By Dwayne Holt, Mortgage Lending Director
For home buyers, the term “closing costs” can seem like a mystery. It’s important to define closing costs and what they cover so you’re confident and comfortable as you complete your mortgage agreement.
First of all, there’s a difference between “closing costs” and “prepaid costs.” Prepaid costs represent your first real investment in your new property. This means paying upfront for homeowners insurance, property taxes and the interest on your loan from the date of closing until the first day of the following month. Taxes and insurance are unavoidable costs associated with home ownership and are frequently overlooked, resulting in unexpected additional expenses for homebuyers.
To help manage the budget, your lender can work with you to set up an escrow account, which will be part of your monthly mortgage payment. The escrow account holds a portion of each payment, then as costs like home insurance and property taxes come due throughout the year, your lender uses the escrow account to pay them for you.
Your lender should list these costs in a document called the Loan Estimate, which you should receive no more than three days after applying for the loan.
Closing costs, on the other hand, are the collected total of expenses to be paid on top of the purchase price when you complete your mortgage agreement (at closing). Closing costs can encompass several different types of services. As a purchaser, you should be able to differentiate between closing costs and prepaid costs at closing. In some cases, closing costs can be negotiated between you, the seller, and the financial institutions involved. If you are unsure, always ask for details on what your closing costs entail.
Following are some of the expenses you may see.
Loan Origination Fees
Loan origination fees are charged by some mortgage lenders for the creation of a loan and typically range from one-half of a percent to one percent of the mortgage amount. These fees can vary depending on the risk factor of the loan and the credit status of the borrower. If you provide a great deal of collateral and/or have a high credit score, the more negotiating power you have regarding these kinds of fees.
Discount points can be purchased up front to reduce the interest rate charged by the mortgage lender for the mortgage loan. This can be advantageous if you plan to stay in your home five years or more.
Appraisal fees cover a professional assessment of the home’s value. They’re generally required by lenders and the cost depends on the size and location of the property. Even if it’s not required, an appraisal is recommended so you know the property’s fair market value.
Title insurance is a type of indemnity insurance offered by title companies for losses resulting from defects in the title, such as liens, outstanding taxes, mortgages and violations belonging to previous owners. It’s paid as a one-time fee at closing and depending on the laws of the state, the cost could be the responsibility of the seller or the buyer.
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is a buyer’s closing cost for any home purchase using a conventional loan with a down payment less than 20 percent. PMI reduces the risk for the lender and allows the purchase to be made despite the low down payment. Fees vary from 0.3 percent to about 1.5 percent of the original loan amount per year, depending on the size of the down payment and the borrower’s credit score.
Recording Fees and Taxes
Local governments charge recording fees and taxes to officially document property sales. Also known as transfer taxes, the costs vary from state to state.
Additional costs depend on the state and municipality where the property transaction is taking place and can include services like title searches, surveys and notary fees. The mortgage process involves lot of details, and closing costs are an important consideration. As a purchaser, you should always feel comfortable asking for an explanation of what you’re paying for…so you can feel good about your new home.
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