October 2016

Closing Costs: How Much Money Do I Need To Buy A Home?

Closing Costs: How Much Money Do I Need To Buy A Home?

When it comes to closings costs, it’s never a fun feeling when you’re not prepared.

No one likes to be surprised by a high utility bill or unplanned house upkeep expenses.

Being fully prepared financially and mentally right from the start helps to minimize those oh so (not) pleasant surprises.

The #2 Most Asked Question

After the #1 most asked question of “How Much Home Can I Afford?”, the runner-up question is “How Much Are My Closing Costs? 

The typical answer a mortgage company or financial advisor will give you is that it can run typically between 2%-5% of the home loan amount.

That means for a $300,000 mortgage, it can range from $6,000 all the way up to $15,000.

A mortgage lender is required by Law to provide you with a Loan Estimate detailing what your closing costs will be within three days of submitting a home loan application.

But if you haven’t selected a specific home and the mortgage company doesn’t have all of your information to complete an application, they might not provide a Loan Estimate for your review.

What Are Closing Costs?

Closing costs, which are also called “Settlement Costs”, are not that easy to calculate because they are a collection of various types of expenses.

Some expenses can depend on the state and county, the lender and type of program.

The rest of the expenses are contingent on other real estate professionals like appraisals or surveyors.

What’s A Loan Estimate (LE)?

Our government has specific rules mortgage companies must abide by when it comes to disclosing estimated closing costs to homebuyers shopping for a home loan and/or lender.

These disclosures are called the Loan Estimate or LE – Always remember to ask your mortgage company for one.

The Loan Estimate shows all of the closing costs associated with your loan in 9 different sections.

Some of the closing costs are fixed while others can vary.  You can shop around to save money on those variable costs.

What Are The 9 Different Sections?

The following 9 sections are included in the Loan Estimate:

A. Lender Fees (Origination Charges)
B. Services You Cannot Shop For
C. Services You Can Shop For
D. Total Loan Costs
E. Taxes and Other Government Fees
F. Pre-Paids (Pre-Paid Charges)
G. Initial Escrow Payment (At Closing)
H. Other
I.  Total Other Costs
J.  Total Closing Costs 

A breakdown of all the closing costs are below:

A. Lender Fees (Origination Charges)

Mortgage companies have two different types of costs:

  1. Origination Charges
  2. Points 

The first cost type is the Origination Charges, which is the fee you pay the lender for providing their service.

This fee is charged to pay the lender or the mortgage loan officer who got you the loan.

Luckily for you, our Home Loan Experts are salaried employees and do not make a commission on your loan. 

Having non-commissioned based Home Loan Advisors helps our company offer clients more competitive rates with superior service and transparency.

The second cost type are Points.

Points are a charge that you pay to lower your home loan interest rate.

It’s like a seesaw effect: more points reduce your home loan rate; lower points increase your home loan interest rate.

But remember – it’s up to you if you want to buy down your home loan rate by paying points.

B. Services You Cannot Shop For

There is a lot that goes on in the backend during a home loan transaction – administrative and legal work is needed. The government will also need a record of the transaction.

This section is broken up into 3 fees: 

  1. Appraisal Fee
  2. Credit Report Fee
  3. Flood Certification Fee

Appraisal Fee

This fee is charged by a licensed certified Appraiser that will determine the value of the home you’re trying to purchase.

The Appraisal Report will disclosure the market value of the home, size, conditions and more.

An Appraiser typically charges around $450 to $500 for their services.

Credit Report Fee

The mortgage company pays the credit report fee to purchase your credit report from the credit reporting agencies.

This fee should be no more than $30.

Flood Certification Fee

This fee is for a certification from the Federal Emergency Management Agency (FEMA).

The fee only shows if the home is in a flood zone to determine whether it needs flood insurance.

This fee should be around $15 to $20. 

C. Services You Can Shop For

Title services and lender’s title insurance make up this entire section.

Title Service Fee & Title Insurance Policy

One of the most important documents in the homebuying process is the Property Title.  This document shows who owns the home and who has a lien against it.  Title service companies research the title to ensure that it’s legitimate.  

Mortgage companies require the borrower to buy a title insurance policy to cover the lender in case the title is later found to be defective.

The cost of title services and lender’s title insurance varies from state to state.

Home Inspection Fee

You pay this fee for an interior and exterior inspection of the home.  We highly recommend finding a good inspector to help find any issues with the home before you buy it.  

Make sure you find a home inspector that’s there for you. Someone who’s looking for issues that could be detrimental to you and your family – like foundation problems, termites, poor plumbing and electrical.

It’s easy to go with whoever’s recommended to you to save time. But be careful and make sure to work with a company that solely represents you and has an excellent track record of working with homebuyers.

A Home Inspection can run you anywhere from $350 to $600.

Survey Evaluation

Another cost you can shop for is a Survey Evaluation of the property.   It outlines and determines the property boundaries as well as the location of fences, walls, gas lines and more.

A survey can cost you anywhere from $500 and $700.

Attorney Fee

Please make sure your attorney specializes in Real Estate Law and has years of experience helping first-time homebuyers.

Sure, the family attorney knows about Real Estate. But if real estate is not what they specialize in, you risk oversights that might cause delays. You also need them to be available to answer questions timely and specifically.  

Attorney Fees range from $900 to $1200.

D. Total Loan Costs

This section adds up your loan costs in the previous sections (D):

D = A + B + C  

Section E determines your remaining fees.

E. Taxes and Other Government Fees

Government recording is charged by the local government (usually it’s the county) for recording a public record of the home sale.

These recording fees can vary from $250 up to $400.

F. Pre-Paids (Pre-Paid Charges)

An additional closing cost is for anything you have to pay for in advance.

Some of these advance charges are put into an escrow account (a special holding account where funds can only be used for certain circumstances):

  1. Pre-paid Homeowners Insurance
  2. Up Front Mortgage Insurance Premiums
  3. Daily Pre-Paid Interest

Prepaid Homeowners Insurance

You will be required to pay your first full year of Homeowners Insurance to protect the home against damage caused by weather, fire, and other unfortunate events.

Homeowners Insurance costs range depending on the coverage and where you live. The costs could be several hundred of dollars to a few thousand a year.

Up-front Mortgage Insurance Premium

Depending on your loan type and the size of your down payment, mortgage companies may require you to pay for mortgage insurance. This can come with an up-front prepayment that you will owe at closing.

Daily Pre-paid Interest

This is another cost you will have to pay upfront depending on the day of the month you close.  

For example, if a month was to have 30 days and you closed on the 15th day you will have to pay 15 days of interest only payments upfront at closing.

G. Initial Escrow Payment 

Escrowing property taxes with your mortgage company will require you to prepay between 3 to 5 months of month property taxes.  

For example, if your yearly property taxes are $6,000 and your lender is requiring you to escrow 4 months of property taxes, you will have to pre-pay $2,000 at closing.   

Some home loan programs like FHA will require you to escrow your property taxes – some lenders will even discount your home loan interest rate if you escrow.

Escrowing Homeowners Insurance will also require you to place 3 months of insurance payments in an escrow account to cover homeowners insurance.  So when it’s due the following year, your mortgage company will make the payment for you.

Make sure that your Loan Estimate breaks down the amount you’ll be required to put in escrow to cover taxes and homeowners insurance.

H. Other 

Owner’s title insurance is an insurance policy that covers you, the homeowner if there are issues with the title. 

For example, if the prior owner of your home was foreclosed on and later wins a legal challenge against that foreclosure, your claim on the home may be found to be invalid.

In that case, a homeowner’s title insurance policy would protect you from financial loss.

Rates on these policies vary widely but can cost over 0.5% of the loan balance. 

I. Total Other Costs

This is the total of all the non-loan costs (I):

I = E + F + G + H

J. Total Closing Costs 

We’ve gone through a lot, but the last calculation is totaling all Closing Costs (J):

J = D + I

This total is only a rough estimate, but it’s a good way of budgeting for what you will owe at closing.  

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