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 Juanita Pay Housing Costs?

On April 1 of next year, Juanita is purchasing a $210,000 house and has accepted the Third Universal Banks offer of a ten-year $174,300 loan with an interest rate of 5%. She has a gross annual income of $90,000 and is concerned about how much her one-time up-front costs and recurring monthly costs will be.

Shes received the following data and form, but shes not certain when she is to pay each costat closing, monthly, or both. Your task is to help Juanita 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 years worth of a cost, such as the houses 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 homeowners 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 17% down payment but will also require 2 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 $697 per year, but is distributed 12 times per year.
	Juanita has purchased a home warranty policy, which carries an annual premium of $480 and is paid 12 times per year, and a homeowners 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: $50
	Title search and deed recording fee: $375
	Loan origination fee: $1,050
	Title insurance policyLender: $420
	Mortgage payment (principal and interest): $1,852
	Appraisal and survey fees: $450
	Attorney fees: $1,000
	Home, termite, and radon Inspections: $525
	Title insurance policyHomeowner: $470
	Messenger and document fees: $235
	Property taxes on the house: $15,750 per year
	The property taxes and homeowners policy should be pro-rated.

	Amount Paid
Cost Incurred	At Closing	Monthly
Down payment	$	$0
Mortgage points		0
Credit report fee		0
Loan origination fee		0
Appraisal and survey fees		0
Attorney fees		0
Home, termite, and radon inspections		0
Title search and deed recording fee		0
Messenger and document fees		0
Title insuranceBank policy		0
Title insuranceHomeowner policy		0
Loan payments (P&I)	0
Mortgage insurance policy	0
Warranty insurance policy	0
Property taxes
Homeowners insurance policy
Subtotal	$	$
Less: Amount owed by seller		0
Total costs	$	$

Using the given information, what is the loan-to-value (LTV) ratio required by the Third Universal Bank?

120.48%

83.00%

17.00%

Juanitas total closing costs are of her mortgage, and her monthly costs are of monthly income.