You can expect the total closing costs to be 2%-3% of the purchase price of the home. Some lenders will agree to fold your portion of the costs into the home loan or allow the seller to pay for them. But if they don’t you will be expected to pay for these charges at the closing itself.
Unless you’re in the enviable position of having enough cash on hand to buy a home outright, you will need to finance the purchase. In most cases, this means you will have to apply—and be approved—for a mortgage loan. When you finance the purchase with a bank loan, you will incur several expenses besides the house and title fees at the time of purchase.
There are three types of extra costs associated with financing a home: loan closing costs, loan discount points and prepaid fees. Here’s a look at each type in detail.
Loan Closing Costs: Closing costs are expenses that the lender charges in order to underwrite your loan. There are three sub-types of loan closing costs:
- Loan applications fee: the lender may charge a fee to run credit checks and to process your loan application.
- Costs for writing the loan: once the lender has approved you for a loan, it then incurs expenses to actually write the loan that will be your legal mortgage document. Loan origination fees are an example of this type of cost.
Loan Discount Points: Loan discount points are a type of prepaid interest. They are particularly good for the lending institution because the lender is receiving an extra amount of money up front. On the positive side, it lowers the interest rate you would pay over the life of the loan. Most home buyers would prefer not to pay discount points, though, since it means a larger initial outlay of cash. But some employers and home builders will offer to pay discount points for you as an incentive when you are transferred for a new job, or to buy a newly constructed home.
Prepaid Costs. You have probably heard the term “escrow.” An escrow is simply a bank savings account that the lender holds for your property. Each month, you deposit into the account enough money to cover the mortgage loan’s monthly payment, as well as additional amounts for property taxes and home insurance. Most lenders will require that you deposit enough funds at the beginning of the escrow account to pay for two month’s worth of insurance and nine months of property taxes. This amount is due at the closing.
- It is negotiable who pays these costs.
- They can be included as part of the total purchase or loan.
We can show you how to limit your closing costs so you’ll have to bring little or no money to the closing. Call Susanne today at 614-975-9650 to discuss strategies for negotiating closing costs, as well as for maintaining your cash flow at your closing.