Mortgage Closing Costs
In addition to the basic mortgage underwriting, processing and origination fees that are charged by a lender, there are several other costs associated with purchasing a new property. Since every player on your real estate home buying team has a stake in your transaction, it’s a good idea to know how to budget for their services.
Common Out of Pocket Expenses to Budget For:
The items below are common to a Real Estate transaction and you may be required to pay for them up-front:
*In most cases the estimated fees for each item have been purposely left out since each scenario is different.
This is usually money well spent since the inspector will evaluate many aspects of your new home to ensure all systems are functioning as they are intended to.
Condominium Questionnaire Fees-
This may be required by your lender, and can take up to 30 days to receive. Fees can range anywhere from $0 to $300 depending on the complex.
Well and Septic Certifications-
If your new home has either of these systems you will want to be sure that they are functioning properly.
This document outlines the borders of your property, and the price can vary depending on the size of the lot and if it was actually staked out. A survey is not a requirement for all purchase transactions.
Depending on your state, loan size, property type, loan program and lender, the appraisal may be required to be paid for up-front by the borrower. And, in some cases, more than one appraisal may be required, especially if the borrower is switching lenders and using conventional financing.
A typical purchase transaction will involve some, but not necessarily all of these services. It’s important to discuss any other potential out of pocket expenses with your agent and loan officer, since some of these items may not be included on the initial Good Faith Estimate.
The important thing to realize is that the vendors providing these services will expect to get paid whether or not your transaction closes, and they may ask that you pay when services are rendered.
A combination of just a few of these fees could easily add up to over $1,000 so it is important to have the funds set aside at the start of the process.
Frequently Asked Questions:
Q: Where Does My Earnest Money Go?
An Earnest Money Deposit (EMD) is simply held by a third-party escrow company according to the terms of the executed purchase contract.
For example, there may be a contingency period for appraisal, loan approval, property inspection or approval of HOA documents.
In most cases, the Earnest Money held by the escrow company is credited towards the home buyer’s down payment and/or closing costs.
*It’s important to keep in mind that the EMD may actually be cashed at the time escrow is opened, so make sure your funds are from the proper sources.
Q: Do I Have to Pay My Real Estate Agent on a Purchase Transaction?
In most cases, the buyer is not responsible for covering the cost of their real estate agent.
When a home owner hires a real estate agent to list, market and sell their property, they’re also (in most cases) agreeing to compensate the agent representing a buyer.
A common myth is that a buyer will get a better price on a property if the seller doesn’t have to pay the typical 3% to a buyer’s agent. However, it’s more expensive to buy an overpriced property, not negotiating properly for the acceptable seller paid closing costs, overlooking important language in the purchase contract, missing potential commercial zoning updates on a nearby lot, or buying a home that has a lawsuit against the HOA.
Q: What Are Mortgage Points?
Mortgage points are fees charged by the lender for services and/or a lower interest rate.
One Mortgage point is equal to one percent of the loan amount. For example, on a $100,000 mortgage $1,000 would be equal to one point.
Understanding what points are and how they work can save you thousands of dollars on your mortgage. Borrowers can pay mortgage points to reduce the interest rate charged on their mortgage. The Borrower may also choose to raise the interest rate to reduce the closing costs. This is sometimes called buying up your interest rate. This buy-up strategy is used when the intentions of the borrower is to keep the mortgage for a short period of time.
To decide whether or not to buy-up or buy-down your interest rate you must first calculate a breakeven point. The following formula can be used:
Cost of buy down / monthly savings = months to breakeven point. If you plan to keep the mortgage longer than the breakeven point then buying down points may be beneficial to you.
For example: $1,000 cost to buy down rate / $100 savings per month = 10 months to breakeven
In the above example if you plan to keep the mortgage for more than ten months (the breakeven point) you should buy-down the interest rate. In the above example if you kept the home for five years your savings would be $5,000.
Make sure you consider mortgage points in your strategy when getting a loan. It can save you thousands of dollars.
Q: Are Discount Points Tax Deductible?
Yes, they may be tax deductible, but make sure to speak with your tax advisor.
Q: Can I Pay More Than One Point For a Lower Rate?
Mortgage points usually are calculated in 1/8 increments. A good rule of thumb to follow on a 30 year fixed rate is for every .25% drop in interest rate it will cost you one mortgage point.
Q: Is a “No Origination Loan” or “No Cost Loan” a Form of Buying Up a Rate?
Yes, this strategy is usually used when the borrower is planning to keep the mortgage for a shorter period of time.