Is This Your Situation: Wondering About Closing Costs?

When saving for a home, most people are primarily worried about saving up the cost of a down payment. But as all your homeowner friends will tell you when you start seriously looking for homes, there’s more to the cost of a home than the sticker price. When you close a mortgage, you have to pay closing costs. Also known as settlement fees, they cost about 2%-5% of the total cost of the home. That may sound small next to the 20% many people save up for the down payment, but on a $250,000 home, closing costs would add $5,000-$12,500. That’s no small change. So what does that money buy?

Lender fees. Not every mortgage lender charges fees, but most do. Lenders want a guaranteed profit up front — one they know they’ll get whether you wind up being able to pay your mortgage or not.

Third-party fees. A lot of people are involved in the purchase of a home. Someone will need to run a credit check on you. Your local government will need to appraise the home for tax purposes. The mortgage lender will call a surveyor. It all costs money. The largest third-party fee, however, is the title search. For this fee, a lawyer is engaged to look through records and make absolutely sure that the person selling you a home is definitely the owner of that home. Without title insurance, you’re vulnerable to lawsuits from anyone who claims otherwise.

Prepayments. When you close on a home, you owe prorated interest on the mortgage for the rest of the month. For example, if you make your purchase on Oct. 15, you owe half a month’s worth of interest before you get your next bill on Nov. 1, and you’re expected to pay that money at closing. The same may go for part of your property tax and insurance payments, depending on the time of year when you purchase.

Points or Credits. Some lenders may allow you to pay part of your mortgage at closing. A point, also called a credit by some lenders, is 1% of your mortgage. Paying one point down at closing will lower your mortgage payments by 0.25%. Whether it makes sense for you to pay down points at closing depends on your circumstances.

This is just a summary — there are more details. Closing costs come as a surprise to some first-time homebuyers, but they don’t have to. Knowing the costs you’ll have to pay means you’ll know how much you need to save. Work with us, and we can help you get a close estimate of the total costs of your home.

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