The dreaded closing costs! It’s easy to overlook these during the initial steps of the home buying process. You’re excited, you’ve made an offer, and all you’re thinking about is how much your down payment will be and what your monthly payment will be at the end of it all. Well, we’re here to help you avoid sticker shock when you finally get that Closing Disclosure in your hands.
HOW MUCH CAN CLOSING COSTS BE?
It’s important to keep in mind that closing costs can be anywhere between 2-5% of the purchase price of the home. This means that for a $300,000 house, you can expect to pay between $6,000 to $15,000 for closing. Keep this in mind as you’re saving up your cash.
WHAT IF I DON’T HAVE THE CASH TO COVER CLOSING COSTS?
You may be able to roll in your closing costs to the total loan, but by doing that you will pay interest on those costs throughout the life of the loan. The easiest way to save money in the long run is to have the cash up front to pay them out of pocket.
WHAT EXACTLY AM I PAYING FOR?
Within your Closing Disclosure, you will typically see two sections of closing costs. One section marked “Loan Costs”, and one section marked “Other Costs”. In this article, we will cover section one: Loan Costs.
A. Origination Charges – These include the Application, Processing, and Commitment Fees. In other words: fees that are charged by the lender in exchange for processing the loan. Depending on the company, lender fees can either be flat fees or a percentage of the total loan amount. Here at Family First Funding LLC, depending on the state that the transaction is taking place, we typically charge flat fees. If your lender charges fees by percentage, this can be anywhere between 0.5% – 1% of the total loan amount. Other origination charges include optional prepaid interest points (also called mortgage points or discount points by some lenders). By paying down these points upfront, you receive a lower interest rate in exchange. Points can be bought down in increments starting at 0.125% (1 point = 1% of the loan amount).
B. Services You Cannot Shop For – These include fees that are charged by third parties and that are passed along through your lender. These typically include appraisal, flood certificates, tax service fee, and credit report. Appraisals can vary between $200-$600 depending on the size and type of home being appraised. Credit report fees are charged per loan applicant and can vary depending on how many times credit needs to be pulled. Flood certificates determine if your home is in a flood zone and if flood insurance is required for the protection of your property. Tax service fees are paid so your tax account can be monitored and your lender can be notified of any unpaid tax bills.
C. Services You Can Shop For – These include all services you are able to shop for yourself. These fees include title fees and attorney fees. Title fees are state regulated, and they generally don’t vary extensively between companies. As the homebuyer, you can select the title company that is used. If you need recommendations, chances are that your lender will have title companies that they work closely with and have chosen because of the quality of their services.
Now that you have an understanding of the Loan Costs section of your closing costs, it’s time to move on to Part 2 that covers the second section of closing costs, “Other Costs”.