs: If you only have enough available for a minimum down payment, your choices of loan program will be limited to only a few types of mortgages. If someone is giving you a gift for all or part of the down payment, your options are also limited. If you have enough for the down payment, but need the lender or seller to cover all or part of your closing costs, this further limits your options. If you borrow all or a portion of the down payment from your 401K or retirement plan, different loan programs have different rules on how you qualify. Of course, if you have enough for a large down payment, then you have lots of choices. Your loan choices include such varied programs as conventional fixed rate loans, adjustable rate mortgages, buydowns, VA, FHA, graduated payment mortgages and all the varieties of each. Shopping for Rates: A very important reason you need to have at least some idea of your down payment is for shopping for interest rates. Some loan programs charge a slightly higher interest rate for minimal down payments. Plus, the interest rates for different loan programs are not the same. For example, conventional, VA, and FHA all offer fixed rate loans. However, the rates vary from one program to another. If you shop lenders by phone, the loan officer will be able to tell you which programs fit and quote your rates accordingly. However, if you are shopping on the Internet, you have to develop some idea of your loan program on your own. Writing your Offers: Another reason you need to have a clue about your down payment is because it affects how you write your offer to purchase a home. Not only are you required to put your down payment information in the offer, but also different loan programs have different rules that also affect how you write your offer. This is especially important when dealing with FHA and VA loans. If you are asking the seller to pay all or part of your closing costs, you have to be certain your loan program allows what you are asking. For smaller down payments, lenders allow the seller to pay less closing costs than for larger down payments. Some loan programs will allow a seller to pay certain types of costs, but not others. Finally, your down payment also affects your ability to qualify for a loan. When you make a small down payment, lenders are fairly strict about having you conform to their underwriting guidelines. For larger down payments, they will tend to make allowances or exceptions to the rules. The Bottom Line: As you can see, the down payment affects every choice you make when you buy a home. Although you should look at ads, familiarize yourself with neighborhoods, learn about prices, and read as much as you can - when you get ready to take action - the first thing you should do is figure out how much money you have available for the purchase.
There really is no such thing as a no-cost mortgage loan. There are always costs, such as appraisal fees, escrow fees, title insurance fees, document fees, processing fees, flood certification fees, recording fees, notary fees, tax service fees, wire fees, and so on, depending on whether the loan is a purchase or a refinance. The term “no-cost” actually means that your lender is paying the costs of the loan. All a no-cost loan means is that there is no cost to you, the borrower. Except that you pay a higher interest rate. Understand How Loans Are Priced: A variation of the no-cost loan is the “no points” loan, or even the “no points, no lender fees” loan. On these loans you pay all the costs associated with buying a house or refinancing, but you do not have to pay the lender associated fees or points. However, since lenders and loan officers do not do anything for free, the profit has to come from somewhere. So where does it come from? First, you have to understand how loans are priced and how mortgage lenders and loan officers earn income. Each morning mortgage companies create rate sheets for loan officers. The rates usually change slightly from day to day. In volatile markets they change several times a day. On the rate sheet, there are many different programs, including the thirty year fixed rate. There will be one column that lists several different interest rates and another column that lists the cost for that particular rate. For example: Rate Cost: (points) 6.250%2.0006.375%1.5006.500%1.0006.625%0.5006.750%0.0006.875%(0.500) 7.000% (1.000) 7.125% (1.500) 7.250% (2.000) In the above example, 6.75% has a “par” price, which means it has a zero cost. The lower in rate you go, the higher the cost, or points. A point is equal to one percent of the loan amount. The parentheses in the cost column for the higher interest rates indicate a negative number. For example, (1.500) equals -1.500, which means instead of having a cost associated with the loan, the lender is willing to pay out money for those interest rates. This is called premium or rebate pricing. Zero Cost Loans How Mortgage Companies and Loan Offices Make Money? The above rate sheet is not a rate sheet designed for public review. In fact, most lenders have a policy that the public cannot see their internal rate sheet. This rate sheet is designed for loan officers and the cost column is the loan officer’s cost, not the cost to the borrower. When the loan officer gives you an interest rate quote, he will add on a certain amount, usually one to one and a half points. Most companies leave it up to the loan officer’s discretion how much to add on to the base cost. However, they usually require at least a minimum add-on, which is usually one point. The loan officer’s commission depends on his split with the company, which varies. He receives a portion of the add-on and the rest goes to the company. If we assume the loan officer is adding on one point, and you were willing to pay one point for your loan, then your rate would be (according to this rate sheet) 6.75%. You would pay one percentage point and receive an interest rate of six and three-quarters. If you wanted a lower rate and were willing to pay two points, you could get 6.5%. If you wanted a “no points” loan, then your rate would be 7%. The loan officer and the mortgage company would split the one point rebate, listed as (1.000) on the rate sheet. See how it works? In addition to the cost noted on the rate sheet above, lenders have certain other fees they collect, too. These can include document fees, processing fees, underwriting fees, warehouse fees, flood certification fees, wire transfer fees, tax service fees, and so on. Usually, you will not be charged all of these fees, it is just that different lenders call them different things. Some of them are legitimate costs to the lender and some of them are simply fees designed to generate additional income to the mortgage company. They are customary in today’s mortgage market and can vary from around $600 to $1,300. In addition, there will usually be an appraisal fee and a credit report fee. Appraisals and credit reports are usually contracted out to independent companies even though these are considered to be lender fees. Note that it is common for companies who charge higher fees to have a slightly lower interest rate and companies that charge lower fees will usually have a slightly higher interest rate. So if you shop entirely based on fees, you may actually spend more money in the long run because your interest rate may be higher. The point is that if you want a “no points - no lender fees” loan, then on our rate sheet above, you may get an interest rate of 7.125%. That is because the loan officer has to bump the interest rate even further than on a “no points” loan in order to cover his own company’s fees. If you want a “no cost” loan, then the loan officer has to bump your interest rate even further. That is because all of the costs on your purchase or refinance do not come from the lender. The escrow or settlement company involved in your transaction will charge a fee that must be paid. The lender will require title insurance and the title insurance company charges a fee for providing this insurance. If your new lender requires information from your homeowner’s association (if you have one) then the homeowner’s association will most likely charge a fee for providing those documents. If you are refinancing, your current lender will usually charge at least two fees: a demand fee, and a reconveyance fee. The demand fee is charged simply for providing payoff information. The reconveyance fee is charged because your current lender prepares a document that releases your property as collateral for their outstanding loan. This document is called a reconveyance. These charges will add about one additional point to how much the loan officer must collect in premium pricing in order to cover the costs associated with your refinance or purchase. For a zero cost loan, he will normally need to collect somewhere in the neighborhood of two and a half points. Because points are a percentage of your loan amount and most of the costs are fixed, it takes fewer points to provide zero costs on higher loan amounts. On smaller loan amounts it takes more. One percent of $200,000 is $2,000 and one percent of $100,000 is only $1,000, so you can see how it is easier to cover costs on larger loans. Does it Make Sense to do a Zero Cost Loan? On a $200,000 thirty year fixed rate loan, the difference in monthly mortgage payments will be about $87, using the example rate sheet on the first page. Over thirty years, it works out that you will pay more than $30,000 extra for getting a zero cost loan. So if you intend to remain in the home for a long period of time it just doesn’t make sense. Suppose you intend to stay for only five years. On a purchase, using the $200,000 example, if you stayed longer than fifty-five months, it would make more sense to pay your own costs and get the lower interest rate. If you kept the loan for a shorter time, then it makes more sense to pay zero costs and get a higher interest rate. Except for one thing: If you knew you were only going to be staying in the home for five years you would probably not want a thirty-year fixed rate, anyway. You would get a loan that has a fixed payment for the first five years, then convert to an adjustable rate or whatever fixed rates are five years from now. These loans have an interest rate almost a half percent lower than thirty year fixed rate loans. Since it is practically impossible to do a zero cost loan on this type of loan, you would have to compare a zero cost thirty year fixed rate loan to paying points on a loan with a fixed payment for five years. The difference in payments would be about $150. The two and a half point rebate equals $5,000. Working out the math, if you stayed in the home longer than thirty-three months, it would make more sense to pay the points and get the loan with the five-year fixed rate. Finally, carry the discussion one step further. Suppose you know you are going to be in the new loan for less than three years? Doesn’t it make sense to get a “zero cost” loan then? No. Then you get an adjustable rate loan. As long as the start rate is two percent lower than the current fixed rate, you cannot lose. The first year you will save a lot of money. The second year you will probably break even. The third year, you will probably give up some of the savings from the first year, but not all of it. Zero cost loans just don’t make sense for most homebuyers. But they sound really good in an advertisement! Exceptions: On a FHA Streamline Refinance Without an Appraisal (not a purchase - which is what the article talks about), it makes sense to do a zero cost loan. This is mostly because the new loan has to be exactly the same amount as the existing balance of the current loan. If the homebuyer only has enough money for a down payment and none to cover closing costs, PLUS no arrangement can be made for the seller to pay closing costs, then zero cost may make sense. (However, I would still recommend negotiating terms with the seller - be willing to pay a higher price in exchange for the seller paying your costs.)
