10/19/2022
Buying a home in the United States is not a simple or cheap process, that's no secret to anyone. If you're thinking about buying a property, you have to worry about having the down payment (20% or more if you don't want to pay a Private Mortgage Insurance) and assuming the mortgage closing costs.
These additional fees are what we will talk about in this article.
Why do I have to pay closing costs?
Mortgage closing costs are a series of charges and fees related to the sale and purchase of real estate that are borne by both the owner and the buyer.
These fees vary depending on the type of mortgage loan, the property you decide to buy and the laws of the state. The closing is when the title is transferred from the owner to the new owner, where the mortgage loan is formalized and used to make the payment.
- Interest: From 4.75% to 5.75%
- Max term: 30 años
- Interest: Consult
- Max term: 30 años
- Interest: First years fixed-rate and the rest adjustable: SOFR + margin
- Max term: 30 años
- Interest: SOFR + margin
- Max term: 30 años
- Interest: From 5.125%
- Max term: 30 años
Among the most common closing costs you will find the title search, title insurance, attorney's fees, taxes, lender's fees and property insurance, which is paid before closing.
Some are non-negotiable, such as local transfer taxes or registration. Others, such as bank fees, can be negotiated. You can also work out an agreement with the owner or lender that they will cover a portion of the closing costs.
The most common mortgage closing costs
According to the rule, buyers should receive a mortgage loan estimate 3 days after the application is approved, which contains the closing costs.
Then, 3 days before closing, you should have in your hands the closing statement, a statement that tells you the final details about the mortgage and the closing costs.
Closing fees are divided into 3 main sections: prepaid costs, title fees and lender charges. We will review each of these below:
Title fees
These typically make up 70% of the expenses related to closing costs. Therefore, we recommend you compare these services so you can save money on the title search, title insurance and settlement.
The bank requires insurance for the requested amount of the mortgage loan and we recommend other optional insurance to protect your investment in the property. This covers you against claims of possession, a lien on the home, unpaid work and for taxes omitted by the previous owner.
Prepaid fees
It is common for the lender to ask you to open an escrow account in order to collect property taxes and homeowner's insurance. At closing, you will have to pay 1 year of insurance and 2 months of premiums as a reserve.
In addition, you will have to pay 2 to 6 months of taxes depending on when the bill is due, which can be very expensive depending on the location of the property. Sometimes, if you put 20% or more down, you may receive an exception to these charges.
Lender fees
This is undoubtedly the largest category because it refers to the guarantees required by the financial institutions that provide you with financing. They can often be grouped together in what is called origination fee.
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This concept groups costs related to: appraisal, administration, processing, credit check, flood certification (if necessary), mailing, transfer taxes and deeds. In addition, you will find options such as mortgage discount points.
Closing Fees for Sellers
Owners who decide to sell their homes are also subject to various fees for these transactions. The most costly is the real estate commission, a split between the buyer's agent and the listing broker, which is usually 6%, but ranges from 5 to 8%.
In addition to paying the cost of the title, the owner must pay the transfer tax, which can range from $1 to $2 per $500.
Example of mortgage closing costs
Now that we have the main fees you may be charged, let's take a simple example to illustrate what it might cost you. Let's assume for a moment that you apply for a mortgage loan for $162,000 with a fixed interest rate of 3.875% and you put 10% or $18K down.
When we process this data, we get the following:
- Bank or lender fees: $1,802.
- Third party fees (appraisal, taxes, etc.): $3,870
- Prepaid costs and owner's payments: $2,382
- Total: $8,054
This is just a basic part of the closing costs that hopefully will give you a more accurate idea of what is involved in buying a house or apartment through a mortgage. You can find several online tools to calculate the closing costs, like the calculator that offers Bank of America.
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