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Friday, January 10, 2014

Mortgage 101: What are closing costs?

Before beginning the home buying process, make sure you're aware of all the fees that are accompanied by a home mortgage.  

If you're new to the home buying process, you're probably concerned about two main things; your interest rate and your monthly payment. However, one expense that a lot of buyers forget about until the very end is closing costs.

Closing costs are just another way to describe the fees involved in a loan, usually associated by a third-party company.  Part of the fees are additional closings costs that the lender covers.  Because you are not required to pay any of the fees until you sign your papers at the closing table, those fees are called closings costs.

So what all do the closing costs consist of?

Typically, you plan on your loan closing costs to be somewhere between 2 to 5 percent of the home's sales price.  However, they can be more or less in certain scenarios.  These costs include:

  • Credit Report
  • Loan Origination, otherwise known as processing fees
  • Legal Fees
  • Appraisals
  • Title Insurance
  • Surveys
  • Escrow 
  • Recording Fees
  • Underwriting Fees
Besides these fees, borrowers have the option to increase their closing costs through discount points.  Discount points help to lower the mortgage's interest rate as well as the monthly payment, saving money over the life of the loan.  

Do I have to pay the closings costs or can I have someone else pay them?

In most cases, the buyer themselves will pay for their closing costs.  However, in some cases, other parties may pay a certain percentage of the costs such as the builder or Realtor on the transaction.  If this is the case, it must be written in to the sales contract when writing it up.  Most loan programs have stipulations on how much the buyer must contribute towards closing costs as well.  

How can I save for closing costs when I don't know exactly how much they will be?

The good news for home buyers is that lenders are required to provide a Good Faith Estimate (GFE) of the closing costs shortly after applying for a loan.  This document guarantees that the amount of costs you will have cannot deviate from the estimate by more than 105 percent on your final settlement statement.  

Keep in mind that closing costs are separate from your down payment, meaning that you need to account for both at the closing table.  Don't let yourself forget that because it could leave you in a very tough bind at closing.  

For additional information or questions about closing costs, please ask us by commenting below or call us directly at 800.461.4152.

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