Home Closing Costs: What Should You Expect to Pay for
When Buying a Home?
You know there are home closing costs. All the ads refer to 'no closing costs' or 'low
closing costs', but if you're a first time home buyer, chances are that you have no
idea exactly what those closing costs pay for, or how much they are.
When you buy a house, 'home closing costs' refers to all the items that you need to pay
for before you actually take possession of the property. When you apply for a loan
for a mortgage, your lender is required to prepare what's called a 'good faith estimate'
of the closing costs that you can expect to pay in an itemized list. The good faith
estimate will include all the costs that they believe you'll be liable for, based on
their own experience in dealing with the sale of real estate. Many of those costs
will be one-time fees or charges, but some of them will be your first payment on
recurring charges like taxes and insurance.
While the estimate is generally prepared by your lender, not all the fees associated
with closing are charged by the company granting you your mortgage. Some will pay
the escrow agent, some will pay your taxes, and some will pay your insurance, or
cover the costs of inspections and the like. Below is a list of home closing costs that
you may encounter, and what they're for. Your lender can give you a better idea of
what the general charge is for those fees.
Escrow Costs
An escrow agent will assist you in finalizing the arrangements for your new home
purchase. He may draw up a contract regarding your deposit, safeguard the money
and keep track of all the tasks that need to be done in preparation for the transfer
of ownership from the current owner of your new house to you. In return, he'll charge
a fee that ranges from a few hundred to a thousand or so dollars depending on what
tasks he performs and what part of the country you live in.
Points
You already know that you pay interest on your mortgage loan. That interest payment
is built into your monthly mortgage payment. Some lenders will allow you to pay part
of that interest up front in the form of 'points'. Each point is equal to about 1%
of the total amount of your loan, and can lower your starting interest rate by as
much as 1%. The way each lender handles points can vary, so be sure to check with
your lender to see whether or not you can purchase points, and what the effect will
be on your monthly payments and the overall cost of your loan.
Private Mortgage Insurance (PMI)
Another term that you might have heard in reference to mortgages is PMI. PMI stands
for private mortgage insurance, and many lenders insist on it. Depending on your state
and the type of loan you're taking out, it may not factor into home closing costs, though.
Essentially, PMI is an added assurance to the lender that if you default on the mortgage,
they'll still get their money.
Other home closing costs that you may run into include appraisal fees, credit report fees
and lender's inspection fees. A lender may also charge you for a Tax Service Fee to
monitor tax payments on your property and be sure that they're paid when due. Again,
this is a measure to protect their investment in your property, since tax liens usually
take precedence over a first mortgage. A lender may also add document drawing fees,
underwriting fees and administrative fees to the closing costs of your mortgage, but
it's difficult to estimate what those fees would add to your closing costs as the
charges vary so widely from lender to lender.
Besides the charges levied by your lender, there are other possible closing costs
that you may be liable for.
Prepaid Interest
Since most mortgage payments are due on the first of the month, and sales can close on
any day of the month, you may have to pay up to a month's worth of interest on your loan
as part of your closing fees. If you close on the 12th of the month, for instance, you
may have to pay 18 days of interest to bring your loan current as of the first of the
following month.
Escrow or Impound Account
If you made a minimal down payment, the bank may require that you pay a certain amount
into an impound or escrow account to assure the lender that there is enough money to pay
your taxes and property insurance.
While home closing costs can take a hefty bite out of your budget, there are ways to reduce
those costs. You can shop around for a lender that offers no closing cost loans, or - if
you're buying a house with a 'motivated' buyer, it's possible to negotiate with them to
pay the closing costs for you.
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