A California Mortgage is a Deed of Trust
What is a Deed of Trust?
When you borrow money to buy a home, the lender records a legal instrument at a county office. That instrument is called a deed of trust, not a mortgage. We use the term mortgage, because it’s the word in common use. There is a technical difference: A deed of trust gives the trustee (often a title company) the right to sell your property, without court approval, if you fail to pay the lender on time (default). By contrast, a mortgage normally involves only a borrower and a lender, and often requires a more complicated judicial foreclosure proceeding if you default.
The cost of getting a loan
Every mortgage comes with several fees. Here are the common ones:
General Fees
The lender typically charges loan application fees (around $650 – $1300) to cover the cost of processing, underwriting, administering and drawing up the documents for your loan. And, if you make a low down payment, you’ll likely be required to purchase private mortgage insurance.
The lender will also require that you pay fees to various third parties – including the appraiser who confirms the value of your house, the escrow company that acts as the middle person in the transaction, the title insurance company that figures out whether the seller has the right to sell you the property free and clear, credit reporting companies, and so on.
These so-called closing costs typically add up to as much as 2%-5% of your purchased price. The fees can be added to your down payment money and paid at closing, or they can be folded in to your mortgage.
Points
Many lenders also charge a loan fee in the form of “points.” Each point is 1% of the loan principal. Points, too, can add up fast – 1% of a $400,000 is already $4,000. Lenders like to charge points because it’s often their main source of profit on your loan, especially if they immediately turn around and resell o the secondary market.
Not all mortgages come with points. But by choosing to a point or more up front, you can usually “buy down” your interest rate, for an overall savings in the log term. For example, you might be offered a 30-year fixed rate loan of $500,00 with two points ($10,000) at 4.75% interest, or the same loan with no points at 5.25%. The calculation is that a loan at two points allows you to pay $152.78 less every month at payment time. To find out how long it will take you to recoup your $10,000 investment, simple divide it by $152.78. You’ll see that it will take approximately 65 months to to equal your investment. After the 65 months, you’re looking at pure savings.
So before comparing points to interest, factor in how long you plan to own you house. The longer you live in your house (or pay on the mortgage) the better off you’ll be paying more points up front in return for a lower interest rate.
We will be continuing to cover various aspects of Real Estate Loans in California
