What else is involved?
When considering mortgages, there are two factors that determine the total cost of the loan — the interest rate and the costs associated with the transaction.
A prospective homebuyer should always consider the total cost of the loan by combining the interest rate and costs, and there are a few crucial questions you’ll need to ask when choosing a mortgage.
On Q Financial, Inc. Mortgage Consultants are well-versed at offering expert advice and competitive lending options for our customers with purchase loan or refinance needs.
When calculating your mortgage rate and figuring in associated costs, there are also settlement charges to consider which include closing costs and prepaids. Closing costs on a mortgage loan are non-recurring and are paid at closing. Prepaids such as interest, taxes, and insurance are recurring and paid each month as part of your mortgage payment.
Because prepaids have nothing to do with your mortgage rate or how your loan is structured, they aren’t important when considering your mortgage option. The most important factor is your interest rate and costs. Prepaids do affect your wallet, especially at closing, and could quite possibly be the most misunderstood settlement charges in the entire mortgage process.
Prepaid Interest: Prepaid interest varies depending on which day of the month you close your home loan. For example, when you purchase a property and you close on the 15th day of a 30-day month, you will pay approximately 15 days interest.
In this example, you won’t own the real estate or property until the 15th and, therefore, will only pay loan interest for the days you own it. Because the interest on mortgages payments are paid in arrears, you won’t directly pay a mortgage payment for the month after you receive your loan, since the interest due has already been paid.
When refinancing and possibly lowering your current mortgage rate, however, you will pay a full month’s interest. The prepaid interest works as explained in the purchase example above, but the rest of the month’s interest will be added to your old lender’s payoff. Therefore, you will pay a full month’s interest no matter which day you close on a refinance, and again because mortgage interest is paid in arrears, you will not directly pay the next month’s payment to the lender, since the interest due has already been paid.
Taxes and Homeowner’s Insurance: If you pay these items monthly as part of your mortgage payment, there are typically two months of the premium due at closing, in addition to any unpaid premiums. When refinancing, for example, if the insurance was paid three months ago, the new lender would collect nine months premium, plus an additional two months premium to have a two month reserve in your escrow account after they are disbursed to your insurance company. Therefore, on a purchase transaction, lenders take the full year premium, plus two months reserves, which again leaves two months reserves after disbursing to your insurance company. Check with your mortgage consultant as various county and state taxes are paid differently.