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By Kate Strassel | Citizens Bank Staff
Buying your first home can be daunting. You’ve found a house; submitted an offer; waited anxiously for said offer to be accepted; and applied for the loan. You’re finally in the home stretch!
Then you receive the Loan Estimate — and included within it, a long list of closing costs. You may have thought you were pretty savvy when it came to mortgage terms, but you’ve never even heard of some of these fees. Prepaid interest? Loan origination fee? Title search fee? For a brief moment, you may wonder why you didn’t just renew your apartment lease for another year.
Don’t worry: Closing costs are a normal part of the home-buying process. Even if you pay cash for a home, you’ll still pay some costs to complete the sale and transfer of the property. Keep reading to learn about the different types of mortgage closing costs and how they may affect the amount you’ll need to pay at the closing.
Put simply, closing costs are the fees that pay for the many services that go along with buying a home and taking out a mortgage. Most, if not all, are the responsibility of the buyer, and the total costs average between 2% and 6% of the loan amount, depending on your area.
Closing costs can generally be divided into two categories:
Costs associated with the loan. Examples may include:
Other costs to close. They may include:
Lenders have a fixed amount of time — usually within three days of receiving your completed mortgage application — to provide you with your Loan Estimate. This is not a loan approval; it simply outlines what the lender plans to offer you should you be approved for and accept the loan. In addition to information about your closing costs, the Loan Estimate lists your estimated monthly mortgage payment, estimated interest rate, and additional stipulations like prepayment penalties.
Once you’ve been approved for your loan, you’ll receive the Closing Disclosure. Be sure to read this document carefully. The closing costs are listed on page 1 of the document, and explained in detail on page 2. Review each cost for accuracy and possible duplications.
You know how sometimes you’re asked to read a “Terms and Agreement” policy online, and you just scroll through and click “Accept”? Don’t do that with your Closing Disclosure or any of your other mortgage closing documents for that matter. Take the time to read and understand every item; if you’re not sure about something, ask your lender for clarification.
The most cost effective way to pay for your closing costs is out of pocket at the closing. Keep this in mind when reviewing the Loan Estimate: Will you have enough cash left over after the down payment to cover the costs? If you’re still in the process of saving for a down payment on a home, now’s a good time to estimate how much you might need for the closing costs (2-6% of the amount you plan to borrow) and increase your savings goal to include that amount.
In some cases, a lender may offer a credit at closing that offsets the out-of-pocket closing costs — in exchange for a higher interest rate. This may seem enticing, since you won’t have to come up with as much cash for the closing. However, you’ll likely end up paying more for those costs in the long run because you’ll be paying interest on them over the life of your loan.
Regardless of whether you pay for your new home in cash (sounds crazy, but some people are able to) or you finance the purchase price via a home loan, closing costs need to be paid. Now that you understand what the potential costs are and how much you’ll need to pay at the closing, you can shift your focus back to the more pleasant aspects of buying a home. Furniture shopping, anyone?
One last note: You may have heard the term “no-closing-costs mortgage” tossed around. It sounds too good to be true — and it usually is. The term itself is misleading; there are closing costs, but they’re just rolled into the loan, which, as discussed earlier, means you’d be paying interest on them. Your situation and future plans will determine whether this option makes sense for you.
Found the home of your dreams and ready to take the next step? A Citizens Bank Loan Officer can help you determine the best mortgage terms and rates for your unique situation. Visit us online or stop by your nearest branch to get started on the application process.
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