If you're gearing up to buy a home, get your checkbook ready. You'll have to pay some extra expenses associated with your home loan. These expenses are called closing costs, and they can vary widely depending on a number of factors.
Closing Costs 101
Closing costs are the expenses your lender incurs in the origination of your new home loan. These expenses generally include the cost of your credit reports, application processing, property appraisals, loan origination fees, attorney’s fees and other fees.
Closing costs generally run between 2 and 3% of the amount you're borrowing from your lender. However, each state includes different fees and taxes in closing costs, so it's important to talk to your lender about how much you can expect to pay.
Good Faith Estimates (GFE)
Closing costs can quickly add up and push you way over-budget on your home purchase. That's why you should find out ahead of time how much you'll have to pay.
Ask your mortgage lender for a good faith estimate (GFE). Lenders are required to provide one of these closing costs estimates within three days of receiving your mortgage application. However, do not accept a verbal estimate - insist that they send it in writing and take time to read all the fine print. Ask plenty of questions about any fees you don’t understand or consult an attorney for further explanation.
Within 24 hours of closing, your lender will provide you with a HUD-1 settlement statement which outlines the exact closing costs. Compare this to your good faith estimate and do not be afraid to ask questions about specific items listed and the associated costs.
In addition to closing costs, you may have to cough up cash for a couple of other home loan expenses, including loan discount points and prepaid items. Loan discount points are fees a borrower can pay to a lender at the closing to lower their mortgage interest rate. If you so choose, you can "buy" points from your lender to bring down your interest rate. The cost of each point is equal to one percent of the loan amount. For example, for a $100,000 loan one discount point equals $1,000.
Each discount point you pay on a 30-year loan will typically lower your interest rate by only 0.125%. That means a 7.5% rate would be lowered to 7.375% if you purchase one point. Many borrowers feel that discount points are simply not worth the high price.
You should also consider the cost of prepaid items. Your lender will probably want you to set up what's called an escrow account, which is basically a savings account with your lender. When you pay your monthly mortgage payment, a certain amount of your payment will be deposited into this account. At the end of the year, when your property taxes and homeowner's insurance come due, your lender will make the payment out of your escrow account.
On the day of your closing, the lender will probably require you to set up an escrow account with about 9 months’ worth of taxes and two months’ worth of insurance payments. These expenses are called prepaid items, and you will have to pay for them out of your own pocket.However, these expenses will vary depending on your state and unique situation. If you are uncertain about how much you might have to pay at closing, talk to your lender.
For more information, please contact SOKOLICH REAL ESTATE at (201) 664-4444.