When it comes to purchasing a house there is one thing that will shock a first-time home buyer more than anything, and that is the total cost associated with closing a loan. To be totally honest, closing costs can be quite earth-shaking to someone who isn't ready. If you are planning to buy a house anytime soon it is strongly recommended that you get your budget in order ahead of time.
If you would like us to review your situation and give you an estimate of what closing costs you may encounter, please feel free to contact us. If not, feel free to read the rest of the article!
Continued: Some of these closing costs are charged by the mortgage company itself, while others are payable to various parties. Here's a little breakdown on some of the fees you may be charged, and who's getting your money.
One of the first fees you're going to run into is the Application Fee. This is charged when you fill out your initial application (the 1003) and is non-refundable. This covers the costs your lender pays in regard to paperwork, or maybe even your credit report when you got pre-approved.
Next is the Loan Origination Fee, which is charged by the lender to cover all the costs that are associated with processing your loan. This also covers their administrative costs. This fee is generally charged to you in the form of "points", where one point equals one % of the amount you are planning on borrowing. So for example, if you are borrowing $150,000, one point is equal to $1,500.
There is actually a symbiotic relationship between "points" and the interest rate you obtain. It is possible to find a loan that charges little or no points, but you will see this reflected to you in a higher interest rate. You can also obtain a lower interest rate by paying extra points up front.
One fee that you will regularly encounter (and which is actually usually optional) is the home inspection fee. In the beginning phases of obtaining a home loan you will be advised to get an inspection for your new house, and it is a very smart move. Mortgages are often stopped dead in their tracks if you get as far as the appraisal and it turns out your foundation is destroyed, or if termites have infested the property.
Next on the list is the appraisal fee. Depending on what type of loan you are getting, your lender will more than likely require a new appraisal of the house before they fund your mortgage. This is done because the bank wants to make absolutely certain that the house you are buying is worth the amount you are paying for it. This fee is usually anywhere from $300-$500.
Some more of your closing costs will come from paying a premium for Private Mortgage Insurance (PMI). Mortgage insurance is paid to protect the lender in case you default on your loan, and if your down payment is less than twenty percent of the purchase price, you will be required to pay this premium no matter what. For closing, you will have to prepay a portion of this when you sign the final documents. The good news is, though, once you reach 20% of the value, the Mortgage Insurance is removed from your monthly payment automatically, saving you money!
Prepaid "per diem" interest is another fee you will encounter at closing. You'll have to pay this to cover the amount of interest that accrues from the time your mortgage is funded until you make your first payment.
The last few random fees you will see can be things such as messenger, recording, and notary fees. These are all commonplace and not at all unusual.
In conclusion, while all these costs may seem a little daunting, it is worth noting that they will be all listed out for you in an organized fashion when you get to your closing and are ready to sign. A good loan officer will notify and explain to you about all these costs beforehand, so you should have a good idea of how much money to bring to closing, and what all your cash is going towards. Soon enough you will be done with the paperwork and ready to move into your new home!
If you have any questions about closing costs, don't hesitate to CONTACT US and we can explain it to you in even better detail!
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