Understanding the Costs Involved at Loan Closing
Closing on a new home should be an exciting time. But to some it ends with the unwelcome surprise of cost increases. Closing costs are one of the least understood aspects of the home buying process. This overview can hopefully help prevent unexpected surprises.
Closing costs tend to vary from lender to lender, but are generally considered any costs associated with the purchase of a home. Today, these costs range between 2 and 7 percent of the home’s purchase price and include three basic categories:
Out-of-Pocket Expenses – Fees For:
- Credit Reports
- Deed Recording
- Tax Services, and
- Other miscellaneous expenses, usually performed by a third party and directly charged to the borrower.
- Homeowner’s Insurance
- Mortgage Insurance, and
- Costs to set up an escrow account. Escrow accounts are a service provided by the lender through which they pay annual insurance premiums and various taxes on the borrower’s behalf. The amount that goes into these accounts is based on the first year’s premium, plus an additional amount to help build the account for future premiums.
A mortgage point is equal to 1% of the mortgage loan amount. When you pay a point(s) it actually helps reduce the loan’s interest rate. For example, paying two points on a $100,000 mortgage would require an additional $2,000 up front at closing, but would cut the monthly mortgage payment. If you obtained the same loan amount at zero points, the interest rate and monthly payment would be higher, but there would not be any additional up-front costs at closing.
Mortgage points and other finance charges affect the Annual Percentage Rate (APR) of the loan. Typically you should expect that APR to be .50% to 1.00% more than the note rate on your loan.
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