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For many of us, buying a home is the culmination of the ultimate dream.
But if anything can be learned from the housing crisis of the past few years, it's the importance of making sure you can afford to make that dream a reality.
It's best to understand all the costs involved with buying a home – from the monthly payments of principal and interest, taxes, and insurance, to the mortgage costs. These mortgage costs, known as closing costs, are the fees involved for the lender to give you the money you need to purchase the property. To help you understand closing costs, we've put together answers to these frequently asked questions.
What are closing costs?
Closing costs include the cost of transferring ownership of a house. These costs do not include the purchase price of the home. Rather, they are the fees and expenses aside from the purchase price. Typical closing costs are detailed below.
What are the specific types of fees involved with closing costs?
Some common types of fees include:
- Appraisal fee
- Credit report fee
- Recording fee
- Title insurance
- Loan discount points
- Attorney's fee
In addition, lenders require you to prepay certain items at the time of closing. This might include prepaid interest, homeowner's insurance and property taxes.
How much are closing costs?
The important thing to note is that closing costs vary based on certain factors, including where the home is located and the amount of the mortgage you are seeking. Closing costs also can vary from lender to lender, so it's important to compare costs before making a mortgage decision. Typically, closing costs make up 3% to 5% of the amount of your mortgage. Using this example, if you were looking for a mortgage of $200,000, your closing costs could run between $6,000 and $10,000.
What are loan discount points?
Points are up-front fees you pay for obtaining a mortgage with a lower interest rate. One point equals 1% of the mortgage loan. So, a $200,000 mortgage with two points would mean you have to pay $4,000 in points. That is in addition to other closing costs described above. Usually mortgages are offered with different combinations of points and interest rates. If you are planning on keeping the property (and the mortgage) for the entire term of the mortgage, it may be advantageous to pay points for a lower interest rate. However, if you think you may move in a relatively short period of time, it might be to your advantage to look for a no-points mortgage with a higher interest rate.
But you also want to decide whether you want to invest that cash in immediate home improvements or appliance purchases. Contact your financial institution to run through several scenarios to determine which is right for your situation.
Do you have to pay points?
No. Many lenders offer mortgages with zero points. The general rule is that if you want a lower mortgage rate, you're better off paying the points up front. And the more points you pay, the lower your interest rate would be. You can choose a zero-point mortgage, but the rate will be higher.
If you don't pay points, do you still have to pay closing costs?
Yes, points are separate from other closing costs, including the appraisal fee, credit reports, attorney's fee, etc.
How can you pay for closing costs and points?
Because of the high costs of closing, lenders will allow you to roll them into the mortgage loan. So if you have $9,000 in closing costs on a $300,000 loan, you can take out a mortgage for $309,000, thereby spreading the closing costs over the life of the loan. But consider how much you'll pay on that $9,000 over the life of your mortgage. Over 30 years at a 4.86% APR, the $9,000 in closing costs would cost $8,118 in additional interest.
How can you get a more specific estimate of closing costs?
The Real Estate Settlement Procedures Act, or RESPA, requires that mortgage lenders give you a good-faith estimate of all the loan-related fees you are likely to pay at closing. They must give you this estimate close to the time of loan application. Keep in mind, however, that these are just estimates. Actual closing costs may be more than the good-faith-estimate closing costs.
In addition, many lenders offer closing cost calculators online that can give you an estimate of what you will pay.
Source: American Heritage Bank
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