Mortgage Loans 101: How to Prepare for Closing Costs
Written by: Brandon Cornett
Most home buyers understand the basics of home mortgage loans.
They know what a mortgage loan is, how interest works, and other
fundamentals of the home loan process.
But when it comes to the closing costs associated with buying a
home, many of these same home buyers get caught off guard - by
both the variety and total amount of closing costs. By
understanding and preparing for these costs ahead of time, you
can avoid such surprises.
What Are Closing Costs?
Closing costs are the total cost of completing the transfer of
ownership of a house. These costs do not include the purchase
price of the home. Rather, they are the extras -- fees and
expenses aside from the purchase price.
On average, closing costs range between 3% and 5% of the total
loan amount. So for a loan of $200,000, closing costs might run
$6,000 to $10,000 (3% and 5% respectively of $200,000).
What's Included Within Closing Costs?
Closing costs vary depending on where you live and what mortgage
lender you choose. But closing costs often include fees for the
following (this list is not all-inclusive):
* Loan origination
* Loan application
* Document preparation
* Attorney's services
* Escrow agent's services
* Pest inspection
* Credit report / processing
Getting an Estimate of Closing Costs
The Real Estate Settlement Procedures Act, or RESPA, requires
that mortgage lenders give you a good faith estimate of all the
loan-related fees you're likely to pay at closing. They must
give you this estimate at the time of loan application. Keep in
mind, however, that these are just estimates. Actual closing
costs may be more than the good faith estimate closing costs.
It's a good idea to obtain good faith estimates from multiple
lenders. Don't choose a lender based on their interest rates
alone. Shop around for estimated closing costs as well.
Just realize that large discrepancies between estimated and
actual closing costs are not uncommon. You can prepare yourself
for this by having enough money in the bank to cover the good
faith estimate amount and then some.
A few days before closing, you will receive another document
called a settlement statement, or "HUD-1 statement." This
document will give you a more exact tally of the closing costs
you'll be expected to pay at closing.
Closing costs include a wide variety of fees and charges. They
can add up to a sizable amount, so it's important to prepare for
them in advance. Be sure to factor closing costs into the
equation when looking for a mortgage lender. Proper planning can
help you avoid unpleasant surprises on closing day.
* Copyright 2006, Brandon Cornett. You may republish this
article in its entirety, provided you leave the byline, author's
note and website hyperlink intact.
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