Some of these home loan costs you can negotiate. Others are fixed fees. Then there are those you can shop to get the best price, like homeowners insurance or home inspections.
So be sure and do your homework to get the best price for those fees you can shop for since this affects what you must have as out of pocket money at your closing.
These costs are additional funds you need to have over and above the down payment monies. Knowledge is power and that can save you money.
You can find many of the costs or fees itemized on your GFE, or Good Faith Estimate that must, by law, be presented to you by the lender within three days after your application is accepted.
The actual final closing costs may be different from those on the GFE, and thus they might be more. There can be a perfectly good reasons for this. But there are fees you need to watch out for.
There are shady lenders who add in "junk" fees at the actual closing. Being aware of what to look for and how these junk fees can appear can help you in your negotiations.
Below is a video to give you an idea of what I'm talking about. Take the time to view so you can be well armed!
Below is an explanation of each of these fees. I want you to understand them so you can see which ones to shop and which ones are those you can negotiate.
First on the list of the loan closing costs is the application fee. This includes the cost of obtaining your credit report. Most lenders want to see this. Average closing costs for the application fee can range from $250 to 400 depending on where you live and the lender you choose.
Most often you can't get around this fee. They use these monies to process your application. It helps cover the overhead of those who are going to look at your documents and get them ready for approval.
Next is the origination fee. This fee pays the person arranging your new loan, the loan officer. Average closing costs vary here, because this fee most often equals one "point", but can be higher. This is usually how your loan officer is paid.
A "point" in mortgage lending equals 1% of the total amount of money you are borrowing (not paying). So, if you need to actually borrow $200,000, one point equals $2,000. You can figure your own average by taking 1% of the loan amount. These can vary depending on down payment, loan amount, and lender policies.
Even though you cannot avoid this fee, it is one you can negotiate. It is also an area where one GFE can differ from another. So be sure to compare this fee when shopping lenders.
This is a very confusing term. The word "discount" makes you think you are getting something for less. However, it means something different in this case.
These points are negotiable (unless, in some situations, you have sub-prime credit) and do not need to be paid.
So why pay them? Usually they are used to lower your interest rate. You are actually paying down your interest rate by paying this fee. Since they lower your loan's interest rate, they can save you money over the lifetime of your loan.
This fee is not required. But if you feel it would benefit you to have a lower interest rate, then go for it. They are usually a .5%, but can be up to 2% depending on the area.
Since these are figured on the entire loan amount, be sure to calculate if the savings is worth the fee you have to pay.
Mortgage closing costs will probably include an appraisal fee. An appraisal is needed to ensure that the property is worth what you and the lender believe it is. Appraisal fees can range from $250 to $400.
Once again, location can dictate this fee. Most lenders have their own appraisers they work with, but if they will let you, you may be able to shop this fee.
You may also have to pay an inspection fee. This inspection is to see that the home is in good condition and is for the lender's legal protection. The average cost here is $400.
You may not be able to get around this fee. If you're considering an FHA loan, they require an inspection. It can also be beneficial to you as well. If things turn up with this inspection, you may be able to negotiate a lower price or the seller will choose to make the necessary repairs.
Depending on the lender, you may be able to shop this fee as well.
A property survey will be needed to confirm a property's location and see about any property improvements. Average closing costs on this: $154.
This is not always required, but it does help define property lines. If your purchase is in a subdivision, this may not be necessary. If your purchase has several acres involved, well the lender may want this done.
Once again, you may be able to shop for a surveyor, if the lender allows it.
Prepaid interest costs are also part of your mortgage closing costs. This one really bothers people. But you cannot avoid it. Let me explain....
Your first payment on your new mortgage is usually not due until six to eight weeks from your settlement date or closing. But interest on your new mortgage begins immediately.
Now you know the lender is not going to go without collecting this interest. So what they do is calculate how much interest will pile up between closing and your first payment due date. Then they have you pay that at closing. Average closing costs here depend on several factors, the two biggest ones being amount borrowed and interest rate.
You won't be able to negotiate or shop these average closing costs.
PMI insurance (which is private mortgage insurance) is a policy that many lenders require you to pay if you have borrowed more than 80% of the value of the home.
This policy covers the lender's losses if you default. By federal law, PMI payments automatically stop when you reach the point where you owe only 80% or less of the property value. The average cost of these policies is $75 per month.
The size of your down payment can affect whether you pay this fee or not. But as a first time home buyer, you may not have enough money for a large down payment.
So just be mentally prepared that this may be a closing cost you may have to pay. Generally it is added to your monthly payment. Although you may have a portion added to your closing papers.
Remember, you don't have to pay it forever! But they are something to consider when figuring average closing costs.
You will be required by your lender to have homeowner's insurance put in place at settlement. They usually have you pay the full year at closing.
Of course, you can shop for this. Just be aware, they have you pay a full year in advance. Even though you pay the full year at closing, you may still pay a portion each month in your monthly payment.
You may be wondering WHY? If you have set up an escrow for your property taxes and house insurance, they will want to collect the monies for these monthly.
Thus, even though you paid for a year in advance, the lender wants to have the monies already in escrow when the next yearly payment is due. That's why they add a certain portion to your monthly payment.
Since your lender requires homeowner's insurance at closing, you will want to shop for the best price with the most benefits.
Now, depending the property's location, the lender, and your situation, there may be several other fees that go into your loan closing costs, too. These range from flood insurance premiums to an escrow account or even title insurance.
Also, if you get a VA, FHA, or RHS mortgage you'll have an additional fee. But you now have an idea of the average closing costs.
These costs can add up. Keep in mind these are just an average of what it may cost you for these fees. I am just trying to give you an idea so you will not be surprised when you see them on your Good Faith Estimate.
As a rule of thumb, you can expect to pay around $3,500 in average closing costs. Of course, this is just an average. Your total cost could be higher or lower.
Are you ready for a mortgage? FHA products are the most flexible. Discover the Best FHA Home Loans to choose from.
If you are a veteran, consider a VA Home Loan as your option. The page explains this awesome product.
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