(This post was written for another blog and posted well before the new Reg Z changes that took place 1/1/2010. The new ‘disclosures’ are even more fun!)
I’m often asked “why are all of these real estate loan disclosures so confusing?” The answer is pretty simple – even if it’s not what most people want to hear: Real Estate loans are just not simple, and no amount of disclosure will make them simpler.
To understand why this is you have to understand that on a real estate loan – especially a purchase real estate loan – you are doing more than just taking out a loan. In fact, for most 1st time buyers you are really doing 6 different things.
1) Purchasing the property – Cost associated with this part are: escrow fees, real estate agent fees (usually paid by the seller,) transfer taxes, and recording fees.
2) Assuring the adequacy of the property – Costs associated with this part are: appraisal fees, home inspection fees, pest inspection fees, etc.
3) Making sure you actually own the property when everything is done – Costs associated with this are: title insurance and surveys.
4) Setting up a system to make sure that the major ongoing costs of owning a home are taken care of – this would be establishing an impound account for the payment of future taxes and insurance payments. (Conventional loans with larger down payments do not require this.)
5) Purchasing insurance – this includes homeowners’ insurance, home warranties and possibly flood insurance and even earthquake insurance if desired.
6) Oh, and taking out a loan – these costs include: loan fees, processing fees, administrative fees, tax service fees, flood zone check fees, etc.
And as if doing 6 different things at once – possibly involving as many as 15 different entities – isn’t complicated enough, you also (usually) have two different real estate professionals putting together a contract that may be as long as a phone book for a small community (and about as exciting) negotiating just who is paying what. Could this get any more convoluted? Sure, but fortunately here in California lawyers are usually not involved in residential real estate transactions.
So what does all of this mean? Simply put – real estate transactions are not simple, and it would be wrong to expect them to be. This does NOT mean that they are so complicated that the average person cannot understand what’s happening – quite the contrary. If you are working with competent professionals you should be able to go through a real estate transaction with a reasonable understanding of every step of the process.
Next: Just what is an Annual Percentage Rate (APR)?