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Understanding Closing Costs

Closing Costs for Home Buyers

In addition to the down payment, you’ll also have to pay closing costs — miscellaneous fees charged by those involved with the home sale (such as your lender for processing the loan, the title company for handling the paperwork, a land surveyor, local government offices for recording the deed, etc.).

On average, homebuyers pay closing costs ranging from 2% to 5% of the purchase price. Unfortunately, this is only a ballpark figure, as there are many variables in each individual transaction. Many lenders will require that you apply for a loan prior to receiving a more precise estimate of closing costs; however, some lenders are more transparent with their available options and will do the necessary legwork to provide you a better idea of those costs.

The key factors in determining the closing costs you will pay include the loan program, your credit scores, the escrow and title company, the down payment, and any negotiated seller concessions. Let’s take a closer look at the typical closing costs paid by homebuyers.

What Are Closing Costs?

As mentioned previously, “closing costs” is a collective term for the various fees and charges you’ll encounter when buying a home. Some of these fees come from the lender and others come from third parties that are involved in the transaction, like home appraisers, homeowner associations (HOAs), and title companies.

The types of closing costs you pay will depend on the kind of loan you’re using, as well as other factors.

Typical closing costs include:

  • Fees relating to obtaining a credit report
  • Loan origination and processing fees
  • Home appraisal fees (though more often than not, they are paid in advance)
  • Discount points, which can be used to secure a lower mortgage rate
  • Title search and escrow service fees
  • Title insurance fees, to cover both the lender and the homebuyer
  • Mobile notary fees
  • Pre-paids: escrow deposits to cover first two months’ property taxes and homeowners insurance.
  • Recording fee paid to the city or county for recording the new land records.
  • HOA transfer fees

Again, these are just some of the typical closing costs for homebuyers. Depending on your situation, you might encounter additional costs that are not on this list – and some of these fees might not apply to your situation.

Finalizing Closing Costs

As mentioned previously, closing costs tend to average between 2% and 5% of the purchase price.

So, if you’re buying a house that costs $200,000, your closing costs might fall between $4,000 and $10,000 (on average). That’s a pretty wide range and isn’t something you can really use for planning purposes. That’s where the new Loan Estimate can give a much more detailed breakdown when you actually start the loan process.

Soon after you apply for your home loan, the lender will give you a document known as a Loan Estimate. This standardized, three-page document gives you a lot of important information about your new loan. Page 1 includes your loan amount, mortgage rate, and estimated monthly payments, as well as an estimate of your total closing costs. Page 2 provides an itemized breakdown of the various costs associated with your loan.

Discount Points and Lender Credits

There are other factors that can affect the amount paid at closing. For instance, consider the different scenarios below:

  • Borrower ‘1’ might decide to pay mortgage discount points in exchange for a lower interest rate.
  • Borrower ‘2’ might avoid paying points in order to reduce the upfront costs.
  • Borrower ‘3’ might forego the discount points and opt for a slightly higher rate, in order to get a lender credit to further reduce closing costs.

These choices could result in a difference of several thousand dollars in the amount these buyers pay to close their loans. That’s why it’s best to take the time to sit down with your mortgage lender so they can understand your situation and what’s most important to you, the borrower!

In closing, here’s a great tipask the seller to pay some of the closing costs. If you’re short on cash for the closing costs and can’t roll the closing costs into the mortgage, ask the seller if they’re willing to pay part of the closing costs. It’s not unusual for buyers to ask for this.  Usually the worst that can happen is that they say no.

Disclaimer: Your closing costs could differ from the examples provided above, based on a number of factors – and the views expressed are my own and do not necessarily reflect those of American Financial Network, Inc.

What Is A Mortgage Refinance, In Simple English

what-is-a-refinance

Simply put, refinancing gives a homeowner access to a new mortgage loan which replaces its existing one. The best part is, the details of the new mortgage loan can be customized by the homeowner, including a  new mortgage rate, loan length in years, and amount borrowed.

Refinances can be used to reduce a homeowner’s monthly mortgage payment; to take cash out for home improvements; and, to cancel mortgage insurance premiums, among other uses.

Source: The Mortgage Reports – Dan Green

To refinance your home means to replace your current mortgage loan with a new one. Refinances are common whether current rates are rising or falling; and you can get one here, as you are not limited to working with your current mortgage lender!

Some of the reasons homeowners do this include a desire to get a lower mortgage rate; to pay their home off more quickly; or, to use their home equity for paying credit cards or funding home improvement.

These loans typically close more quickly than a purchase mortgage loan and can require far less paperwork.

3 Types Of Refinance Mortgages

These mortgages come in three varieties — rate-and-term, cash-out, and cash-in.  The refinance type that’s best for you will depend on your individual circumstance – and mortgage rates vary between the three types.Refinance

Rate-And-Term Refinance

In a rate-and-term refinance, the only terms of the new loan which differ from the original one are either the mortgage rate, the loan term, or both.  The loan term is the length of the mortgage.

For example, in a rate-and-term refinance, a homeowner may refinance from a 30-year fixed rate mortgage into a 15-year fixed rate mortgage; or, may refinance from a 30-year fixed rate mortgage at 6 percent mortgage rate to a new, 30-year mortgage rate at 4 percent.

With a rate-and-term refinance, a refinancing homeowner may walk away from closing with some cash, but not more than $2,000 in cash.

“No cash out” refinance mortgages allow for closing costs to be added to the loan balance, so that the homeowner doesn’t have to pay costs out-of-pocket.

Most refinances are rate-and-term refinances — especially in a falling mortgage rate environment.

Cash-Out Refinance

In a cash-out refinance, the refinance mortgage may optionally feature a lower mortgage rate than the original home loan; or shorter loan term, such as moving from a 30-year mortgage to a 15-year mortgage.

However, the defining characteristic of a cash-out mortgage is an increase in the amount that’s borrowed.

With a cash-out refinance, the loan balance of the new mortgage exceeds than the original mortgage balance by five percent or more.

Because the homeowners only owes the original amount to the bank, the “extra” amount is paid as cash at closing, or, in the case of a debt consolidation refinance,  directed to creditors such as credit card companies and student loan administrators.

Cash-out mortgages can also be used to consolidate first and second mortgages when the second mortgage was not taken at the time of purchase.

Cash-out mortgages represent more risk to a bank than a rate-and-term refinance mortgage and, as such, carry more strict approval standards.

For example, a cash-out refinance may be limited to a lower loan size as compared to a rate-and-term refinance; or, may require higher credit scores at the time of application.

Most mortgage lenders will limit the amount of “cash out” in a cash-out refinance mortgage to $250,000.

Cash-In RefinanceNelson Post

Cash-in refinance mortgages are the opposite of the cash-out refinance.

With a cash-in refinance, a refinancing homeowner brings cash to closing in order to pay down the loan balance and the amount owed to the bank.

The cash-in mortgage refinance may result in a lower mortgage rate, a shorter loan term, or both.

There are several reasons why homeowners opt for cash-in refinance mortgages.

The most common reason to do a cash-in refinance to get access to lower mortgage rates which are only available at lower loan-to-values. Refinance mortgage rates are often lower at 75% LTV, for example, as compared to 80% LTV.

Another common reason to cash-in refinance is to cancel mortgage insurance premium (MIP) payments. When you pay down your loan to 80% LTV or lower on a conventional loan, your mortgage insurance premiums are no longer due.

For more, see Dan’s full article here….

 

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