Understanding Closing Costs
The most common closing fees are:
Appraisal fee—For the estimate of your home’s market value
Attorney fees—For any legal representation to prepare and record documents
Inspection fee—For examining for structural problems; also for termites, lead paint in older homes and your roof
Origination fee—For processing and administering your loan
Underwriting fee—For reviewing your mortgage application
Title fees—For the search to verify there are no tax liens on the property and for insurance to protect you if a problem is discovered
There are also fees you may have to pay for applying for your loan, running your credit report, flood determination and monitoring, recording your purchase with the local government, and surveying your property.
In some cases, your seller may pay some of your closing costs, especially if they’re motivated to sell quickly, but this comes with limitations.
Your Home Lending Expert can answer any questions or help you understand your Closing Disclosure, so you can plan ahead for your closing costs.
Mortgage Terms Made Easy
A lender cannot lend you an amount greater than what the property is worth. In an appraisal, someone independent of the lender, buyer or seller evaluates the property to determine the fair market value of the home. The determination is based on its characteristics as well as recent sales of comparable properties in the area. If the appraisal comes in lower than your offer amount, you can pay the difference between the appraised value and the purchase price at the closing table. Or, you can try to renegotiate the sales price with the seller. If neither of these options is successful, you’re able to nullify the purchase agreement and get your earnest money back.
Annual Percentage Rate or APR is the cost for the lender to give you the money based upon current market interest rates. APR includes the base interest rate as well as closing costs associated with your loan, including any origination fees, discount points, and settlement agent fees. When you compare interest rates, it’s important to look at the APR, rather than just the base rate, to get a more complete picture of overall loan cost.
This is a check you write when a seller accepts your offer and you draw up a purchase agreement. Your deposit of money is a show of good faith to the seller that you’re serious about the transaction. If you ultimately close on the house, this money goes toward your down payment and closing costs.
An escrow account is for funds to be held for future required payments. In the context of your mortgage, most people have an escrow account so they don’t have to pay the full cost of property taxes or homeowners insurance at once. Instead, a year’s worth of payments for both are spread out over 12 months and collected with your monthly mortgage payment. Your escrow amount is analyzed once a year by your lender to ensure the correct amount is being collected to pay for taxes and homeowners insurance.
This is a way for lenders and creditors to judge the creditworthiness of a borrower based on an objective metric. Clients are judged on payment history, age of credit, the mix of revolving versus installment loans, and how recently they applied for new credit. The scoring range is between 300 and 850. Credit score is one of the main factors in determining your mortgage eligibility.
Loan-to-value ratio(LTV) is one of the metrics your lender uses to determine whether you can qualify for a loan. All loan programs have a maximum LTV. It’s calculated as the amount you’re borrowing divided by your home’s value. You can think of it as the inverse of your down payment or equity. For example, if you have a 10% down payment, you have a 90% LTV.
The mortgage note, not the mortgage as typically thought, is where the terms of your loan are specified, such as the interest rate and term of the loan as well as when payments are to be made.
Sometimes referred to as prepaid interest points or mortgage discount points, points affect your interest rate. By prepaying some interest upfront, for example, you can get a lower interest rate.
Private mortgage insurance (PMI) and mortgage insurance premium (MIP), are types of mortgage insurance to protect the lender and/or investor of a mortgage.
If you make a down payment of less than 20%, mortgage investors enforce a mortgage insurance requirement. In some cases, it can increase the monthly payment of your loan, but the flip side is that you can pay less on your down payment.
Conventional loans have private mortgage insurance, either borrower-paid mortgage insurance (BPMI) or lender-paid mortgage insurance (LPMI). BPMI is pretty straightforward: an extra monthly fee. LPMI programs, allow you to avoid the monthly mortgage insurance payment in one or a combination of ways. The first option is to take a slightly higher rate than loans that have BPMI. You may see the second option sometimes referred to as single-payment or single-premium mortgage insurance in which you avoid the higher rate by paying a one-time fee upfront. You can also make a smaller one-time payment at close and employ a combination of both options.
FHA loans have MIP, which includes both an upfront mortgage insurance premium (can be paid at closing or rolled into the loan) and a monthly premium that lasts for the life of the loan if you only make the minimum down payment at closing.