Taking the Confusion Out of Your Mortgage Closing Costs
Once you have found the house of your dreams the next step is to find financing for your purchase. In doing so you might be surprised by many closing costs involved in finalizing the deal. Such costs vary from state to state and lender to lender, but the important thing to know is that some costs can be negotiable and some are disputable. The fees involved in obtaining a mortgage loan are sometimes called junk fees. Some lenders will offer you a low percentage rate but with higher junk fees, so it is important to understand what these fees are so you can decide whether or not the loan is best suited for you.
What is of primary importance is to ensure you are dealing with a reputable loan officer who can provide you with client recommendations. It is not unheard of for hidden costs to be added into closing costs and disguised as something else. Your lender should provide you with a good faith estimate within three days of submitting a loan application. Review the items listed in the estimate carefully to ensure that they are, in fact, valid and attempt to negotiate some of the others. A good faith estimate will list all of the closing costs that are necessary to secure your home purchase. Also you will learn what your annual percentage rate is (APR). Some costs are generally included in the APR. Find out what these are. Lenders are required by law to disclose the interest rate and the APR which will help you when comparing loans. Because different lenders have different methods of calculating APRs it is difficult to be definitive in this area.
The following is a general picture of what some of the fees listed on a good faith estimate will consist of:
Loan Origination Fee
This fee is usually charged by a mortgage broker and by some lenders. It can vary depending on the amount of work involved in securing financing for you. If your credit is shaky then the lender may have to work harder to secure a loan for you. If your credit is excellent then you should expect a lower origination fee. This fee may be included in your APR.
This fee is usually collected up front to cover the cost of an appraisal and/or a credit report. Make sure that it is not excessive and find out if this fee is refundable if your loan application is denied.
Refuse to cover overhead costs incurred by the lender. It should be listed how much is being charged by the broker and how much is being charged by the wholesale lender. Make sure these amounts are not more loan origination fees in disguise.
Document Preparation Fees
While some lenders will charge separately for document preparation fees others will include this amount in the application fee or in the attorneys fees.
Points are paid upfront to obtain a lower interest rate on your mortgage. Each point costs 1% of the actual mortgage (example: 1 point on a $100,000 mortgage would cost 1,000). Paying points can be beneficial if you are planning on a long period of time to pay off your mortgage, since you will benefit from the lower rate. This fee may be included in your APR.
If you are putting less than 20% down as your down payment the lender may require you to purchase mortgage insurance. This is typically paid from an escrow account annually or in a lump sum at closing. This fee may be included in your APR.
A certain amount of interest may need to be paid to cover the gap between the date of your closing and the first of the month when the mortgage loan payment is due. It is therefore a good idea to try to schedule your closing toward the end of the month. This fee may be included in your APR.
Escrow Account Amounts
An escrow account is an account from which the lender will pay certain bills for you when they become due. A portion of your total mortgage payment is used to pay these bills.
The lender will divide the annual premium for your homeowners insurance by 12 and determine an estimated monthly amount to be paid each month. To start an escrow account for these payments a lender may ask you to deposit two months of premiums to fund the account.
In addition, you will have to deposit an amount to cover your share of property taxes for the balance of the year. This amount is based on what month you close and when the property taxes are due.
If you are required to pay mortgage insurance your lender may ask you to deposit at least two months into your escrow account.
Flood Certification Fee
Your lender will want certification as to whether or not the home you are purchasing is located in a federally designated flood zone.
This is also referred to as a termite inspection and will also cover items such as wood rot and water damage.
Your lender may require you to obtain a surveyor certificate if the previous one conducted on the property is outdated. You will receive a copy of the certificate, which outlines the parameters of the property.
Title insurance must be purchased to cover the lender and in most cases, the purchaser so that they have clear title to the property, free of any liens or claims. It can cover both the lender and the borrower against legal claims of ownership. It is usually paid for by the purchaser and the rate amount for the policy can be reduced if the property was owned for a short time by the previous owner and the company agrees to reissue the policy.
Your attorney will represent you and in most cases be present at and facilitate the closing. They typically collect all fees and pay the appropriate parties involved in the transaction their respective amounts. The attorney will also record information with the county and notarize the closing documents.