By Ken Go
After saving for a down payment, house hunting and applying for a mortgage, closing costs can come as an unpleasant and stressful surprise. Knowing what closing costs cover and budgeting for them will smooth out the final stretch of the home-buying process. Let’s see how we can easily explain how to read and analyze closing estimated fee sheets.
What are closing costs?
Closing costs are the fees for the services and expenses required to finalize a mortgage. You will have to pay closing costs whether you buy a home or refinance. There are so called non-re occurring and Re-occurring fees. For those who are refinancing and a No Closing Cost Fees, that only pertain to the Non re occurring fees like your lender fees, escrow fees and title fees, I call them one-time fees. To get to a no cost loan, the lender will bump the rate slightly higher to cover your one-time closing cost. Therefore, understanding how to get a no cost loan is critical if your refinancing. The rest of the fees like your Property Taxes, Insurance and Loan Interest are called Re occurring fees because the homebuyers will have to pay them on a refinance regardless.
How much are closing costs?
Average closing costs for the buyer run between about 2% and 3% of the loan amount. That means, on a $300,000 home purchase, you would pay from $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 as a one-time expense. You may be able to finance them by folding them into the loan, if the lender allows, but then you’ll pay interest on those costs through the life of the mortgage.
When buying a home, you can comparison shop and negotiate some of the fees to lower your closing costs. Your lender is required to outline your closing costs in the Loan Estimate you receive when you first apply for the loan and in the Closing Disclosure document you receive in the days before the settlement. Review them closely and ask questions about anything you don’t understand.
Closing costs calculator
Here are the fees that the buyer’s closing costs can include:
Appraisal fee: It’s important to a lender to know if the property is worth as much as the amount you want to borrow. This is for two reasons: The lender needs to verify the amount you need for a loan is justified and make sure it can recoup the value of the home if you default on your loan. The average cost of a home appraisal by a certified professional appraiser ranges between $500-600.
Home inspection: Most lenders require a home inspection, especially if you’re getting a government-backed mortgage, such as an FHA loan insured by the Federal Housing Administration.
Application fee: This covers the cost of processing your request for a new loan and includes costs such as credit checks and administrative expenses. The application fee varies depending on the lender and the amount of work it takes to process your loan application.
Prepaid interest: Most lenders require buyers to pay the interest that accrues on the mortgage between the date of settlement and the first monthly payment due date, so be prepared to pay that amount at closing; it will depend on your loan size.
Loan origination fee: This is a big one. It’s also known as an underwriting fee, administrative fee or processing fee. The loan origination fee is a charge by the lender for evaluating and preparing your mortgage loan. This can cover document preparation, notary fees and the lender’s attorney fees. Expect to pay about 0.5% of the amount you’re borrowing. A $300,000 loan, for example, would result in a loan origination fee of $1,500.
Now a days, lenders don’t charge a loan origination nor discount fees unless your are getting a non conventional loan or Alternative Loan.
Mortgage insurance fees
Mortgage insurance application fee: If you make a down payment of less than 20%, you may have to get private mortgage insurance. (PMI insures the lender in case you default; it doesn’t insure the home.) The application fee varies by lender.
Upfront mortgage insurance: Some lenders require borrowers to pay the first year’s mortgage insurance premium upfront, while others ask for a lump-sum payment that covers the life of the loan. Expect to pay from 0.55% to 2.25% of the purchase price for mortgage insurance, according to Genworth, Ginnie Mae and the Urban Institute.
In addition to monthly premiums, the FHA requires an upfront premium payment of 1.75% of the loan amount.
Property taxes: Buyers typically pay two months’ worth of city and county property taxes at closing.
Annual assessments: If your condo or homeowners association requires an annual fee, you might have to pay it upfront in one lump sum.
If your condo or homeowners association requires an annual fee, you might have to pay it upfront.”
Homeowners insurance premium: Usually, your lender requires that you purchase homeowner’s insurance before settlement, which covers the property in case of vandalism, damage and so on. Some condo associations include insurance in the monthly condo fee. The amount varies depending on where you live and your home’s value.
Owner’s title insurance: You should also consider purchasing title insurance to protect yourself in case title problems or claims are made on your home after closing. The owner’s coverage lasts as long as you or your heirs own the property.
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. A discount is sometimes offered when both the lender’s and owner’s policies are purchased at the same time.
Mortgage closing documents
With so many closing costs to consider, it’s obvious you’ll face a lot of paperwork just prior to and during the loan signing. Two of the most important closing documents are the Loan Estimate and the Closing Disclosure.
You’ll receive the Loan Estimate three days after applying with a lender. It will officially detail all fees, the interest rate and the other costs to close your loan. It’s legally binding, so you’ll want to read it carefully.
Then, three days from loan settlement and prior to making the big commitment, you’ll 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 big cup of coffee and a thorough review.
Thanks for your inquiries, please call Ken Go of 1st Innovative Finance Group at 562-508-7048 CABRE 01021223 NMLS 238636