From the Editor:
 As
summer temperatures cool down, the refinancing discussions at many co-ops are heating up.
With rates at levels not seen since the early 1960s, refinancing underlying mortgages will
be a central topic for many boards this fall.
A key element in this discussion will be the cost of a new loan. Closing costs are
substantial, so co-op boards need a clear understanding of every cost. "Closing in on
Closing Costs" provides a quick overview of the main expenses involved in the
refinancing process and it offers guidelines for each expense, as well as some tips on
saving money.
I also want to draw your attention to the "Mortgage Masters" program on Page
4. I'm very excited by the overwhelmingly positive comments I've received from those
who've taken the course. "Very informative-and very professional," remarked a
recent graduate.
I extend an open invitation to other management firms to sign up. The course is free
and helps managing agents better understand the complicated process of refinancing an
underlying mortgage.
Once again, thank you for reading Co-op Financing Quarterly.
I hope your fall is both pleasant and colorful!
Patrick B. Niland
President
First Funding of New York
©1998 by Patrick B. Niland |
Closing
in on Closing Costs
As interest rates have plummeted, your board probably has been thinking more seriously
about refinancing your building's underlying mortgage. Since refinancing is such a complex
and time-consuming process, everyone's first question is: "How much will it
cost?" The answer to this question depends on the unique circumstances of your co-op.
However, closing costs-the actual out-of-pocket expense of finding, processing, and
closing a new underlying mortgage-often play the largest role in determining whether a
co-op enters the market before its existing loan comes due. Some refinancing costs depend
on the size of your new loan, and some do not; some are fixed, while others are
negotiable. Therefore, before you begin, it pays to know what's involved.
Refinancing costs fall into three main categories: "get ready" costs,
"up front" expenses, and "actual" closing costs. "Get ready"
costs include fees paid to your attorney, accountant, and managing agent for gathering and
analyzing all of your co-op's records in preparation for the refinancing effort. Never
skimp on these activities. Being well prepared before contacting lenders will pay big
dividends later on.
"Up front" expenses include any amounts which lenders collect in advance as
part of the application and underwriting process. For example:
- Application Fees ($250 to $2,500)-Few lenders collect pure
"application" fees. However, if collected, they are rarely negotiable and never
refundable.
- Good Faith Deposits (1% to 2% of the new loan amount)-Paid to lenders at time of
formal application to show serious intent. Rarely negotiable, sometimes refundable.
- Appraisals ($1,500 to $6,000)-Required by most lenders, except in extremely low
loan-to-value situations. Usually performed by an outside firm with a Member of the
Appraisal Institute (MAI) designation. Rarely negotiable, never refundable.
- Engineering Inspections ($500 to $4,000)-Not always required. Somewhat
negotiable.
- Environmental Reports ($500 to $3,500)-Almost always required. Be prepared to pay
for removal or remediation of any hazardous substances identified in the survey. Somewhat
negotiable.
- Credit Reports ($250 to $1,000)-Most lenders will check the co-op's credit
record. Not negotiable, not refundable.
Once your loan application has been approved, a commitment letter will be issued. Most
commitment letters include a list of documents and other information that must be supplied
prior to closing. Virtually all of this documentation will be assembled or prepared by the
co-op's attorney.
Once all of that legal work has been completed, a closing will be scheduled. At the
closing, the new lender will pay off the outstanding balance of any existing loan, as well
as the following expenses:
- Origination or Commitment Fees (0% to 2% of the new loan amount)-This amount is
somewhat negotiable and usually will be reduced by the amount of any good faith deposits
submitted earlier.
- Title Insurance (roughly $3 per $1,000 of new loan)-Every lender requires a new
title insurance policy covering the amount of the new loan. Since the fee comes from a
standard schedule, it is not negotiable. However, it often is possible to save some money
by updating the policy from your old loan.
- Prepayment Penalties-If you are refinancing an existing loan before its maturity,
you may owe a prepayment penalty. Call your current lender to verify. Sometimes
negotiable.
- Pay-Off Letter-The old lender will send a representative to your closing to pick
up a check for the outstanding balance on your old loan (unless those funds are wired) and
deliver a "satisfaction letter." They also will send a bill for $200 to $800 for
this service.
- Mortgage Recording Tax-In New York State, all mortgages that are recorded in the
county clerk's office are subject to a tax. This tax ranges from 1% in outlying areas to
2.75% on larger loans in the five boroughs of New York City. However, there is a provision
in the law that allows an existing lender to assign the old mortgage to the new lender.
Assignment transfers a credit for any taxes already paid on the old loan to the new
lender. Therefore, the new lender will collect mortgage recording tax only on the
"new money" advanced. No lender is required to assign or accept assignment.
Most, however, will do both.
- Survey-Most lenders will require a new survey of the property being used as
collateral for the new mortgage. Depending on the work involved, this might cost $300 to
$3,000. You can save some money by updating and recertifying your old survey.
- Legal Fees-Your co-op will be represented by an attorney and so will the lender.
As borrower, you get to pay for both. Each side's legal fees are somewhat negotiable
between a minimum of $2,500 (for loans up to $500,000) to $20,000 (for loans over $10
million).
- Searches and Recordings-Before closing your new loan, both attorneys will search
the public records for anything that could effect the integrity of the new loan, e.g.,
unsatisfied mortgages, mechanic's liens, unpaid taxes, building violations, easements,
etc. Further, the new lender will insist that all important documents be recorded in the
public records at the county clerk's office. For these two activities, expect to pay a
total of $500 to $1,000.
- Brokerage Commissions-If your co-op retains the services of a mortgage broker to
arrange the new loan, you also will pay their fee at closing. Brokerage fees typically
equal 1% of the new loan amount, but often they are negotiable.
Lastly, most lenders will require that your co-op's property insurance be prepaid for
the entire year after closing. They also will collect one-twelfth of the annual total of
your co-op's real estate taxes and water and sewer charges for every month that has
elapsed since these items were last paid. They do this to establish an escrow account to
which they will add an additional one-twelfth every month. This escrow account will allow
the lender to continue to pay all of these items directly when they next come due.
As you can see, refinancing an underlying mortgage is a very expensive process.
Therefore, it should not be undertaken lightly nor without extensive preparation and
involvement by all the co-op's professional advisors. Nevertheless, a refinancing can
produce significant long-term savings if the process is completed properly.
Since closing costs add up quickly, it pays to get a detailed estimate before applying
to any lender. A co-op's professional advisors (attorney, accountant, managing agent, and
mortgage broker) can provide these estimates as well as other important information that
will help the board make an educated decision about when - or whether - to refinance. |
