A minefield of mortgage charges: What's 'nonshopable'?

Understanding the 360-day year and other industry oddities

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Understanding the 360-day year and other industry oddities

Jack Guttentag
Inman News™

Last week I discussed the various mortgage charges for which borrowers could shop. It is also important for mortgage borrowers to know the charges they can't shop, if only to avoid wasting time trying to shop or negotiate them.

Private mortgage insurance (PMI): On a conventional (not a Federal Housing Administration-insured or Department of Veteran's Affairs-insured) mortgage, you are required to purchase PMI if you put less than 20 percent down on a purchase, or have less than 20 percent equity on a refinance. Because the insurer is selected by the lender, PMI has never been "shopable" by the borrower, who pays the premium quoted by the lender.

This will change in a few months when a major mortgage insurer will be quoting premium rates on my website. The quotes will cover both monthly premiums and single premiums financed in the mortgage, offering borrowers a choice they do not now have. Until then, however, PMI will remain "unshopable."

Appraisal: On most mortgage loans, lenders require that the property be appraised in order 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 or deed of trust, 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.

State and local transaction taxes: These taxes may cover the mortgage transaction, the property transaction or both. They vary greatly from jurisdiction to jurisdiction, but are never negotiable. They are what they are.

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 -- the U.S. Department of Housing and Urban Development 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?" on my website.

Keep in mind that the escrow deposit continues to be your money, can be used only to pay your debts, and any unused portion will be returned to you when you pay off the mortgage.

Daily interest: Because mortgage payments are due on the first day of a month, regardless 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 percent and it is funded on April 16, which requires an interest payment for the 15 days until May 1. The daily interest is thus 0.05 divided by 360, then multiplied by 200,000. That equals $27.78. Multiply that total by 15, and you get: $416.70.

Why 360 days rather than 365? No justifiable reason. It is a self-serving convention of the industry that has never been challenged by regulators. It is of no interest to class-action lawyers because the amounts involved have been so small. Using a 365-day year in the example, the amount comes to $410.96, for a difference of $5.74.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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