Deciphering Closing Costs
Shopping for the best mortgage involves more than just checking interest rates and loan terms. Many borrowers are surprised by the many additional costs involved in closing the loan.
Almost all closing costs relate to fees that the mortgage lender is charged by a third-party company and then passes on to the borrower. Some of the fees are additional costs the lender levies. Because these fees are all settled at the closing table, they are commonly referred to as closing costs.
Breaking down closing costs
Closing costs usually account for 2 to 5 percent of a home’s sale price, although they may be more or less in some cases. These costs typically cover:
Obtaining a credit report
Processing paperwork for the loan (loan origination fees)
Origination charges (for certain loan programs)
Title insurance (to learn more about title insurance, check out my blog)
An escrow deposit for taxes and insurance
Recording the transaction in the city or county’s records
Underwriting the mortgage (evaluating the borrower and the property)
Funding fees (for Veteran's loans)
In addition to these fees, home buyers may elect to increase their closing costs through discount points, which lower the mortgage’s interest rate and saves the borrower money over the life of the loan. Buyer's putting less than 20% down may also elect o pay their monthly mortgage insurance upfront, to lower their monthly payment.
Who pays closing costs?
In most cases, the buyer pays the bulk of the closing costs. In some cases, however, other parties may absorb a portion or all of these costs. For instance, if a home is purchased using a Veterans Affairs (VA) loan, then the seller will pay some of the closing costs, and the buyer will pay the remaining costs.
Some mortgage lenders advertise mortgages without closing costs. These may or may not be a good choice, depending on the specifics of the mortgage. Home buyers, however, should realize that any bank offering mortgages without closing costs will likely build those fees into the structure of the mortgage. Buyers (or sellers) will probably pay the fees associated with purchasing a house, one way or another.
A Helpful Tip: It is important to keep your lender in the loop on your budget for your home purchase, as they will take into account closing costs when pre-qualifying you. For example, if you tell your lender you have $25,000 total to put down, your lender should structure your loan with about $19,000-$20,000 as down-payment, and $5,000-$6,000 for closing costs to avoid going over your budget
Did you know? Your buyer's, seller's agent or the seller can contribute to your closing costs. You may ask your realtor if they can contribute 1% of their commission towards your closing costs.
Saving for closing costs
Home buyers should be aware of the closing costs they will be expected to pay because these fees can significantly increase the amount of money needed at closing. The good news is that lenders must provide a Loan Estimate (LE) of these costs shortly after the borrower applies for the loan. The law now states that the final settlement of the loan must not deviate from this estimate by more than 105 percent — and for some loan products not at all.
But, borrowers can still be surprised by the LE if they are not already planning to pay at least some closing costs.
A Helpful Tip: Your earnest money check, the deposit you made when you went under contract, will be used to cover your closing costs at closing!
Ask Your Lender: If there is an interest rate available that may cover your closing costs.
To see if you qualify for a mortgage refinance, pre-qualify at www.approvedbyjamie.com
Guild Mortgage Company is an Equal Housing Lender; Company NMLS #3274
The information provided herein has been prepared by a third party and has been distributed for education purposes only. The positions, strategies or opinions of the author do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.