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Real Estate News Letters
TWO DIFFERENT MORTGAGE OPTIONS
By Kim K. Steffan, Attorney
Copyright 2006
There are many choices for a mortgage loan for a new home or for refinancing an existing loan – local banks, mortgage brokers, on-line lenders,
balloon loans, etc. Here are two less common options that may interest you.
One is the Energy Efficient Mortgage (“EEM”), also called a “green mortgage.” This program began by Fannie Mae (backed by the U.S. Department
of Housing and Urban Development) in 1979; however, Fannie Mae hasn’t done a good job making either lenders or consumers aware of it.
In a green mortgage, borrowers can add up to 15% of the home’s value to their mortgage amount and use that money for energy improvements.
The green mortgage pays for energy upgrades during construction of a new home. It is also available to upgrade an existing home so that homeowners
can save money on their energy costs. To be sure the mortgage stays affordable, there is a rule that spending on energy improvements must save the
homeowner at least as much as the extra amount the purchase adds to the mortgage. For example, if the cost of upgrading a heating system adds $20
per month to the mortgage payment, it must save the homeowner at least $20 per month average on utility bills.
EEM borrowers get professional assistance deciding which energy improvements give the most “bang for the buck.” A trained energy inspector tours
the home to score its existing energy efficiency, and to explain where the biggest energy losses happen. The inspector suggests which energy
improvements will result in the most savings on energy costs.
There are two possible obstacles in getting an Energy Efficient Mortgage. One is that lenders may not be aware of the program, since Fannie Mae
has not promoted it. The other is that there is some additional paperwork to be done. Since mortgages are already paper-intensive, some lenders
may not be willing to do the additional paperwork for an Energy Efficient Mortgage. For more information on green mortgages, visit
www.energystar.gov and search for “mortgages.”
Another useful mortgage product is the “reverse mortgage.” Instead of the homeowner sending the bank a check each month on their mortgage, the
bank sends the homeowner a check each month. The amount of the loan balance owed against the home goes up incrementally with each payment sent
to the homeowner, so a reverse mortgage “eats into” and eventually “eats up” the equity in the home.
The purpose of reverse mortgages is to allow a homeowner with limited income but a lot of home equity to turn that equity into monthly income.
This is ideal for elderly persons with limited income but a house that is paid for, or for someone who becomes disabled but has a lot of equity
in their home. The loan balance, which keeps growing with each check sent to the homeowner, will be paid in full when the homeowner dies or sells
the home. If checks are paid to the homeowner long enough, of course, the mortgage balance will eliminate the homeowner’s equity. However, banks
are careful in their calculations. The lender sets the amount of monthly payment they make to the homeowner at an amount that will not run out
before the homeowner’s life expectancy. Many banks and lenders offer reversible mortgages. However, because they are not as common as regular
mortgages, you may have to ask some questions to locate the person at the bank or lender who handles reverse mortgages.
WHAT DO LAWYERS DO IN REAL ESTATE CLOSINGS?
By Kim K. Steffan, Attorney
Copyright 2003
Q: We have a real estate loan closing coming up. What does a lawyer do for the closing?
A: Believe it or not, this is a “hot topic” with the Federal Trade Commission (FTC). The FTC wants the N.C. State Bar
(which regulates the practice of law) to decide that lawyers are unnecessary in real estate loan closings and that lay persons can handle
closings. The State Bar, on the other hand, believes that many duties in closings are indeed part of the practice of law, and should be
performed only by licensed attorneys. I don’t know how that debate will end, but I can tell you what lawyers do when they close real estate
loans.
First, the lawyer performs a title search. A title search before buying property keeps you from buying “a pig in a poke,” and assures your
lender that they will have good title if they ever have to foreclose. Lenders usually will not do a mortgage loan unless they know there is
good title to the property. A title search typically looks at property records for the last 30-40 years. The idea is to be sure that previous
owners passed on good title to the current owner. The title search identifies prior mortgage loans that must be paid off. The search also
examines whether there are outstanding judgments or liens against the property or the property owner, or lawsuits pending that could result
in such judgments. Lawyers need to verify whether property taxes are paid current. Sometimes thorny questions arise, like whether all the
heirs were located and consented when estate property was sold.
After the title search, the lawyer writes a “title opinion” to certify that the owner has good title. Most banks require title insurance,
and lawyers arrange for it. Title insurance protects the insured against “title defects.” Title defects include things like lien claims
that exist but have not been filed in court records, forgery in a prior deed, or incorrect legal descriptions in earlier deeds. If a lender
requires title insurance for the loan amount anyway, it is usually only a small additional expense to get coverage for the property owner
for the full value of the property. For that reason, most attorneys recommend title insurance coverage for property owners. Title insurance
is paid by a one-time premium from the loan closing.
Next, the lawyer prepares any special documents needed for that closing. If a client is refinancing his first mortgage, but wants to keep
his equity-line second mortgage open, the lawyer will prepare a “subordination.” That way the equity-line will still be second in line to
the new first mortgage. If a client is building a new home, she may need a driveway easement if her new driveway crosses someone else’s
property.
In most closings, an existing loan is being paid off and closed out. Lawyers obtain the correct payoff balance from the existing lender.
Before closing, the lawyer reviews the “loan closing package” sent by the new lender. The lawyer makes sure the documents are in order.
The lawyer may prepare a deed, note or deed of trust. A deed conveys property to the buyer. A note promises to re-pay the lender.
A deed of trust pledges the real estate as collateral for the note.
Then the lawyer prepares the “closing statement” listing the financial details of the closing – new loan balance, payments for old loans,
closing costs, seller’s proceeds, etc.
At the closing, the lawyer reviews the closing package with the client, explains the documents, and answers any questions the client may have.
It is important that the client be able to tell that the deal in the paperwork is the same deal his banker promised him. Then the lawyer
records the new loan documents at the Register of Deeds and disburses the loan funds.
With interest rates at record lows, many people are deciding to buy property or to refinance their current loan at a lower interest rate.
I hope this article helps to demystify the loan closing process.
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