CLOSING COSTS -

 

The bundle of fees associated with the buying or selling of a home are called closing costs. Certain fees are automatically assigned to either the buyer or the seller; other costs are either negotiable or dictated by local custom.

 

Buyer Closing Costs

 

Closing costs are one of the least understood aspects of the home financing process

 

The term "closing costs" refers to the money paid by the borrower to close a mortgage loan. Closing costs vary among different lenders and mortgage products. Separate from the down payment, these fees usually fall into one of three basic categories: out-of-pocket expenses, prepaid items, and mortgage points.

 

Out-Of-Pocket Expenses

 

Out-of-pocket expenses usually cover third-party services that are directly charged to the borrower, such as fees for appraisals, attorneys, credit reports, deed recording, or tax services. Which services the borrower must pay for varies depending on the jurisdiction and the lender. If you don't understand what a particular fee covers, or why you are required to pay it, ask your lender to explain.

 

Prepaid Items

 

Prepaid expenses can vary based on the type of property and the time of the closing, but they generally include homeowner's insurance, mortgage insurance, and fees associated with establishing an escrow account. Escrow accounts are set up by lenders as a mechanism for paying property tax and insurance premiums. Instead of paying the entire premium every six or twelve months, the borrower pays a portion of the cost along with every monthly mortgage payment. This helps the borrower avoid the hassle of planning for the large payments, while reassuring the lender that tax and insurance payments are always up to date.

 

Depending on the date of your closing, a certain amount of interest may also be prepaid. Because mortgage interest is paid in arrears, the interest for the first full month of the mortgage is generally due at the beginning of the second full month. Since it won't be included in your first mortgage payment, the interest that accrues during the time between your closing and the beginning of the first full month of your mortgage must generally be prepaid. When you schedule your closing, keep in mind that you would prepay more interest if you closed on the 5th than if you closed on the 25th.

 

Mortgage Points

 

Most mortgage programs give borrowers the ability to reduce the interest rate on their mortgage by paying a certain number of mortgage points at closing. One mortgage point is equal to 1 percent of the amount of the mortgage, and the more points you pay, the more you can lower your interest rate. If you expect to stay in your home for a number of years, lowering your monthly payments by paying points up front can be a great investment.

 

Good Faith Estimate

 

When a buyer applies for a loan, lenders are required to provide them with a good-faith estimate of their closing costs. The fees vary according to several factors, including the type of loan they applied for and the terms of the purchase agreement. Likewise, some of the closing costs, especially those associated with the loan application, are actually paid in advance. Some typical buyer closing costs include:

 

- The Down Payment

 

- Loan Fees (points, application fee, credit report)

 

- Prepaid Interest

 

- Inspection Fees

 

- Appraisal

 

- Mortgage Insurance (typically 1 years premium plus an escrow of 2 months)

 

- Hazard insurance (typically 1 years premium plus an escrow of 2 months)

 

- Title Insurance and Document Stamps

 

 

 

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