Why is Title Insurance Important
The WHY, HOW and WHEN to Refinance
Why is
Title Insurance Important?
Title insurance plays a major role in making certain home
ownership is safe and secure. The Title Insurance Company protects against loss
due to any defect in title, and in the event a problem should arise, it's the
Title Company's obligation to provide legal support. A reputable Title Insurance
Company offers reliable purchasing information, insight into historic matters of
importance, and the security of a state licensed and regulated company.
How Does
it Work?
Unlike most material purchases, paying money for real estate and
receiving a deed to property does not assure the buyer of a free and clear
title. According to real property laws, once settlement is final, the buyer is
financially responsible for any valid claims made against his or her property.
This means that any unsettled matters involving the property and past owners
becomes the current owner's problem. For example, the property title may have
been transferred by a minor or someone who was legally incompetent. The
possibilities are endless. However, Title Insurance assures you that your
investment is secure.
One of the Title Insurance Company's main functions is to conduct a thorough
title search of the property, which is a review of all matters affecting the
state of ownership. The search also reveals tax information, right of ways for
power companies, and any unsatisfied liens or claims against the property.
However, sometimes the most careful investigation fails to disclose title
defects. For this reason, buyers purchase Title Insurance to protect themselves
and their mortgage company. Title Insurance is actually a package of two
separate policies, one covering the buyer and the other covering the lender.
How Much
Does it Cost?
The total basic rate amounts to less than 1/2 of 1% of the
property's purchase price. And although the premium is paid only once, at
settlement, Title Insurance continuously protects the owner or his/her heirs as
long as they own the property. There are no annual renewal payments needed to
keep your policy in force.
Why
should I use Conestoga?
At Conestoga, we realize how busy you are. And because we've
been in the title business for more than four decades, we know how to make the
settlement process go smoothly.
We do all the things you would expect of a capable Title Company. We search the
title, complete the paperwork accurately and on time, issue title commitments
and insurance policies promptly, and conduct settlements at the convenience of
the parties. We also provide notary and escrow services wherever needed, along
with all the other niceties that take the hassle out of the closing.
Beyond that, however, Conestoga Title Insurance Co. focuses on building lasting
relationships with professional credibility and integrity. We have the
experience, financial strength, and personalized service you can depend on.
We're local people making local decisions, just like you. And we'll work hard to
earn and to keep your confidence.
The
WHY,
HOW
and
WHEN
to Refinance
by John D. Maida,
Attorney-at-Law
copyright
1986, 1993, 1995, 2001 all rights reserved
As interest rates decline, many homeowners will consider refinancing their residence and investment real estate. Refinancing may not only generate immediate savings, but also may allow restructuring of debts and provide for other investments. This newsletter will address why, how and when to refinance.
Simply stated, money. The lower the interest rate, the lower is your cost for the money you borrow. As a rule, if the cost to refinance can be recovered in less than the time you anticipate owning the property, it is time to refinance.
Many lenders profess that when current interest rates are two percentage points or more below your present mortgage rate, it is time to refinance. This factor alone gives you reason to consider refinancing, but before doing so, you should first be certain that the cost to refinance can be economically recovered over the remaining term of the loan; that is, not the number of years left on your current mortgage loan, but the number of years you intend to continue to own the property to be refinanced. Consider the following example:
Joe and Jane Smith purchased their home is 1994 for $200,000.00, securing a mortgage of $160,000.00 at 9% interest to be repaid over 30 years. The Smiths home is now valued at $250,000.00 and they plan to move and build a new home in three years. Should they refinance their $160,000.00 loan at the present rate of 7%?
Various factors must be considered. Although the monthly savings may be substantial, the Smiths will incur considerable refinancing cost. Today's most common Lenders charge to refinance is 3% (usually called points) of the new loan amount, plus application, document preparation and other fees of generally hundreds of dollars. Lenders also require the borrower to obtain title insurance, the cost for which will vary depending on the title insurance company selected.
In our example, if the Smiths refinance their original loan with a new loan of $160,000.00, they may incur the following estimated cost:
Bank Charges* $ 4,800.00
Appraisal & Credit Report $ 300.00
Other Bank Fees $ 350.00
Title Insurance/Endorsements** $ 1,128.30
Notary Fee $ 15.00
Recording new Mortgage $ 47.00
Satisfying Old Mortgage $ 20.50
TOTAL: $ 6,660.80
(*These charges may be called "commitment", "origination", "discount" charges, but they are generally referred to as points, with one point being equal to one percent of the new mortgage loan.)
(** This charge may vary substantially, and as such a prudent Borrower will shop around, not simply select the Lender’s recommended Title Agency –)
To justify refinancing, this cost of $6,660.80 must be recovered over the life of the new loan. In other words, the Smiths, having decided to sell their present home in three years, have only 36 months in which to recover these costs. By dividing the closing cost ($6,660.80), (which your lender must estimate at time of application) by the number of months the Smith’s will remain in the home (36), the result of $185.02 (the “threshold amount”) is then simply added to the new monthly mortgage principal and interest payment of $1,064.48, to determine if the refinancing is justified. (Please note, do not add in escrow deposits paid to the Lender for insurance and taxes in this calculation, as they should generally be unaffected by the transaction.) If the resulting amount ($185.02 + $1,064.48), in this example $1,249.50, is less than the Smith’s current mortgage payment (principal and interest only), it is time to “consider” refinancing. If it is more, refinancing is not advisable.
In our example, the monthly cost of the old mortgage is $1,287.40 (principal and interest only); whereas, the new monthly mortgage cost will be $1,249.50. Therefore by refinancing, if the Smith's remain in the property for three-years as planned, they will reduce their payments by $37.90 per month or $1,364.40 over the remaining life of the loan.
In the example however, one must not overlook other factors. The Smith's by refinancing the 1994 mortgage loan of $160,000.00, must now pay out some of the cost for the new loan of $160,000.00 since the remaining balance of the old loan to be paid off at closing of the new loan would be $155,467.75, thereby leaving only $4,532.25 to be applied against these cost. The remaining balance of $2,128.55 ($6,660.80 - $4,532.25) will therefore be needed to close the loan. The Smiths may secure this sum by increasing the new loan by a similar amount, that is borrowing $162,150.00, in which case the new mortgage payment would increase each month by $14.30, as a result of which the “true savings” over the remaining three-year life of the loan is only $849.60.
Although the example indicates how the true savings by refinancing are determined, the Smiths may have other reasons to refinance. If they need the down money for the new home, they may consider now refinancing 80% of the current value of their home, or $200,000.00 as opposed to $160,000.00, as a result of which they will have immediate use of an additional $40,000.00 for this or other purposes. In this case their new monthly mortgage payment will increase by $266.12 (to $1,330.60), but this sum is mostly interest, and the interest may be fully tax deductible, meaning Uncle Sam will pick up on average about $74.00 of this interest cost by way of allowing the Smiths’ a mortgage deduction. Furthermore, the additional funds may be used to pay off other debts, such as car loans or credit cards which often charge higher interest rates, and on which the interest is not tax deductible. The funds may even be invested in the stock market or other instrument the Smith’s believe will return to them a sum greater than the 7% per annum they are paying for the loan.
As with the stock exchange, the commodities market and most other forms of investment however, real estate values are affected by interest rates and the economic condition of the country. Many homeowners will refinance now if they foresee a rise in interest rates at a later date, others may wait and gamble on a further fall in rates. The decision of when to refinance is therefore up to you.
Whether you are buying or refinancing, the loan process is to a great extent fairly similar for all Lenders.
You must therefore first determine the costs, which sum Lender must estimate for you. Consider not only the interest rate, but also the points and all other charges associated with the loan and the funds necessary to pay off your present loan. Ask your lender to compare these expenses for the various loan products they offer, e.g. a zero point or 5/25 loans. Keep in mind there are no different grades of money—but there are many different loan products. Therefore, the cost to you and the reliability, service record and reputation of the Lender with whom you are dealing must be your greatest concern. Be sure to select a loan and Lender that you find best suits your financial situation and will best service your needs.
Once you have selected a loan product and Lender, it's time to order title insurance. The premium for title insurance is your expense, so seek the best service and rates. Regardless of what many are told or may believe, title insurance rates and services are not all the same. In most cases, the selection of a title company and agency is yours - so choose wisely.
When all factors set forth herein have been considered and tell you: "I will save by refinancing" or "By refinancing, I can use the equity out of my home for other worthwhile purposes"-- it is time to refinance.
Call REAL ESTATE SERVICE GROUP at 610-275-2100 first for all of your the title insurance needs.
John D. Maida, Esq. is a Pennsylvania attorney with over 25 years of real estate and title experience. Author of a Practical Guide to Buy and Sell Real Estate and Save, he has also published many newsletters and articles on real estate and orchestrated seminars for various professional groups, including the Pennsylvania and Montgomery County Bar Associations and the American Institute of Bankers, Valley Forge Chapter. He is also licensed real estate broker, graduate accountant, and a title agent for Conestoga Title Insurance Company, trading as Real Estate Service Group