10 Important Things To Know About Closing Costs

 In First-Time Home Buyers, Qualifying for a Mortgage, Refinancing your Mortgage

When you buy a house and get a mortgage, there are two things you need to pay for: the down payment and the closing costs.  This post deals with the closing costs.  Here are the things you need to know.

How Closing Costs Are Determined

  • The closing costs are composed of four different types of expenses: the money you pay to the lender and the various third-party vendors they use, the money to set up the escrow account, which pays for your homeowner’s insurance and property taxes, the money for the first year of homeowner’s insurance and the interest from the date of closing until the end of the month, and the money to pay for any points you decide to pay to get a lower interest rate.
  • The money you pay to the lender depends on which lender you choose.  Some lenders charge an origination fee, which can be in the thousands of dollars.  Some lenders also charge an underwriting fee, a funding fee, a rate lock fee, and any number of other fees that they charge just to make extra money.  These fees are known in the industry as “junk fees” because they are unnecessary fees that do not really have to be charged.  The only lender fees we charge are a $500 processing fee, which pays for our loan processor (the person who does the paperwork for us) and a credit report fee to pay for the credit report we have to pull to get you approved.  We do not charge an origination fee, an underwriting fee, or any other junk fees, and we have some of the lowest closing costs in the industry.
  • The third-party fees you pay go to the appraiser and the title company.  These fees will generally be the same, regardless of which lender you choose.
  • The money you pay for the first year of homeowner’s insurance and for the interest from the date of closing until the end of the month depend on which insurance company you choose and the closing date.

Paying Points and No Closing Cost Loans

  • When you lock in an interest rate, you either get money back from the lender for choosing that rate, or you pay points to get that rate.  If you get money back from the lender, it will be used to pay some of your closing costs.  If you pay points to get a lower rate, it will increase the amount of your closing costs.  When you use us as your lender, we will show you several different scenarios, and you will see exactly how much it will cost to get a lower rate.  We show you how much you will be saving, and then you will be able to make an informed decision about whether to pay points for a lower rate or not.
  • If you choose a higher interest rate, you get money back from the lender, and that is used to pay some (or all) of your closing costs.  This is how lenders are able to offer “no closing cost” loans.  The closing costs don’t go away – they are just paid by the money the lender gives you for choosing a higher rate.

Other Important Closing Costs Info

  • If you don’t want to pay the closing costs yourself, and you don’t want to pay for them by being charged a higher rate, you can ask the seller to pay them for you.  The seller will usually ask you to pay a higher price for the house if you do it this way, so they make the same amount of money as they would if they sold the house to someone who was willing to pay their own closing costs.  But, it’s still a great way to pay the closing costs if you just don’t have enough money.
  • Closing costs cannot be estimated as a percentage of the sales price.  If you are using a lender like us, who does not charge an origination fee, the closing costs do not depend on the purchase price.  They are almost exactly the same for a $100,000 house as they are for a $900,000 house, so the percentage can vary tremendously.
  • You should NEVER pay a loan application fee.  It doesn’t cost a lender anything to get you pre-approved, and the application fee (which is always non-refundable) is just a cheap sales trick to keep you from shopping around with other lenders.
  • Our lender fees are only $500 for our processing fee and $44 for our credit report.  Many lenders charge thousands of dollars more then that, for much less service.

 

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