Understanding mortgage closing costs
By Ken Go
After saving for a down payment, looking for a home, and applying for a mortgage, closing costs can be an unpleasant and stressful surprise. Knowing what closing costs cover and budgeting for them will make the last step in the home buying process easier. Let’s see how we can easily explain how to read and analyze the estimated closing fee sheets.
What are the closing costs?
Closing costs are the fees for services and expenses necessary to finalize a mortgage. You will have to pay closing costs if you are buying a home or refinancing. There are so-called non-recurring and recurring costs. For those doing refinancing and fees with no closing costs, which is only for one-time fees like lender fees, escrow fees, and title fees, I call them one-time fees. To get a free loan, the lender will increase the rate slightly to cover your one-time closing costs. Therefore, understanding how to get a loan without charge is essential if your refinancing. The rest of the fees, such as your property taxes, insurance, and interest on the loan, are called recurring charges because homebuyers will have to pay them when refinancing anyway.
How much are the closing costs?
The average closing costs for the buyer are between about 2% and 3% of the loan amount. This means that on a $ 300,000 home purchase, you would pay $ 6,000 to $ 9,000 in closing costs.
The most cost effective way to cover your closing costs is to pay them out of pocket all at once. You may be able to finance them as part of the loan, if the lender allows it, but then you will pay interest on these costs for the life of the mortgage.
When you buy a home, you can shop around and negotiate some of the fees to lower your closing costs. Your lender is required to describe your closing costs in the loan estimate you receive when you first apply for a loan and in the closing information document you receive in the days before settlement. Examine them carefully and ask questions about anything you don’t understand.
Closing costs calculator
Here are the costs that the buyer’s closing costs may include:
Property related costs
Appraisal Fee: It is important for a lender to know if the property is worth as much as the amount you wish to borrow. This is for two reasons: the lender must verify that the amount you need for a loan is justified and ensure that they can recover the value of the house if you do not pay off your loan. The average cost of an in-home assessment by a certified professional assessor ranges between $ 500 and $ 600.
Home Inspection: Most lenders require a home inspection, especially if you get a government guaranteed mortgage, such as an FHA loan insured by the Federal Housing Administration.
Application Fees: These cover the costs of processing your new loan application and include fees such as credit checks and administrative fees. Application fees vary depending on the lender and the amount of work required to process your loan application.
Prepaid Interest: Most lenders require buyers to pay interest accrued on the mortgage between the settlement date and the due date of the first monthly payment, so be prepared to pay this amount at closing; it will depend on the amount of your loan.
Loan origination fees: This is a big one. These are also subscription fees, administrative fees or processing fees. The loan origination fee is a charge by the lender for the evaluation and preparation of your mortgage. This can cover document preparation, notary fees, and lender’s attorney fees. Expect to pay around 0.5% of the amount you borrow. A loan of $ 300,000, for example, would incur a loan origination fee of $ 1,500.
These days, lenders don’t charge loan origination fees or discount fees unless you get an unconventional loan or an alternative loan.
Mortgage Loan Insurance Fee
Mortgage Loan Insurance Application Fee: If you make a down payment of less than 20%, you may need to purchase private mortgage insurance. (PMI insures the lender in the event of default; it does not insure the home.) Application fees vary by lender.
Initial Mortgage Insurance: Some lenders require borrowers to pay the first year’s mortgage insurance premium in advance, while others require a lump sum payment covering the term of the loan. Expect to pay 0.55% to 2.25% of the purchase price of mortgage insurance, according to Genworth, Ginnie Mae and the Urban Institute.
In addition to the monthly premiums, the FHA requires an upfront payment of 1.75% of the loan amount.
Property taxes: Buyers typically pay two months of city and county property taxes on closing.
Annual Reviews: If your condo or homeowners association charges an annual fee, you may need to pay it upfront all at once.
If your condominium or homeowners association charges annual fees, you may need to pay them up front.
Home insurance premium: Usually your lender will require you to purchase home insurance before settlement, which covers the property in the event of vandalism, damage, etc. Some condo associations include insurance in the monthly condo fees. The amount varies depending on where you live and the value of your home.
Homeowner’s Title Insurance: You should also consider purchasing title insurance to protect yourself in case of title issues or claims with your home after closing. Owner’s coverage lasts for as long as you or your heirs own the asset.
The cost of the owner’s policy is about 0.5% to 1% of the purchase price, according to the American Land Title Association.
Whether the buyer or seller pays for title insurance varies by region. Sometimes a discount is offered when the lender’s and homeowner’s policies are purchased at the same time.
Mortgage closing documents
With so many closing costs to consider, it is obvious that you will have to deal with a lot of paperwork right before and during the signing of the loan. Two of the most important closing documents are the loan estimate and the closing disclosure.
You will receive the loan estimate three days after you apply to a lender. It will officially itemize all the fees, interest rate, and other closing costs of your loan. It’s legally binding, so you’ll want to read it carefully.
Then, three days after the loan is settled and before you make the big commitment, you will receive the closing disclosure from your lender. It confirms – or makes minor adjustments to – what you saw on the loan estimate. Again, it’s worth a great cup of coffee and a thorough review.
Thank you for your inquiries, please call Ken Go of 1st Innovative Finance Group at 562-508-7048 CABRE 01021223 NMLS 238636