Understanding Closing Costs

Article attempts to explain the various charges that can be included in the closing costs of purchasing or refinancing a home.

The purchasing of a home, while being a very exciting time, can also be a very busy, stressful and challenging time. This article will attempt to educate those in the market to purchase a home and those seeking to refinance an existing mortgage, concerning the closing costs associated with the loan accusation process.

Closing costs can be categorized as non-recurring and recurring. Non-recurring closing costs are charges that are paid by the buyer on one occasion and that is typically at the closing on the loan. Recurring closing costs are those that the buyer will pay on a schedule, even after the loan has been closed upon, such as taxes assigned to the property and insurance on the home. The lending institution collects payment from the buyer to cover these recurring charges and then the lender pays the appropriate party, on behalf of the lender, at scheduled times. An example would be for the lender to pay the county the annual taxation fee for the borrowers' property.

When inquiring about a loan, the borrower is entitled to a Good Faith Estimate of what the purchaser can expect to pay for the closing of the loan. The lender is required to send a copy of the Good Faith Estimate within three working days after the borrower has applied for a loan. A wise consumer-purchaser would request a copy of the Good Faith Estimate be faxed, e-mailed or given in person to him/her, before submitting a loan application, so that there is written documentation of the estimate at the borrowers' disposal. A Good Faith Estimate is, just as it says, an estimate. Because the closing costs include parties besides the lender, the lender sometimes underestimates what third parties will want the borrower to pay. Examples of third parties include but are certainly not limited to businesses that appraise properties and title companies.

Closing costs that the lender profits from the buyer include a loan origination fee. This is one of the things that can be negotiable, especially if the buyer has a good credit history. Fees are dependant on the amount to be borrowed and the person borrowing the money. A typical origination fee could vary between ½ and 2 percent of the loan. The lender might also allow the buyer to buy down an interest rate buy purchasing points. Points are one percentage point of the total money being borrowed. This money also is to the profit of the lender. A point for a $35,000 dollar home would then cost $350.00.

Other closing costs include title insurance. This is money to remedy situations in the event that outside parties were to ever claim rights to the property that is being purchased. An example might be a lien against the property that was unknown to the lender and the buyer at the time of closing. The purchaser should always get a copy of this insurance policy (just as with any other insurance policies). Appraisal fees are another cost that is for the purpose of determining the fair market value of the home. The cost of this service varies from state to state, type of loan and the amount of the mortgage. FHA and VA loans require the appraiser to look for more than value of the home so the fees might be more for this type of a loan than for conventional loans.

Another fee that the lender is likely to charge a purchaser is a credit report fee. This can run as much as $60.00 or more. Transfer taxes and recording fees could also be part of the costs. These are to compensate parties for the work necessary to assure the proper ownership, documentation and taxation of the property.

Part of closing costs will also include the initial payments to cover taxes and insurance on the home, which can include fire, theft, earthquake, flood insurance etc. The purchaser can contact the companies from which they will be purchasing this insurance to get a price, if they wish to do so. The buyer can also contact the proper government authorities to establish the amount of taxes assessed on the property currently. Insurance and taxes are subject to increase annually. The Good Faith Estimate should include these costs, but only in an estimated form. The lender will require a certain amount of months' worth of insurance premiums be paid in the closing costs. The purchase of insurance to pay off the mortgage, in the event that the owner dies, is also available and can be paid through the mortgage payment or directly to the company offering the insurance. Money for future tax and insurance payments are held in an escrow account for the home owner.

Perspective home owners have the right to compare the closing costs charged by any institution they choose. Lower interest rates offered a lending institution might actually be offset by charging the consumer more closing costs.

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