Question

When Should Melissa Pay Housing Costs?

On April 1 of next year, Melissa is purchasing a $210,000 house and has accepted the Third Universal Bank’s offer of a ten-year $178,500 loan with an interest rate of 10%. She has a gross annual income of $70,000 and is concerned about how much her one-time up-front costs and recurring monthly costs will be.
She’s received the following data and form, but she’s not certain when she is to pay each cost—at closing, monthly, or both. Your task is to help Melissa by completing the form and classifying the costs. Hint: Remember that the purchase is expected to close on the first of April. This means the following:
• Although a year’s worth of a cost, such as the house’s property taxes, may be owed by the home buyer, a portion of the total cost will be paid by the seller.
• A portion of a cost, such as the homeowner’s insurance premium, may be deposited into an escrow account so that the accumulated funds will be available to pay the entire annual premium when it is due next year.
• For its mortgage, the bank will permit a 15% down payment but will also require 5 points. Mortgage insurance is required if the loan-to-value (LTV) ratio is less than 20%.
• A private mortgage insurance (PMI) policy, if necessary, is expected to cost $714 per year, but is distributed 12 times per year.
• Melissa has purchased a home warranty policy, which carries an annual premium of $480 and is paid 12 times per year, and a homeowner’s insurance policy, which costs $2,100 per year. Premiums for these two policies are paid to the respective insurance companies from an escrow account at the bank.
• Credit report fee: $85
• Title search and deed recording fee: $420
• Loan origination fee: $900
• Title insurance policy—Lender: $375
• Mortgage payment (principal and interest): $2,355
• Appraisal and survey fees: $600
• Attorney fees: $1,050
• Home, termite, and radon Inspections: $575
• Title insurance policy—Homeowner: $450
• Messenger and document fees: $315
• Property taxes on the house: $10,500 per year
• The property taxes and homeowner’s policy should be pro-rated.

Answer 1

Step-by-step explanation:

To help Melissa classify her costs and understand when they should be paid, let's break down the costs into categories and determine when they are due:

1. **Up-Front Costs (Paid at Closing):**

- Credit report fee: Paid at closing - Up-Front.

- Title search and deed recording fee: Paid at closing - Up-Front.

- Loan origination fee: Paid at closing - Up-Front.

- Title insurance policy—Lender: Paid at closing - Up-Front.

- Appraisal and survey fees: Paid at closing - Up-Front.

- Attorney fees: Paid at closing - Up-Front.

- Home, termite, and radon Inspections: Paid at closing - Up-Front.

- Title insurance policy—Homeowner: Paid at closing - Up-Front.

- Messenger and document fees: Paid at closing - Up-Front.

2. **Mortgage-Related Costs:**

- Mortgage payment (principal and interest): Paid monthly.

- Private Mortgage Insurance (PMI): Paid 12 times a year, included in the monthly mortgage payment.

- Points: Paid at closing - Up-Front.

3. **Property Costs:**

- Property taxes on the house: Paid annually, but Melissa's portion will be pro-rated at closing. A portion is paid at closing, and the rest is typically paid monthly into an escrow account.

4. **Insurance Costs:**

- Homeowner's insurance premium: Paid annually, but Melissa's portion will be pro-rated at closing. A portion is paid at closing, and the rest is typically paid monthly into an escrow account.

- Home warranty policy premium: Paid 12 times a year, included in the monthly mortgage payment.

In summary, Melissa will have some up-front costs paid at closing, and some recurring costs that are paid monthly. Additionally, the property taxes and insurance premiums are typically pro-rated at closing, with a portion paid then and the rest paid monthly into an escrow account.