Home Loans 101

Helpful articles to help get you up to speed on the mortgage process.


 Overview of Mortgage Closing Costs

The mortgage process can be confusing for many people.  That’s why we’re here to help!  We get many questions about closing costs. Closing costs include all the additional fees that you will pay when you finalize your real estate transaction.  Some fees are required and others are charged by the lender for certain services performed.

What common charges are included in mortgage closing costs?
Those that are almost universal include appraisal fee, credit report fee, flood certification fee, recording fees and title insurance fee.  These fees are charged because these items are required for each loan, some by our regulators and some by the secondary market.  Credit reporting agencies charge for their reports, appraisers charge for their services as do all of the providers of the services or reports listed.  Lenders pass on the costs for each of these to borrowers.  Most lenders charge some or all of the following fees as well:

• Origination and Document Preparation Fees:  Fees charged by the lender to originate the loan. This covers the cost of staff and system time for putting a loan together and payment for legal documents that are needed such as deed, liens and disclosures. 

• Settlement or Closing Fee:  A fee paid to the title company for administering the loan closing.

Likely the most confusing costs that borrowers encounter when their loan is closed are fees needed in the escrow fund.  These are amounts that will be needed to pay property taxes and insurance when due. They are prorated depending when a loan is made, then additional amounts are added to monthly payments so that there will be sufficient amounts to pay the bills when they come due. For first time home buyers, one year’s homeowner’s insurance premium will be collected as will flood insurance if applicable.

All costs are to be listed in the Good Faith Estimate at time of application. Oregonians Credit Union charges an origination fee to cover our costs and discloses all individual third party fees but only charge the third party services actually used.  We do not mark up fees like many lenders. There are other fees that are common that are not listed here. 


 Escrows—Impounds—Mortgage Insurance Payments

Escrow, Impounds and PMI.  What are they?
You were approved for a home loan and you are told that the loan will close in escrow and you will need funds for impounds.  Your down payment is 10% and you are told private mortgage insurance (PMI) is required due to the loan to value.  What does it all mean?

Escrow
This is where an independent third party receives and disburses money and/or documents for the transacting parties. In Oregon, title companies generally perform escrow duties.  An escrow agent makes sure that funds are disbursed properly and that new owners are properly placed on deeds.

Impound Accounts
Escrow and impound are often used interchangeably when discussing funds collected each month with the mortgage principle and interest payment. 

Impounds are usually collected monthly by the lender in addition to the loan payment for property taxes, flood insurance, hazard (homeowner’s) insurance and mortgage insurance (PMI, if needed).  Loans that do not have at least a 20% down payment will require impounds for property taxes and insurances.   

Many borrowers that have at least a 20% down payment choose to pay these expenses monthly even though it is not required. By paying this way, the borrower doesn’t have to worry about coming up with those payments when the taxes and insurances are due. The mortgage lender pays these on behalf of the borrower.

Mortgage Insurance
The ‘traditional’ loan is one with at least a 20% down payment.  Loans for greater than 80% of a home’s value are considered higher risk.  Private Mortgage Insurance (PMI) is then required to help protect the lender in case of default.  Borrowers pay the PMI premiums in addition to the monthly payments.


 How Much Home Can I Afford?

For first-time home buyers, there are many things to take into consideration when deciding how much to spend on a home.  The following are some things to consider when researching how much home you can afford.

• Consider your current monthly housing expense.  A monthly mortgage payment includes monthly principle, interest, homeowners’ insurance premium, and property tax.  Depending on the percentage of your down payment on the purchase, the payment may include monthly mortgage insurance.  Additional insurance may be required if the home is in a special hazard zone such as a flood or earthquake zone.

• As a renter, utilities are often included in the rent.  These are the homeowner’s responsibility.  It is wise to check with the utility companies that service the home you are interested in to get an average cost.  The most frequent utilities are electricity, gas or oil, water, sewer, and garbage.  It is important to budget for these expenses.

• Next list your monthly debts such as student loans, credit cards, automobiles, auto and health insurance.  List your assets; funds for down payment, savings accounts, retirement accounts and investment accounts. 

• What is your net monthly income? The mortgage lender will ask for your gross income but keep in mind, social security taxes, income taxes and often health insurance and retirement deductions are taken from the gross.  The balance after the deductions is the net income which is used to pay debt, purchase basic needs and save for emergencies or vacations.  Will there be enough left over for savings, groceries and basic needs?

• Often a larger payment can be afforded, but will that leave you “house poor”? Remember that homes need maintenance and things will need to be replaced.  Be sure to have funds available for unforeseen expenses.

• Once you have determined how much of your monthly income can be used for a housing expense and down payment, you are ready to calculate how much of a loan you can afford. See below for helpful mortgage calculators.

Mortgage Calculators