Understanding Title Insurance

What is title insurance? Newspapers refer to it in the weekly real estate sections and you hear about it in conversations with real estate brokers. If you’ve purchased a home you may be familiar with the benefits of title insurance. However, if this is your first home, you may wonder, “Why do I need yet another insurance policy?” While a number of issues can be raised by that question, we will start with a general answer. The purchase of a home is one of the most expensive and important purchases you will ever make. You and your mortgage lender will want to make sure the property is indeed yours and that no one else has any lien, claim or encumbrance on your property. The Land Title Association, in the following pages, answers some questions frequently asked about an often misunderstood line of insurance - title insurance. What is the difference between title insurance and casualty insurance? Title insurers work to identify and eliminate risk before issuing a title insurance policy. Casualty insurers assume risks. Casualty insurance companies realize that a certain number of losses will occur each year in a given category (auto, fire, etc.). The insurers collect premiums monthly or annually from the policy holders to establish reserve funds in order to pay for expected losses. Title companies work in a very different manner. Title insurance will indemnify you against loss under the terms of your policy, but title companies work in advance of issuing your policy to identify and eliminate potential risks and therefore prevent losses caused by title defects that may have been created in the past. Title insurance also differs from casualty insurance in that the greatest part of the title insurance premium dollar goes towards risk elimination. Title companies maintain title plants, which contain information regarding property transfers and liens reaching back many years. Maintaining these title plants, along with the searching and examining of title, is where most of your premium dollar goes. Who needs title insurance? Buyers and lenders in real estate transactions need title insurance. Both want to know that the property they are involved with is insured against certain title defects. Title companies provide this needed insurance coverage subject to the terms of the policy. The seller, buyer and lender all benefit from the insurance provided by title companies. What does title insurance insure? Title insurance offers protection against claims resulting from various defects (as set out in the policy) which may exist in the title to a specific parcel of real property, effective on the issue date of the policy. For example, a person might claim to have a deed or lease giving them ownership or the right to possess your property. Another person could claim to hold an easement giving them a right of access across your land. Yet another person may claim that they have a lien on your property securing the repayment of a debt. That property may be an empty lot or it may hold a 50-story office tower. Title companies work with all types of real property. What types of policies are available? Title companies routinely issue two types of policies: An “owner’s policy” which insures you, the Homebuyer, for as long as you and your heirs own the home; and a “lender’s” policy which insures the priority of the lender’s security interest over the claims that others may have in the property. What protection am I obtaining with my title policy? A title insurance policy contains provisions for the payment of the legal fees in defense of a claim against your property which is covered under your policy. It also contains provisions for indemnification against losses which result from a covered claim. A premium is paid at the close of a transaction. There are no continuing premiums due, as there are with other types of insurance. What are my chances of ever using my title policy? In essence, by acquiring your policy, you derive the important knowledge that recorded matters have been searched and examined so that title insurance covering your property can be issued. Because we are risk eliminators, the probability of exercising your right to make a claim is very low. However, claims against your property may not be valid, making the continuous protection of the policy all the more important. When a title company provides a legal defense against claims covered by your title insurance policy, the savings to you for that legal defense alone will greatly exceed the one-time premium. What if I am buying property from someone I know? You may not know the owner as well as you think you do. People undergo changes in their personal lives that may affect title to their property. People get divorced, change their wills, engage in transactions that limit the use of the property and have liens and judgments placed against them personally for various reasons. There may also be matters affecting the property that are not obvious or known, even by the existing owner, which a title search and examination seeks to uncover as part of the process leading up to the issuance of the title insurance policy. Just as you wouldn’t make an investment based on a phone call, you shouldn’t buy real property without assurances as to your title. Title insurance provides these assurances. The process of risk identification and elimination performed by the title companies, prior to the issuance of a title policy, benefits all parties in the property transaction. It minimizes the chances that adverse claims might be raised, and by doing so reduces the number of claims that need to be defended or satisfied. This process keeps costs and expenses down for the title company and maintains the traditional low cost of title insurance. Article by CLTA

Which ARM is the Best Alternative?

How would you like a mortgage loan where you did not have to make the whole payment if you did not want to? Or would you like a loan with an interest rate about 1% below a thirty-year fixed rate mortgage and pay zero points? Or a loan where you did not have to document your income, savings history, or source of down payment? How would you like a mortgage payment of only 1.95%? You can have all that with the 11th District Cost of Funds (COFI) Adjustable Rate Mortgage. Sound too good to be true? Sound like a bunch of hype? Each statement above is true. However, it is also only part of the story and loan officers do not always tell you the whole story when promoting this loan. Other loan officers may try to scare you away from adjustable rate mortgages. However, once you become aware of all the details of the loan, it is an excellent way to buy the house of your dreams, especially when fixed rates begin to go up. ARMs in General Adjustable rate mortgages all have certain similar features. They have an adjustment period, an index, a margin, and a rate cap. The adjustment period is simply how often the rate changes. Some change monthly, some change every six months, and some only adjust once a year. Indexes are simply an easily monitored interest rate that moves up and down over time. Adjustable rate mortgages have different indexes. The margin is the difference between your interest rate and the index. The margin does not change during the term of the loan. So if you have an adjustable rate mortgage and you wanted to calculate your interest rate on your own, all you have to do is look up the index in the paper or on the internet, add the margin, and you have your rate. Indexes and the 11th District The “Prime Rate” you hear about in the news is one interest rate index, although it is very rare that mortgages are tied to this index. It is more common to find adjustable rate mortgages tied to different treasury bill indexes, the average interest rate paid on certificates of deposit, the London Inter-Bank Offered Rate (LIBOR), or the 11th District Cost of Funds. COFI ARM Index The 11th District Cost of Funds (COFI) is the weighted average of interest rates paid out on savings deposits by banking institutions in the 11th district of the Federal Home Loan Bank (FHLB), which is located in San Francisco. The 11th District includes the states of California, Nevada, and Arizona. The COFI index moves slower than the other indexes, making it more stable. It also lags behind actual changes in the interest rate market. For example, when rates begin to go up, the COFI index may continue to decline for a couple of months before it also begins to rise. The Margin and Interest Rates The margin on the COFI ARM typically ranges between 2.25-3%. Monthly Adjustments Sound Scary, but... Although you can get a COFI ARM with an adjustable period of six months, you can get a lower margin if you go for the monthly adjustment period. Since the margin plus the index equals your interest rate, the lower margin is an advantage and most people choose the monthly adjustment. Monthly adjustments sound scary to the uninitiated, but keep in mind that this is a slow moving index. Most other ARMS have an annual cap of 2% a year. Since 1981, when the FHLB began tracking the index, the most it has moved during any calendar year is 1.6%. So why get a higher margin just to get a rate cap that you probably will not use anyway? The“life-of-loan” cap for the COFI ARM is usually 11.95%. The most recent year that this cap could have been reached was 1985. Plus, most experts do not expect a return to the interest rates of the early 1980’s when interest rates were pushed up artificially to combat the inflation of the 1970’s. Make Only Part of Your Payment? This is the really interesting feature of the loan. You do not have to make the whole payment. Each month you get a bill that has at least three payment options. One choice is the full payment at the current interest rate. A second choice allows you to pay only the interest that is due on the loan that particular month, but does not pay anything towards the principal. Finally, the third option gives you the choice to pay even less than that and is called the “minimum payment.” The minimum payment when you start your loan can be calculated as low as 1.95%. Keep in mind that this is not the note rate on your loan, but just a way to calculate your minimum payment. Deferred Interest and Amortization Of course, if you only make the minimum payment each month, you are not paying all of the interest that is currently due that month. You are deferring some of the interest that is currently due on the loan so you will have to pay it later. The lender keeps track of this deferred interest by adding it to the loan and the loan balance gets larger. Neither you nor the lender wants this to continue forever, so your minimum payment increases a bit each year. The payment cap on the loan is 7.5%, which also has nothing to do with the interest rate. All it means is the most your minimum payment can increase from one year to the next is seven and a half percent. For example, if your minimum payment is $1000 this year, next year the most it could be is $1075. This continues each year until your payment is approximately equal to the payment at the full note rate. Just in case, there are fail-safes built into the loan. If you continue making only the minimum payment and your current balance ever reaches 110% of the beginning balance, the loan is re-amortized to make sure you pay it off in thirty years (or forty years, whichever option you chose). Every five years the loan is re-amortized to make sure it pays off within the term of the loan. Stated Income and Other Features Many COFI lenders allow Homebuyers with good credit to apply without documenting their income, assets, or source of down payment. Of course, you have to make a twenty or twenty-five percent down payment on your home purchase. This is helpful for self-employed borrowers or those who have jobs where it is difficult to document their income. Plus, some people just do not like the bother of supplying W2 forms, tax returns and pay-stubs. Anyway, it makes for a quick and easy loan approval. Sub-Prime COFI ARMs Some people have less than perfect credit and they are used to being charged outrageous rates for past problems. Some COFI lenders offer this same loan but have a slightly higher starting payment and a higher margin. The end result is that your interest rate would be about one percent higher. Who Should Get This Loan? Most people who get the COFI ARM are purchasing a home between $300,000 and $650,000, but it is not limited to that. It is a real favorite of those working in the financial industry and those with higher incomes. One reason these groups like this particular loan is because they consider any deferred interest to be an extended loan at a very attractive rate. By making the minimum payment, they can do other things with the money. Homebuyers whose income has peaks and valleys, such as self-employed or commissioned salespeople also like the loan, because it provides flexibility in the monthly payment. During a slow month they can make the minimum payment if they choose. Another reason borrowers like the loan is because it allows for tax planning. The borrower can defer interest payments and at the end of the year, analyze their tax situation. If it serves their tax interests, they can make a lump sum payment toward any interest that has been deferred and deduct it for tax purposes. Skipping the Starter Home or Move-Up Home If you’re buying a home with the intention of living in it for only a few years before you move up to a bigger home, the COFI ARM makes sense, too. With this loan and its low start payment you can often qualify for a larger home than you can when applying for a fixed rate loan. This allows you to skip the intermediate purchase and move up immediately to the home you really want, which makes more sense and saves you money. If you buy a home then sell it to move up to a bigger home, you are going to have to pay a REALTOR’S® commissions and closing costs. On a $300,000 house, this would be around $25,000. If you skip buying that home and buy the home you really want, you save that money. Plus, you save money in another way. Say you live in your intermediate purchase for five years, then move up and buy another home with another thirty-year mortgage. That is thirty-five years of home loans. If you buy your ideal home now, you save five years of mortgage payments. Depending on your loan amount, that can be a lot of cash. Conclusion So, when rates start going up this is an attractive alternative to a fixed rate mortgage. It even makes sense for some borrowers when rates are low. Something we also did not mention is that most COFI lenders also give you a fourth option on your monthly mortgage statement, which allows you to pay it off quicker.

Finding the Right Seller

The best seller is one who is highly motivated. A highly motivated seller is more likely to sell at a price that is less than his or her house is actually worth. And it matters that you find out why. Learning the reason why can help you get the price you want and help the seller get what they want: a timely sale. When given the opportunity to meet with sellers, ask them why they are selling. The reason could be anything, such as a job change to a new location or financial problems. If you can solve their problem, whether it is cash related or time related, do so. For example, if the sellers are highly motivated because they need to move quickly, give them a fast sale - and a lower price. If you can make an offer, even a low one, that gives them cash in a short time, they are more likely to accept. There are also some sellers that you should avoid. Not every seller is as genuinely motivated as they make themselves to be. Some possible hints: they stall on having the home appraised or inspected they are unable to clear up liens against their property they do not own 100% of their property they push back the move-out date they do not have a replacement property or back up plan etc. It is impossible to find the perfect seller. But it is possible to find out which sellers are legit and which ones aren’t.

Finding the Right Agent

Not all agents work the same way. The most important attribute of an agent is that he/she is well connected to the real estate industry. He/she should know the market and provide information on past sales, current listings, his or her marketing plan, and at least 4 solid references. In addition, you also want to look for an agent that is honest, assertive, and one that best understands your needs. Try to go with a local agent. They can better serve your needs because they should be more familiar with the local market conditions, local prices, and what’s hot or not in your community.