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I am a freelance writer and professional blogger. My work has been quoted in, and linked to by, publications such as USA Today, NPR.org, Consumerist, LifeHacker, and The Atlantic Wire. Additionally, I have been a guest on MarketPlace (and other financial radio programs), and mentioned on the web sites of the Wall Street Journal, the Washington Post and CNN Money. My work appears in numerous online and offline publications.
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For some homebuyers, adding a real estate attorney to the proceedings can provide peace of mind. A knowledgeable and reputable real estate attorney can help you navigate the closing process and make sure that your interests are represented.
However, attorneys cost money. In some cases, you might even find that your lender has already hired a closing attorney, and the fees for that attorney are part of your closing costs. It’s important to find out ahead of time if this is the case and decide whether you want your own attorney as well.
What is Included in Closing Attorney Costs?
As with so many things in life, the cost of a closing attorney varies from state to state, and from attorney to attorney. It also depends on the type of transaction(s) the attorney will be handling.
Some attorneys start at a $100 - $150 flat fee to prepare a deed, and then go up to $1,000 or more for a “complete package.” Many packages start at around $500 or $600, depending on what you have done. A complete real estate closing package might consist of deed preparation, title examination, purchase/sale review (including checking the paperwork on your behalf), lender work, and purchases that require more than one transaction.
Other attorneys work at an hourly rate. It’s not uncommon to find closing attorneys that charge $200 an hour. However, you need to be careful, since you might be billed for time you spend communicating via phone or email with the attorney – and some will even put you on the clock for non-business related small talk!
In many cases, it is best to ask for a flat fee real estate closing package. Many closing attorneys offer these types of legal packages since property transactions are so common. If you only have a small amount of work to be done, an hourly rate might work, but it is often more cost-effective, overall, to ask about a package. Many closing attorneys offer special deals for closing packages, since they are so routine.
Shop around, calling at least four or five attorneys, to get a feel for what’s available, and what is a reasonable closing attorney cost for your area.
If you are looking for a lower interest rate, but also want a fixed-rate period, you can consider a hybrid loan. These loans start out as fixed-rate mortgages for a limited period of time, and then switch to a variable rate loans after the initial period ends. There are two main types of hybrid loans:
In certain circumstances, hybrid loans can provide advantages for borrowers. For those who want to take advantage of low interest rates, a “regular” hybrid fixed/adjustable rate loan can be helpful. However, it’s important to make sure that you can handle the adjustable payments after the re-set, or refinance to a fixed rate before interest rates rise.
Option ARMs are even riskier when used irresponsibly. While the ability to change payments month to month can be helpful in some cases of irregular cash flow, the fact of the matter is that hybrid option ARMs can be devastating as well. If you don’t make bigger payments on months when you have a higher income, you can add to your principal in months when you choose the negative amortization option. If home values drop, you can’t refinance, and you quickly end up under water.
Hybrid loans should be approached carefully; they are not often the best choice for those who are stretching to afford a home.
One of the ways that you can get the best deal on your mortgage is to use a mortgage broker – a financial who works to match borrowers up with lenders.
What is a mortgage broker?
Rather than limiting you to one type of loan with one lender, as a regular loan officer might do, a mortgage broker can leverage a wide network of banks in order to give you access to a variety of different loan options. Mortgage brokers can help you determine your eligibility for FHA loans, VA loans, first-time homebuyer programs, sweat equity programs, and other options that you might not be aware of.
What does a mortgage broker do?
The main role of a mortgage broker is to give buyers more choices as they look for mortgage rates to purchase a home. Unlike a loan officer, a mortgage broker isn’t associated one particular bank. This means that the mortgage broker can collect offers from a number of banks, offering you different deals. Brokers can also reduce the required paperwork by filing certain parts of the application on behalf of the borrower.
Why use a mortgage broker?
A mortgage broker works as a middleman between the buyer and the bank. Instead of going into different banks to find out if you qualify for a home loan your mortgage broker will take care of all communication between you and the banks. Those with poor credit, or self-employed individuals who cannot prove their income, often benefit from the network and assistance of a mortgage broker.
You do need to be careful, though. Mortgage brokers are paid by banks, and so represent their interests. Additionally, a Congressional investigation found that home buyers who acquired their mortgage through a broker paid up to $400 more on average during closing costs than did those who dealt directly with a lender.
Mortgage brokers are also rewarded a yield-spread premium for having a borrower agree to pay a higher interest rate for a loan. While many mortgage brokers are honest and work hard to get their borrowers the best deal, there are others who prey on less knowledgeable consumers, jacking up their interest rates, and pocketing extra commissions. As a borrower you should always protect yourself by conducting research outside the broker’s office.
Homebuyers are not limited to working with a single mortgage broker. Just like you would shop for a loan, you should shop for a broker, since different brokers have access to different lenders. By speaking with a few more brokers, you might dramatically expand your mortgage options.
When you are overwhelmed with debt, it is difficult to know what to do next – especially if your mortgage lender is threatening a foreclosure. Bankruptcy can be one way to help you put off foreclosure, or even stop it altogether.
Bankruptcy: Automatic Stay
When you file for bankruptcy, the court issues an “automatic stay.” This means that creditors have to stop trying to collect from you. As a result, a foreclosure sale of your home is postponed. You can stay in your home while the issue is resolved.
Your lender can file a motion to lift the stay, though. Additionally, in some states you might be out of luck if there is an advanced notice of foreclosure. If that advanced notice is filed, the lender might be able to proceed, even though you have filed for bankruptcy.
In many cases, though, the automatic stay you receive for filing bankruptcy can at least buy you a little bit of time to avoid foreclosure.
Chapter 13 vs. Chapter 7 Bankruptcy and Foreclosure
If you want to have a chance of retaining your home by filing bankruptcy, you need to file for Chapter 13. You are allowed to present a plan to pay off your late unpaid payments over time. However, you need the income to afford your current mortgage payments, as well as to make payments from the past that you might be behind with. If you can follow the payment plan approved by the court, you can avoid foreclosure. On top of that, you might even be able to have your second and third mortgages “stripped off” and re-categorized so that they aren’t threatening your ability to keep your home. This means that these mortgages are no longer secured by the equity in your home.
Chapter 7 bankruptcy is another matter, though. Even though you can cancel what you owe, and be relieved of personal liability for the debt, you likely have signed a lien agreement, using the home to secure the debt. As a result, your debt is cancelled, but the lender still has a right to take the home in an attempt to recover its losses. Chapter 7 bankruptcy will not cancel a foreclosure, and if you go this route, you could lose your home.
Whether you end up with bankruptcy or foreclosure your credit score will be affected. Bankruptcy has a bigger impact and stays on your report for seven to 10 years. A foreclosure also remains on your credit report for seven to 10 years, but you can usually buy a home two to five years after a foreclosure. You might have more difficulty buying a home after a bankruptcy.
Before filing for bankruptcy, consult with a knowledgeable lawyer about the impact of bankruptcy on a foreclosure in your state and in your case.
Equity, where finances are concerned, most often deals with homeownership. Essentially, equity represents your ownership in a home that you purchase with a mortgage.
How Equity Works
Since most people can't afford to buy a home outright with cash they need to turn to a lender for a loan. Once the borrower is accepted, the lender provides the loan for the house, called a mortgage. The homebuyer then repays the lender over time.
As long as the homebuyer owes the lender money on the mortgage, the lender can repossess the home. Over time, as the buyer makes payments on the mortgage, he or she starts to build equity or ownership in the home.
Another way to express equity is as the difference between what your home is worth, and what you still owe on the mortgage. As your home increases in value, you see more equity. If
your home is worth $200,000, and you still owe $130,000 on your mortgage, the
equity in your home is $200,000 - $130,000, or $70,000.
Equity is expressed as a percentage in many cases. In the example above, you have $70,000 equity in
your home, which is 35% of $200,000. Over time, you can eventually build up
enough equity to completely own your home, meaning you have 100% equity, and
the bank no longer has claim to ownership in your house.
The flip side is that you can also have negative equity in your home. This is when you owe more than
your home is worth. This can happen if home values drop. If you owe $180,000 on
your home, but it has dropped in value to $160,000, you have $20,000 in negative
Using the Equity in
As you build up
ownership in your home, you can use your equity as collateral for financing. If
you have $70,000 equity in your home, you might be able to borrow $40,000
against that ownership. You can make home improvements, pay off debt, or do
something else with the money. If you miss payments, though, the lender can
repossess your house, because now the home equity lender has ownership in your
home, and your own equity has been reduced to $30,000, or 15% (using the
$200,000 example above).
Equity is most
important when you sell your home. After you sell your home and pay off your
mortgage, whatever money you have left will be equal to the equity you had in
the house. If you've managed to build up a large amount of equity during the
time you owned the home, then you'll have a large amount of money ready to use
as your next down payment or to simply keep for yourself.
If you are in the process of buying a home, “escrow” is probably a term you have encountered. The point of escrow, during a home purchase, is to make sure that such a large transaction goes through.
Escrow is an arrangement in which a third party receives the money for the transaction from the buyer and then disburses it to the seller. The money held in the escrow account accomplishes two things:
Escrow is about more than just managing a home purchase transaction. It can also be used to ensure that property taxes and home insurance are paid.
Property Taxes and Home Insurance through Escrow
An escrow account is established separately and deposits are made to pay property tax and home insurance. This money is usually collected by the mortgage lender at the same time as the principal and interest payments. One payment is made by the borrower and the funds are divided up, with some going to the mortgage account and the money for taxes and insurance going to the escrow account.
The escrow agent is charged with making sure that the money goes where it should. These accounts are often required by mortgage lenders who want to make sure that property taxes and home insurance are paid. This reduces the risk to lenders that the failure to pay property tax will result in a lien that can lead to a borrower’s default.
If property taxes or home insurance costs go down during the year, the escrow account will have extra money in it and it is usually refunded to the borrower. However, if property taxes or insurance costs rise, the borrower might be required to pay in the difference.
It is worth noting that for conventional loans a borrower might have the option to “waive escrow” as long as he or she has more than 20% equity in the home. It is quite uncommon for lenders to circumvent escrow with a down payment of less than 20%. If you are interested in managing insurance and tax payments yourself, you can ask about waiving escrow. Realize that for FHA, USDA, and VA loans there is no getting around escrow.
As you go through the process of buying a home, you will have to work with a title company. The title company is responsible for making sure that there are no debts attached to the property before the purchase goes through, as well as providing title insurance to protect your ownership of the property.
What Does the Title Company Do?
The main responsibility of the title company is to research the property you plan to buy, and then issue insurance meant to help protect the mortgage lender in the event that something was missed in the initial research.
A title company’s main purpose is to establish a clear line of ownership on the property. The title company researches the property for ownership disputes; before the property can be purchased, these disputes need to be resolved.
On top of that, the title company searches the records related to the property to find out if there are unpaid debts. Before a lender agrees to provide you with the funds to buy a home, it wants to know that unpaid debts and taxes aren’t going to put your ability to make your mortgage payments at risk.
After returning a clean title search, the same title company will often issue you title insurance. This insurance policy will protect you should a past owner ever dispute your ownership of the property, or if back taxes and debts one day come up concerning the property. A title insurance policy is just one of the necessary purchases a homeowner needs to make as part of the process. Lenders are more comfortable when borrowers have title insurance.
Who Pays for Title Insurance?
In most cases, the borrower pays for the title insurance. Often, the mortgage lender puts a borrower in contact with the title company, and often takes care of the logistics, although borrowers can often choose their preferred title company. As you look to buy a home, you will find that there are a number of costs associated with the mortgage. Title insurance is one of the many fees that you will pay as you close on your mortgage.
Title insurance usually costs between $1,000 and $4,000, depending on what state you live in. Sometimes, a formula, such as multiplying the purchase price by 0.005 is used. If you buy a home for $250,000, the title insurance, by this method, would be $1,250. Find out ahead of time how your title insurance premium will be figured.
Title insurance is only a one-time cost, though, so you don’t have to worry about paying it on a recurring basis. Some lenders might waive the fee, or pay it for you, but most require you to pay for title insurance, along with PMI, your credit check, attorney fees, and any other related costs that crop up.
Generally, when you buy a home, you are expected to make a down payment. Your down payment reduces the amount that you borrow, and helps you start out with equity in your home. However, in some cases it is difficult to come up with the money you need for a down payment. The good news is that, in some cases, it’s possible to get help from your lender.
Prior to the financial crisis 2008, one of the common types of down payment loans was the 80/20 loan. Basically, the lender gives you a loan of 20% of the purchase price, and that serves as the “down payment.” The remaining 80% is then borrowed as well. The smaller loan, though, has a higher interest rate attached to it.
The main advantage to the 80/20 loan is that it provides you with a way to avoid Private Mortgage Insurance, since you are technically putting a 20% down payment on your home. It’s possible to find lenders that offer 80/20 loans, but they are less prevalent in the past.
FHA Down Payment Loan
You can also receive a loan to help meet your down payment requirement for a FHA loan. While the down payment is smaller with a FHA loan, you will still have to pay the FHA insurance if you don’t have a large enough down payment.
Friends and Family Down Payment Loan
While a lender can provide you with a down payment loan, a friend or relative usually cannot. Most lenders will not want you to use a loan from another source as your down payment. With a mortgage loan, it’s possible for you to accept a true gift from a relative for your down payment, but you can’t plan to pay it back. Many lenders require you and the donor to sign paperwork affirming that the money is the true gift.
When you begin considering your mortgage options, one of the loans you might run into is the 5/1 ARM. This is a loan that starts out with a five-year fixed rate, and then switches to a variable rate, which changes once a year during the remaining years of the loan. That is what the 5/1 means: The loan is fixed for the first five years, and each year after that, the interest rate adjusts. The fact that the interest rate (and your monthly payment) only changes periodically therefore gives a 5/1 ARM a level of stability relative to other ARMs, which have rates that may change on a monthly or semiannual basis.
The 5/1 ARM can be an attractive mortgage option because it often starts with a fairly low interest rate. The introductory interest rate is usually lower than what you would see with a fixed rate loan – sometimes by as much as a full percentage point. However, you should be prepared for the fact that when the five-year fixed-rate period ends, your interest rate, and your monthly payment, could rise. Most ARMs come with a cap. This cap can either be a periodic cap, which limits the amount that the rate can rise each interest period (often quarterly or annually), or a lifetime cap, which limits the total increase for the interest rate over the lifetime of the loan.
Many homeowners start with a 5/1 ARM intending to refinance to a fixed-rate loan before the initial period expires. Freddie Mac reports that the average pay off period for mortgage loans is a little less than four years. This means that many owners either sell or refinance (or foreclose) within this time period. Even during 2008 and 2009 when that average bumped up, it still remained less than five years. To be able to refinance you will need to have a certain amount of equity in your home; if refinancing is your plan, you should figure out the loan you want to eventually take and make sure you will qualify for it under your current schedule.
Your home equity line of credit can present a serious strain on your budget – especially if you are already in trouble. Many people wonder if it’s possible to discharge a HELOC during bankruptcy in order to avoid continued payments. Whether or not you can discharge the HELOC, though, depends a great deal on the type of bankruptcy you choose.
Chapter 7 Bankruptcy
The short answer as to whether you can discharge a HELOC during Chapter 7 bankruptcy is “no.” At least not if you want to keep your house. During Chapter 7, you liquidate your unsecured assets, and your creditors are paid with whatever funds derive from the sale. This means that they may not get paid in full, but your situation is deemed severe enough that you aren’t required to pay all that you owe. However, if you want to keep your house, you have to keep making the HELOC payments. As long as you are up to date, you can usually keep your home.
Chapter 13 Bankruptcy
You can actually use Chapter 13 bankruptcy to get rid of a HELOC. With Chapter 13 bankruptcy, you create a payment plan that lasts three to five years. During this time, you continue paying on your first mortgage. The rest of your disposable income goes to a trustee assigned by the court. The trustee can then distribute payments to your creditors – including the HELOC lender.
Once the period of bankruptcy is over, your HELOC, along with credit card balances, are discharged/eliminated. As long as you continue paying your first mortgage you should be able to keep your house.
Each case is different, though, and the terms of your bankruptcy will vary. The bottom line is that if you are interested in eliminating your HELOC and keeping your home, Chapter 13 is your best bet. Chapter 7 bankruptcy won’t allow you to discharge your HELOC while keeping your house.
As always, though, you will want to consult a bankruptcy attorney to learn your options, and have the possibilities fully explained to you.