May 3rd, 2016 6:28 AM by Jackie A. Graves, President
most people, buying real estate is
an uncommon occurrence. Engaging in real estate transactions just once or twice
in a lifetime provides little opportunity to become intimately familiar with
the process. There are mountains of paperwork to sign, a confusing new
vocabulary to deal with, and a host of fast-talking sales people - from real estate agents
to mortgage brokers - who smile, point and tell you where
in the mix of elation at purchasing a property and boredom from signing forms,
it's easy to lose track of what you're paying for and how much you're spending.
Aside from the amount of the mortgage, most of the other expenses get lumped
into a category referred to as "closing costs". Paying attention to these
costs can help you understand where your money is going and maybe even save you
a few hundred dollars. Read on to learn more.
Closing Costs: What Are They?
The phrase "closing costs" is shorthand for the total
cost of several dozen potential expenses associated with purchasing and
financing real estate. These expenses can be categorized as
"recurring" and "nonrecurring".
Recurring costs get paid not only at closing, but also on a
monthly basis thereafter, and include real estate taxes, homeowners insurance,
and, if you're putting less than 20% down, private mortgage insurance (PMI). (For more on PMI, check out Six Reasons To Avoid
Private Mortgage Insurance and Outsmart Private
expenses must be funded in advance at the time of purchase, which is done by
putting them into an account so that they are available to cover the next
year's obligations. This is known as putting the money in escrow. Depending on your closing date,
it may also be necessary to prepay interest to
cover your first few days or weeks in the home. (Learn the 10 steps that lead
up to closing the deal on your new home and taking possession in Understanding The Escrow
Nonrecurring costs are also paid at closing. They may include:
costs may also include:
host of other miscellaneous costs may include a courier/delivery fee, endorsements, recording fee, transfer tax and optional home
How Much Do They Cost?
Fees vary widely based on the lender, the geographical location of
the property and the price of the home. The Federal Reserve Board provides some general guidelines for
some of the most common fees:
$75 to $300 (including credit report for each applicant)
Loan Origination Fee
1-1.5% of loan amount
0-3% of loan amount
$300 to $700
Lender-Required Home Inspection
$175 to $350
Varies based on loan amount, interest rate and number of days
that must be paid ($300 to $750 is not unusual)
Private Mortgage Insurance
Up to 1.5% of loan amount to prepay first year
FHA, VA, or RHS Fees
1.5%, 1.25-2.0%, or 1.75%
$300 to $1,000/yr. depending on home price
Flood Determination Fee
$15 to $50
$150 to $400
Source: Federal Reserve Board
Watch Out for the Garbage
"Garbage fees", also known as "junk fees", are
tacked on to most mortgages. There is no way to completely avoid them, but you
can often minimize them.
out for excessive processing and documentation fees in the following
any of these fees seems to be unusually high, ask about them, as they can often
be negotiated. This advice applies to other fees as well. If it looks funny,
ask about it. Often, the mere act of questioning the fee will result in the fee
being lowered or eliminated.
All-In-One Closing Cost Pricing
Realizing that consumers are overwhelmed by the fees and frustrated
at the process of trying to determine whether the fees are fair, some lenders
now offer "all-in-one" flat-rate fees that include all closing costs.
The "all-in-one" terminology is used to describe other mortgage
products as well, such as mortgages that are tied to checking accounts, so care
must be taken when shopping for these products to purchase the one that applies
strictly to mortgage closing costs without consideration to other banking
relationships or products. (Offset mortgages combine a checking account,
home-equity loan and mortgage into one account. Learn more about it in All-In-One Mortgage A Good
Option For Thrifty Buyers.)
As a general rule, you can expect to spend from 3-5% of the price of the
property in closing costs.
Minimize the Pain
If the real estate market in your area is favorable to buyers, you
may be able to ask the seller to pay closing costs. If that isn't an option,
getting an all-in-one mortgage is probably the best way to minimize the feeling
that you are being taken advantage of during the closing process. While you are
still paying the fees, you won't need to despair over them one fee at a time.
shopping is another way to get comfortable with the process and get a better
feel for the costs. Ask half a dozen lenders to provide good faith estimates and compare the results. This will
help you learn the terminology and get a sense of the range of closing fees in
your area. Once you choose a lender and have a good faith estimate in hand,
save it. It will come in handy later.
The official form that includes a breakdown of all closing costs
is called an HUD-1 form. You have a right to see the HUD-1
document 24 hours in advance of closing. Ask for it and compare it to the good
faith estimate. If the numbers aren't reasonably close, ask questions.
spending time to comparison shop and by carefully reviewing all documentation,
you can minimize the expense and anxiety associated with the closing costs
involved in purchasing real estate.
Lisa Smith - To view the original article click here