Mortgage Closing Costs

Mortgage Closing Costs

Once you've been approved for a mortgage, found a house, made an offer, and the offer has been accepted, you are close to calling your property home. What's left is to finalize the documents which will transfer ownership of the house from the seller to the buyer. The "close" or "settlement" usually involves the seller, real estate agent, lawyer, escrow agent, mortgage lender and buyer, and title company.

Once you've been approved for a mortgage, found a house, made an offer, and the offer has been accepted, you are close to calling your property home. What's left is to finalize the documents which will transfer ownership of the house from the seller to the buyer. The "close" or "settlement" usually involves the seller, real estate agent, lawyer, escrow agent, mortgage lender and buyer, and title company.

How the process works

The escrow agent and title company will present you with a variety of documents to examine and sign; title, insurance, escrow, and others - each with their own fees. Expect to pay 3-5% of your mortgage amount toward closing costs. Most fees are negotiable, with lenders picking up some of the costs upfront, while others require some costs to be paid by the borrower upfront, or built into the cost of the loan.

Settlement Costs Estimates

FEE - Average Cost(s)

Administration - $250.00

Application - $250.00

Appraisal - $300.00

Attorney fees - $300.00

Credit report - $25.00

Document preparation - $150.00

Escrow - $735.00

Fire insurance - $300.00

Flood certificate - $20.00

Hazard insurance - $300.00

Origination fee (points) - $2,500.00

Pest Inspection - $150.00

Private Mortgage Insurance (PMI)** - $2,500.00

Processing - $4,500.00

Recording fee - $475.00

Tax services - $60.00

Title examination - $150.00

Title insurance - $300.00

Underwriting - $300.00

TOTAL = $9,165,000 (3.66% of $250,000)

* Based on a $250,000 mortgage. Costs may vary by lender.

** If down payment is less that 20% of the loan amount.

For a description of the terms above, please see our mortgage glossary.

What is Private Mortgage Insurance?

Your lender may advise you to set up an escrow account should your down payment be less than 20% or if you're a high credit risk. Less money down means the greater the risk the lender needs to assume. So to guarantee your property tax payments and private mortgage insurance (PMI) premiums, a small percent of your mortgage will be set aside each month to cover your payments. Your PMI rate will vary based on the mortgage amount and covers the lender in the event you default on your payment.

Should you pay extra for points?

Should you secure a lower interest rate on your mortgage you can expect to pay a certain percentage to the lender in the form of points. Points or origination fees are what lenders charge in interest to reduce the rate of the loan. It can be paid upfront or built into the cost of the mortgage. One point is equal to 1% of the mortgage amount (e.g., one point on a $250,000 loan equates to $2,500) which goes to the lender at closing.

Read an article on whether or not it makes sense to pay mortgage points.

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How Much Home Can You Afford to Buy

How Much Home Can You Afford to Buy

Knowing how much house you can afford begins by listing the type of features you'd like to have in a home. Your individual needs, location requirements, style and the amount of effort you are willing to put into finding your dream house, all factor into the equation. How important is it for you to be near a school? How long will it take you to commute to work? How much will you spend on gas to commute to work? How safe is the neighborhood? These are all legitimate questions that can help you choose your ideal home.

Knowing how much house you can afford begins by listing the type of features you'd like to have in a home. Your individual needs, location requirements, style and the amount of effort you are willing to put into finding your dream house, all factor into the equation. How important is it for you to be near a school? How long will it take you to commute to work? How much will you spend on gas to commute to work? How safe is the neighborhood? These are all legitimate questions that can help you choose your ideal home.

Have a range in mind before you go house hunting. What is the minimum and maximum amount you can afford to buy? Compare mortgage rates. For instance, if you're considering purchasing a house in the $200,000 to $250,000 range, a down payment of $20,000 could be the difference between an additional $200-$300 monthly on a higher priced home.

Why debt ratios are important to lenders

Your debt-to-income ratio is a simple way of showing lenders what percentage of your income is available for a mortgage payment after taking all of your other debt obligations into consideration. You may see conventional loan debt limits referred to as the 28/36 qualifying ratio with FHA and VA loan ratios typically running higher at 29/41. Both numbers are percentages that are used to examine two unique aspects of your debt load.

The first number, or the front-end ratio, indicates the maximum percentage of your monthly gross income that the lender is willing to allow for housing expenses. This total includes payment on the loan principal and interest, private mortgage insurance (PMI), property taxes, and hazard insurance, collectively referred to as PITI, and homeowner's association fees, if any.

The second number, or the back-end ratio, indicates the maximum percentage of your monthly gross income that the lender is willing to allow for housing expenses plus recurring debt. This total includes credit card payments, child support, car loans, and other obligations that extend beyond 6-10 months to repay.

If you're unable to come up with a down payment to obtain a loan close to what you're paying for rent, then consider lowering your debts to decrease your back-end ratio to pre-qualify for a higher loan amount. However, depending on the lender, some have been known to approve back-end ratios as high as 60%. More aggressive lenders even offer 100% financing with no stated income, no ratio pre-determination, and no income verification mortgages.

Once you have an idea of how much additional debt you might qualify for, then you can experiment using a mortgage rate calculators by inserting different variables (e.g., expenses, credit card loan balances, down payments, etc.) to determine how much home you can afford.

Compare the best mortgage rates.

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Buy versus Rent

Buy versus Rent

A home is one of the most expensive purchases most of us will ever make during our lifetime. Whether you decide to rent or buy, either choice comes with its own rewards and risks.

A home is one of the most expensive purchases most of us will ever make during our lifetime. Whether you decide to rent or buy, either choice comes with its own rewards and risks. Homeownership offers many advantages over renting including:

Advantages of Buying versus Renting

Buying Renting
Tax write-off. No tax write-off.
You can upgrade your home as you see fit. Need permission to make any changes.
Build equity in your home as value appreciates. Your money goes toward the landlords equity.
Control of loan payment options
Compare mortgage rates.
Rent can increase periodically.
Pride of homeownership. You have no ownership.

While owning your own home has many benefits, there are still risks to consider:

Disadvantages of Buying versus Renting

Buying Renting
You're responsible for property maintenance. Your landlord or manager handles general repairs.
Need to sell, rent or lease property in order to re-locate. May have to wait until market conditions are right. Freedom to move once your lease expires.
You pay for all your own utilities, property taxes and insurance. May include utilities, property taxes, and property insurance.
Home improvement upgrades can run into the thousands of dollars. You're not financially responsible for improvements.
Homes can depreciate in value depending on market conditions You don't have equity, therefore nothing to depreciate. However, depreciation of home values may cause rent to rise.

However, all things considered, homeownership is by far one of the best single investments you can make given the potential long-term benefits.

When does it make sense to buy?

People who have rented for several years want to purchase a home for various reasons. One reason is that owning something of value with a chance of watching their investment appreciate. Purchasing a home to save money over the long-term is another.

Example

Assume you're currently renting a 2-bedroom, 2-bath apartment with a monthly rent of $1,000. You find a 2-bedroom, 2-bath home at a market price of $250,000 (roughly the national average.) You have $25,000 saved - enough for a 10% down payment. For the purpose of this example, you're looking to finance $225,000 which includes closing costs. Compare mortgage rates.

 

Assuming a 6.20% APR mortage loan, your monthly payment would be approximately $1,385. If you assume a 1% property tax rate and and a 4% annual appreciation in value your effective monthly payment over five years would average $499 per month.

Costs Savings of Buying versus Renting

Results
Calculations Rent Purchase
Monthly rent/estimated mortgage payment $1,000 $1,385
Purchase price of home   $250,000
Percentage of down payment   25,000
Length of loan term (years)   30
Interest rate   6.2%
Years you plan to stay in the home   5
Yearly property tax rate   1%
Yearly home value appreciation rate   4%
   
Price of home after appreciation   $304,163
Remaining balance after 5 years   209,887
Equity in house   94,276
Tax savings (28% bracket)   23,030
Avg. monthly payment over time 1,047 499
Total payments (over 5 years) $62,820 $29,973
Total savings if buying $32,847

Source: Ginniemae.gov. These calculations are estimates only. You should always seek the guidance of financial or tax experts before making any buying decisions.

The outcome could dramatically change should an unforeseen economic downturn or financial hardship occur (e.g., home improvement costs, catastrophic damage, etc.). While, no one can predict if home appreciation values will spiral downward, or if mortgage interest rates will rise, it's clear that under the right circumstances home ownership can be financially rewarding.

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