3. The benefits and costs of home ownership - Part 2 How Should the Costs of Purchasing and Owning a Home Be Categorized? You can categorize the costs associated with home ownership according to whether they are paid at closing, or monthly throughout the life of the mortgage loan, or even after the home is paid off. Consider the following situation, and then complete the form that follows by entering the necessary data, classifying the costs according to whether they represent up-front, monthly costs, or both. Finally, answer the associated questions that follow. Note: Round all dollar amounts to the nearest whole dollar, and if no payment is necessary, record a zero (0) in the space. In case of deduction, enter the dollar amount without minus sign. When Should David Pay Housing Costs? On April 1 of next year, David is purchasing a $165,000 house and has accepted the Fourth Global Bank's offer of a ten-year $135,300 loan with an interest rate of 8%. He has a gross annual income of $70,000 and is concerned about how much his one-time up-front costs and recurring monthly costs will be. He's received the following data and form, but he's not certain when he is to pay each cost-at closing, monthly, or both. Your task is to help David 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 18% down payment but will also require 4 points. Mortgage insurance is required if the loanto-value (LTV) ratio is less than 20%. - A private mortgage insurance (PMI) policy, if necessary, is expected to cost $541 per year, but is distributed 12 times per year. - David 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 $1,650 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: $330 - Loan origination fee: $900 - Title insurance policy-Lender: $375 - Mortgage payment (principal and interest): $1,644 - Appraisal and survey fees: $600 - Attorney fees: $825 - Home, termite, and radon Inspections: $575 - Title insurance policy-Homeowner: $450 - Messenger and document fees: $315 - Property taxes on the house: $12,375 per year - The property taxes and homeowner's policy should be pro-rated. Amount Paid \begin{tabular}{|c|c|c|c|} \hline Cost Incurred & & At Closing & Monthly \\ \hline Down payment & $ & & $0 \\ \hline Mortgage points & & & 0 \\ \hline Credit report fee & & & 0 \\ \hline Loan origination fee & & & 0 \\ \hline Appraisal and survey fees & & & 0 \\ \hline Attorney fees & & & 0 \\ \hline Home, termite, and radon inspections & & & 0 \\ \hline Title search and deed recording fee & & & 0 \\ \hline Messenger and document fees & & & 0 \\ \hline Title insurance-Bank policy & & & 0 \\ \hline Title insurance-Homeowner policy & & & 0 \\ \hline Loan payments (P\&I) & & 0 & \\ \hline Mortgage insurance policy & & 0 & \\ \hline Warranty insurance policy & & 0 & \\ \hline \multicolumn{4}{|l|}{ Property taxes } \\ \hline \multicolumn{4}{|l|}{ Homeowner's insurance policy } \\ \hline Subtotal & $ & & $ \\ \hline Less: Amount owed by seller & & & 0 \\ \hline Total costs & $ & & $ \\ \hline \end{tabular} 18.00% 121.95% 82.00% David's total closing costs are of his mortgage, and his monthly costs are of monthly income