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Unit 1, Lesson 8
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Terms in this set (33)
documentary stamp
a tax attached to the deed in a real estate transaction
deed
a legal document used to transfer ownership
In Florida, the documentary stamp tax is charged for
both the deed & the mortgage
Documentary Stamp Tax on the Deed
The seller typically pays the documentary stamp tax on the deed
For example, in Florida, the seller is charged $0.70 for every $100 (or portion thereof) on the sale price of the house
To determine the tax on the deed,
1. Round the selling price up to the next $100
2. Then multiply that amount by 0.70/100 = 0.007
Regardless of whether a buyer pays cash for a house or uses financing, the seller is still responsible for the documentary stamp tax on the selling price
Documentary Stamp Tax on the Mortgage
The buyer typically pays the documentary stamp tax on the mortgage
In Florida, a buyer will pay $0.35 for every $100 (or portion thereof) of borrowed money
To determine the tax on the mortgage,
1. Round the amount borrowed up to the next $100
2. Then multiply that amount by 0.35/100 = 0.0035
Although the seller is usually responsible for the documentary stamp tax on the deed while the buyer is responsible for the documentary stamp tax on the mortgage,
who actually pays is open for negotiation; many times buyers & sellers will negotiate payment of this tax as part of the contract
The documentary stamp tax for the deed is based on
the selling price of the property
The documentary stamp tax for the mortgage is based on
the amount of the mortgage
The phrase "or portion thereof" indicates
the amount must be rounded up
mortgage points
other costs associated with a mortgage
What are the two types of mortgage points?
origination points & discount points (both are usually 1% of the cost of the loan)
Origination Points
Also called origination fees
Fees paid to the lender or mortgage broker for their services in securing a loan; these don't affect the interest rate on the loan
Discount Points
Can be thought of as prepaid interest
Reduce the interest rate & therefore reduce the monthly payment
Each discount point generally lowers the annual interest rate by 0.125% to 0.25%
The lender ultimately determines by how much to reduce the interest rate
When considering a mortgage, a consumer must consider
the type of loan, the interest rate, the length of the loan, & mortgage points
Mortgage Broker
Helps people find a loan
An intermediary between a borrower & a lender; the broker can provide buyers with several different loan products depending on a buyer's needs; this enables the buyer to consider numerous options
However, they charge a brokerage fee which varies from state to state & broker to broker
Some states limit brokers to a maximum brokerage fee; for example, in Florida, the maximum brokerage fee is $250 plus 10% of the mortgage
In some states, brokers charge between 1% & 5% of the loan amount; be sure to ask questions & be aware of your payment responsibilities when hiring a mortgage broker
Calculate Brokerage Fees
If a mortgage broker fee is $200 plus 3% of the loan, it means you must first multiply 0.03 by the amount of the loan, & then add the $200
Recall that by the order of operations you must multiply before adding
Closing
The final exchange in the sale & purchase of real estate
When closing the sale of property, some fees need to be divided between the buyer & seller
Some expenses and fees are prepaid for the year, & some are
paid at the end of the year
In finance, fees are said to be paid
in advance or in arrears
prorate
to distribute or allocate funds or expenses proportionally
Paying in advance means
the period of time being paid for has not yet occurred
Paying in arrears means
the period of time has already passed
When property transfers ownership,
certain expenses need to be prorated
Example of Prorating
To prorate means to distribute or allocate funds or expenses proportionally
If the buyer owns the house for 60 days out of the year, the buyer should pay 60/365 of the expenses, & the seller should pay 305/365 of the expenses
Multiplying the expenses by each fraction will divide the expenses proportionally
Interest on a Mortgage
In the US, mortgage interest is always paid in arrears; this means you're paying for a period of time that has already passed; for example, a mortgage payment on January 1 pays the interest for December
Suppose a buyer obtains a mortgage on June 15; the buyer's first mortgage payment won't be due until August 1; this payment on August 1 will pay the interest for July; but what about the interest owed to the bank for June 15 to June 30? at closing, the interest expense must be prorated for that portion of the month, charged to the buyer & paid to the bank
Interest on an Assumed Mortgage
An assumed mortgage is when the buyer is able to take over the mortgage from the seller
If the lender approves, the mortgage is transferred to the buyer & the buyer begins paying the monthly payments (there will most likely be an additional fee the buyer must pay the lender when assuming a mortgage)
Because mortgage interest is paid in arrears, the buyer will be paying interest for the time the seller owned the house
This interest expense for the assumable mortgage must be prorated; in this case, the interest expense is charged to the seller & paid to the buyer
Property Taxes
Can also be paid in arrears; however, some states require property taxes to be paid in advance
If the property taxes are paid in arrears, the buyer pays for the whole year, so the seller must reimburse or pay back the buyer
If property taxes are paid in advance, the seller pays for the whole year, so the buyer must pay the seller
At closing, it's important that the proration is calculated & charged to the correct party
Who Pays Closing Costs
Although the responsibility for payment is attributed to either the buyer or the seller, most closing costs are open for negotiation
In some cases, the seller agrees to pay all closing costs; in other cases, the buyer agrees to do so
Some contracts specify a dollar amount, such as "Seller will pay $5,000 toward buyer's closing costs"
Questions that Help to Calculate the Prorated Expenses
Who pays?
How many days?
How much per day?
What is the total?
Interest Rate Per Day on Property Taxes
Taxes paid in advance/days of the year/month
Prorated Mortgage Expense on Property Taxes
Interest rate per day x number of days that the buyer owned the house in that year
How to Calculate Prorated Interest
1. Find how many days of interest need to be paid
2. Multiply the annual interest rate by the amount of the loan to find the interest paid per year
3. Divide the interest paid per year by 365 to get the daily interest
4. Multiply the number of days by the interest per day to get the prorated interest amount
How to Calculate Prorated Property Taxes
1. Determine how many days the seller owned the house in the year
2. Determine how many days the buyer owned the house in the year
3. Divide the total property tax paid by 365 to get the tax per day
4. Multiply the number of days the buyer owned the house in the year by the property tax per day to get the prorated property tax amount
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