Loans, Mortgage documentation

[Dave Reed]

On Friday 25 July 2003 23:27, Jason Rennie wrote:
> lapham at extracta.com.br said:
> > The part I'm most interested in comments about is the mortgage part,
> > since I have no idea if it is setup correctly.  (are there other 
fees
> > besides closing costs?  How are closing costs calculated?) 
> 
> It's probably best to work with "closing costs" as a black box as 
you've
> done.  The average home user probably won't care to break down all the
> little expenses individually.
> 
> There are, however, a few items, "prepaids," that probably should be
> broken down.  The borrower always pays "prepaid interest" at closing,
> which is interest on the loan from the date of closing (or a few days
> after, depending on the jurisdiction) to the end of the month.  This
> should be filed as a mortgage interest expense.  If the loan is more 
than
> 80% of the value of the house, the borrower must usually escrow real
> estate taxes, and PMI (mortgage insurance), if applicable.  The tax 
escrow
> is usually around 1/4 of the yearly tax bill (e.g. 1/4 of $3000) and 
the
> PMI escrow is usually 2 months worth (e.g. 1/6 of 0.75% of the value 
of
> the home).  The examples are ball-park numbers from my personal
> experiences.  The escrows are, of course, assets, though quite viscous
> ones. :)
> 
> Also, I'd recommend that you do a monthly payment to show the parts of 
> the payment going to principal, interest and (if necessary) escrow and 
> PMI.
> 
> Oh, and "points" would be a good thing to discuss as many mortgages 
come
> with them.  One point is an extra 1% of the loan size that is paid to 
the
> lender.  I don't know how points are classified in terms of expense
> (whether they classify as mortgage interest).


I knew I shouldn't have replied late last night - I forgot points and
prepaid interest. Basically anything that affects taxes need to be
split out (which for the residential homeowner is points and
interest). Again, the HUD-1 form tells you this. The escrow issue may
be tricky. I don't escrow so I haven't thought through the
details. You'll probably want to keep track of the escrow amount and
then need to use your bank's statement to find out how much of the
escrow went to insurance and property taxes (since they can be an
itemized deduction).

Dave