The Difference Between Rates and Closing Costs
Whether you are a first time homebuyer or you have purchased a home in the past, many people are scared of the word mortgage, not just because of the payment, but also because of costs they know come along with a loan. Every loan has closing costs related to the purchase of a home. The scary part can by not knowing what those costs are. We want to explain to people more of what closing costs are and what they can expect when looking for a mortgage.
What are closing costs?
Closing costs can be divided into two sections, basic closing costs and origination fees.
Basic Closing Costs – There are basic fees that all mortgage lenders have including: loan processing and underwriting fees, home appraisals, title settlement fees, and insurance. These costs generally don’t vary too much from one lender to another.
Origination Fees – Origination fees or origination points are paid on top of other costs. Usually these are used to buy the interest rate down and this is where you can see variation from different lenders.
Typically, total closing costs range from 2 to 5% of the home purchase price.
Is it worth paying points to get your interest rate down?
The first thing you need to determine is whether paying more money in closing costs up front will out weigh the monthly savings you will receive with a slightly lower interest rate.
For example: Should you pay $2000 at closing time for an additional origination point to lower rate and save only $20 per month on your payment? Or is it better to take a higher loan interest rate up front and save that $2000 in additional closing costs? In most cases it is better for you to take the higher rate with cheaper closing costs because people rarely keep their loan for more than 5 years. Many people move to a different home or refinance their mortgage as rates change.
Your Closing Costs Shouldn’t Be a Surprise – Know Before
As you are looking for a home loan and apply with a particular lender, the lender is required to give you a Loan Estimate within 3 days of your application. The Loan Estimate will show the terms of your loan, payment, and estimates of what closing costs will be on your particular loan so you know what to plan for before closing on your home. The Loan Estimate is an estimate of these costs and not final numbers. A few days before your home closing, you will receive a Closing Disclosure that gives final numbers of your loan payment and closing costs. You should compare this document to your original loan estimate to make sure they match closely. If you have any questions make sure you talk with your loan officer. You don’t want any surprises when you go to sign on the loan.
Talk to a Professional
It’s so important to sit down with a loan officer to discuss any questions you may have about a mortgage, costs, and your individual situation. Together you can determine terms of a loan and any costs that come along with it.