First-Time Homebuyer’s Guide: Part 16
Closing costs, illuminated
Often the most challenging step of the mortgage for borrowers is the last one. Guaranteed Rate’s success is partly based on the transparency it maintains throughout the home loan process, and this is never more beneficial for customers than when they’re confronted with fees and costs at the closing table. Closing costs average around 2% of the home purchase price but can go as high as 5%.*
Lenders are required to supply you with a Loan Estimate three days after receiving your application to give you an idea of what your total loan costs will be. Three days before the scheduled closing, you’ll be provided a Closing Disclosure with the updated figures. These two documents will most likely differ due to any number of variables but the figures shouldn’t be too far apart. As a borrower you should ask as many questions as it takes to understand any differences, especially if they are significant.
Below are some common costs and fees you can expect to see upon closing and what they mean.
There are certain administrative costs that a lender assumes when processing a loan application. This fee can be paid separately before the loan closes or at the closing table with the rest of the costs.
Charged by a licensed appraiser, this fee is usually up to the buyer to pay though it’s not unheard of for the seller to pick it up. The appraisal, or final inspection, is a lender requirement to be certain that the sale price is an accurate reflection of the home’s fair market value.
Whether you retain a lawyer to review contracts and negotiate on your behalf, or you live in a state where a third-party attorney is required to oversee the transaction, you’ll pay for the services. Depending on the size and complexity of the purchase, legal costs can be realized by multiple parties, including the lender.
Some lenders will charge you to pull credit scores. They may be a separate line item or part of the application or origination fee.
This is a basic handling fee, and one of a few that typically figures into the Loan Origination fee (see below).
The lender will require that you protect the home against natural disasters, theft and other incidents. Flood insurance is often a separate policy from the main property insurance, and may or may not be required, based on location.
This is also known as the underwriting fee, administrative fee or processing fee, depending on the lender. The loan origination fee can include a number of different costs, including the lender’s underwriting, processing and closing costs.
If the down payment is below a certain percentage of the home’s sale price—twenty percent is the typical benchmark—the lender will likely require that you purchase private mortgage insurance (PMI).
Points, or loan discount
You may have an option to pay interest to the lender up front, thereby lowering the mortgage interest rate. If you pay one point at closing, that’s one percent of the loan principal, which will typically result in a .125% reduction to the rate. This will save money in the long run, but if you plan to move relatively soon it may not make sense.
Pro-rated property taxes will be assessed at the closing table. Depending on the size of the property, geography and time of year, this closing cost could vary greatly.
This fee can be paid by the buyer, seller or both parties. It reflects the cost associated with the government creating an official change of ownership.
FHA, VA and USDA
These fees are applied to borrowers with home loans backed by one of the three government entities. They’re called ‘insurance premiums’ by the FHA, and ‘guarantee fees’ by the VA and USDA.
This cost can be paid by either party to get an accurate assessment of lot size and dimensions.
To guard against claims made on the home after closing, it’s advisable to purchase title insurance at closing.
This fee is derived from the search that is performed to make sure there are no outstanding liens against the property and that the seller actually owns it.
In next week’s First-Time Homebuyer’s Guide…
Part 17: Mortgage escrow and five frequently asked questions
*Time, “How much will my closing costs be?” May, 2014.