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 Michael Pay Housing Costs?

On April $1$ of next year, Michael is purchasing a $$195,000$ condominium and has accepted the Tenth National Bank$$s offer of a ten$-$year $$159,900$ loan with an interest rate of $5\%.$ He has a gross annual income of $$120,000$ 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 Michael 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 condominium$$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 $2$ points. Mortgage insurance is required if the loan$-$to$-$value $($LTV$)$ ratio is less than $20\%.$

$$ A private mortgage insurance $($PMI$)$ policy, if necessary, is expected to cost $$640$ per year, but is distributed $12$ times per year.

$$ Michael has purchased a home warranty policy, which carries an annual premium of $$480$ and is paid $12$ times per year, and a homeowner$$s insurance policy, which costs $$1,950$ 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$

$$ Title search and deed recording fee: $$390$

$$ Loan origination fee: $$900$

$$ Title insurance policy$$Lender: $$375$

$$ Mortgage payment $($principal and interest$)$: $$1,699$

$$ Appraisal and survey fees: $$600$

$$ Attorney fees: $$975$

$$ Home, termite, and radon Inspections: $$575$

$$ Title insurance policy$$Homeowner: $$450$

$$ Messenger and document fees: $$315$

$$ Property taxes on the condominium: $$14,625$ per year

$$ The property taxes and homeowner$$s 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 insurance$$Bank policy

$0$

Title insurance$$Homeowner policy

$0$

Loan payments $($P&I$)0$

Mortgage insurance policy $0$

Warranty insurance policy $0$

Property taxes

Homeowner$$s 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 Tenth National Bank?

a$-121\mathrm{.}95\%$

b$-82\mathrm{.}00\%$

c$-18\mathrm{.}00\%$

Michael$$s total closing costs are $(36\mathrm{.}21\%$ or $27\mathrm{.}17\%)$ of his mortgage, and his monthly costs are $(31\mathrm{.}74$ or $19\mathrm{.}85$ of monthly income.