Closing Costs and Points Explained

One of the great mysteries of home buying, at least to those who have never been through the process, is closing costs. While nearly everyone has heard of them, few who haven't had to pay them really understand them. Even some people who have paid them aren't sure what they spent all that money on.

Closing costs are the various fees that a homebuyer must pay before the mortgage lender will finalize the mortgage. Generally speaking, these costs are about 3 to 6 percent of the amount borrowed. That is in addition to your down payment. Following are some of the components of your total closing costs.v The lender will charge an application fee to cover the costs of completing your mortgage application. This may or may not include the fee for your credit report. They will also charge a loan origination fee, also known as points. This covers the administrative costs of processing your mortgage. One point is equal to 1% of the total amount loaned.

Many lenders offer the option to purchase without points, but keep in mind that this will result in a higher interest rate. There are also lenders who will let you pay additional points to lower the interest on your loan.

Title insurance will be required by your lender. This protects you and the mortgage company in case the seller does not have the legal right to sell it. There could be unknown co-owners of the property, or it could have an unpaid lien against it that would prevent the seller from legally selling it.

An appraisal is also required by lenders. This is to ensure that the home is worth the amount loaned to you to purchase it. A home inspection is not usually required, but it's a good idea to have one. The cost of the inspection could also be considered part of closing costs.

Homeowners insurance is a standard requirement of mortgage lenders. They will require proof of it and may require you to pay the first year's premium before closing. Private mortgage insurance may also be required depending on the amount of your down payment, and part of the fee will be included in your closing costs.

Taxes associated with the transfer are usually the buyer's responsibility, unless other arrangements are agreed upon. You may also have to pay for a survey of the property. You will likely be required to pay the interest accrued between the time your mortgage was originated and the due date of your first payment. Attorney and notary fees may also be a part of your closing costs.

Closing costs are comprised of all of the expenses that must be paid before the purchase of your new home is finalized. Points are a fee charged by your lender that may be somewhat flexible and directly affect your interest rate. Knowing what these terms mean and what fees they consist of can help you be more prepared for them when the time comes.

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