Mortgage Library

Closing Costs Explained

Closing costs are the expenses that the lender accumulates on your behalf from the origination of your new home loan. Some of these costs may be related to your loan application, while many other fees are related to purchasing the house itself.

Unless the lenders specifically offers to pay them for you, these expenses are charged to you the buyer and often will cost between 2.5% and 6 percent of the amount being borrowed. Because different states require different taxes and fees to be included, it is impossible to come up with a generalization that applies to loans nationwide.

Typical closing costs include loan application fees and credit reports, title search and insurance fees, property appraisal, lender's attorney fees, inspections, survey, recording fees, transfer taxes, buyer's attorney, document stamps, points and origination fees, and potentially more. Escrow accounts are often required for many loans for homeowners insurance, real estate taxes, and homeowners associations and require cash deposits at closing.

After your initial meeting with a bank and/ or mortgage professional, you should receive a Good Faith Estimate (GFE) that shows all of the closing costs associated with your mortgage application. This estimate is required by The Real Estate Settlement Procedures Act and must be given to you within 3 days of applying for the loan.

You may be able to negotiate some of the fees included in your closing costs. Things like credit reports typically cost the same with every mortgage program. However, if you see that your preferred lender is offering a great rate but is over-charging on closing costs, point out the discrepancies and ask them to lower certain charges. Keep in mind that most third party fees have been previously negotiated between the mortgage company and the third party, and may not be able to be reduced. Also, watch out for "filler/junk fees" that are included with most mortgage programs. Once you identify a filler fee, try to negotiate it down or eliminate it entirely before accepting the loan.

Home Mortgage Rate Factors

	Increase in amount	Decrease in amount
Amount of Loan	Rates Up	Rates Down
Length of Loan	Rates Up	Rates Down
Adjustable Rate	Rates Down	Rates Up
% Down Payment	Rates Down	Rates Up
Discount Points	Rates Down	Rates Up
Closing Costs	Rates Down	Rates Up
Credit Quality	Rates Down	Rates Up
Income Level	Rates Down	Rates Up
Lock In Period	Rates Up	Rates Down

The loan size may affect your interest rates due to the conforming loan limits established by Fannie Mae and Freddie Mac at the beginning of each year. If the amount financed exceeds the conforming loan limits that have been established for the year, interest rates can increase.

Shorter loans can save you thousands of dollars in interest payments over the life of the loan, but will raise the cost of your monthly payments. An adjustable rate mortgage may initially give you a lower rate than a fixed interest mortgage, but your payments are subject to increase as soon as the interest rate changes. Example if you pay off your house in 15 years vs. 30 years.

The size of your down payment can also affect interest rates. Large down payments, usually those that are greater than 20 percent, will get you the best available rates. Smaller down payments of 5 percent or less will bring higher rates as you are offering less equity as collateral. If you have money on-hand when you apply for your loan and would like to lower your interest rate, it is a good idea to put more money down. The concept is simple: In exchange for more money (collateral) upfront, lenders are willing to lower the interest rate they charge, since there is less risk involved for them. This subsequently reduces your monthly payments. This in essence reduces the risk of a borrower from going into forclosure if/when home prices decline.

Closing costs are fees paid by the lender. If you don't want to pay all of the closing costs, expect a higher rate which will pay the lender additional interest over the life of the loan. In essence you can pay today or pay over the next 30 years.

Your credit quality and income level will also affect your interest rates because they determine your FICO Score, which is used when calculating loan terms. If you have excellent credit and your income surpasses the amount of debt you owe, you will receive lower rates. However, if your monthly income is insufficient to meet minimum debt obligations, you will receive a higher interest rate, even if you have a stellar credit report. Basically, the more money you make and the stronger your credit score, the better the rate a bank will offer you.

Information on Mortgage Rates

Research Rates

Begin by checking out current interest rates and recent rate movements when shopping for a mortgage. Mortgage rates generally rise and fall along with Wall Street securities and generally reflect the overall direction of federal interest rates. By keeping an eye on mortgage market trends and key economic indicators, a borrower has a better chance of obtaining the best interest rate.

What is APR?

A reference used to compare loans across different lenders is the Annual Percentage Rate (APR). The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. It is designed to represent the true cost of the loan to the borrower, expressed in the form of a yearly rate. The purpose is to prevent lenders from hiding fees and upfront costs behind low advertised interest rates.

Meeting with a Lender

You may prefer to meet with the mortgage company before house hunting to determine in advance how much you can afford and the size of the mortgage amount for which you can qualify. This step is called pre-qualification and can save you time and trouble by making certain you are looking in the correct price range.

Lock in Your Rate

A lock in, also called a rate commitment, is a lenders guarantee to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.

FHA Loans

FHA loans have been helping people become homeowners since 1934. How do we they it? The Federal Housing Administration (FHA) — which is part of HUD — insures the loan, so your lender can offer you a better deal.

• Low down payments
• Low closing costs
• Easy credit qualifying

What the FHA has for you?

FHA might be just what you need. Your down payment can be as low as 3% of the purchase price, and most of your closing costs and fees can be included in the loan. Available only on 1-4 unit properties.

HUD 203(b)

What is the purpose of this program?

To provide mortgage insurance for a person to purchase or refinance a principal residence. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.

The eligibility requirements?

• Borrower must meet standard FHA credit qualifications.
• Borrower is eligible for approximately 97% financing. The borrower is able to finance the upfront mortgage insurance premium into the mortgage. The borrower will also be responsible for paying an annual premium.
• Program's Eligible properties are one-to-four unit structures.

Fixer Upper

FHA has a loan that allows you to buy a home, fix it up, and include all the costs in one loan. Or, if you own a home that you want to re-model or repair, you can refinance what you owe and add the cost of repairs - all in one loan.

The purchase of a house that needs repair is often a catch-22 situation, because the bank will not lend the money to buy the house until the repairs are complete, and the repairs can't be done until the house has been purchased.

HUD's 203(k) program can help you with this dilemma and allow you to purchase or refinance a property plus include in the loan the cost of making the repairs and improvements. The FHA insured 203(k) loan is provided only through approved mortgage lenders nationwide. It is available to persons wanting to occupy the home.

Financial help for seniors

Are you 62 or older? Do you live in your home? Do you own it outright or have a low loan balance? If you can answer "yes" to all of these questions, then the FHA Reverse Mortgage may be right for you. It lets you convert a portion of your equity into immediate cash.

Top Ten Things to Know about a Reverse Mortgage

Reverse Mortgages are becoming popular in America. The U.S. Department of Housing and Urban Development (HUD) created one of the first of them. HUD's Reverse Mortgage is a federally-insured private loan, and it's a safe plan that can give older Americans greater financial security. Many seniors will use it to supplement social security or meet unexpected medical expenses or make home improvements.

Since your home is usually your largest single investment, it's smart to know more about reverse mortgages, and decide if one is right for you!

1. What is a reverse mortgage?

A reverse mortgage is a special type of home loan that lets a homeowner sell a portion of the equity in his or her home into cash. The equity built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. HUD's reverse mortgage provides these benefits, and it is federally-insured as well.

2. Can I qualify for a HUD reverse mortgage?

To be eligible for a HUD reverse mortgage, HUD's Federal Housing Administration (FHA) requires that the borrower is the homeowner, 62 years of age or older; own your home outright, or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan; and you must live in the home. You are then further required to receive consumer information from HUD-approved counseling sources prior to obtaining the loan.

3. Can I apply if I didn't buy my present house with FHA mortgage insurance?

Yes you can. It doesn't matter if you didn't buy it with an FHA-insured mortgage. Your new HUD reverse mortgage will be a new FHA-insured mortgage loan.

4. What kind of homes are considered eligible?

Your home must be a single family dwelling or a two-to-four unit property that you personally own and occupy. Townhouses, detached homes, units in condominiums and some manufactured homes are also eligible. Condominiums must be FHA-approved. Yes, it is possible for individual condominiums units to qualify under the Spot Loan program.

5. Is there a difference between a reverse mortgage and a bank home equity loan?

Yes, with a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. However, the reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You don't make any payments, because the loan is not due as long as the house remains your principal residence. Like all homeowners, you still are required to pay the real estate taxes and other payments like utilities, but with an FHA-insured HUD Reverse Mortgage, you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."

6. Can the lender take my home away if I outlive the loan?

No! You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than your home's value.

7. How much money can I get from my home?

The amount you can borrow depends on many conditions including your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

8. How do I receive my payments?

You have five options:

• Tenure — these are equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term — here equal monthly payments for a fixed period of months selected.
• Line of Credit — this provides unscheduled payments or in installments, at times and in amounts of borrower's choosing until the line of credit is exhausted.
• Modified Tenure — this is a combination of line of credit with monthly payments for as long as the borrower remains in the home.
• Modified Term — provides combination of line of credit with monthly payments for a fixed period of months selected by the borrower.

Buying a Home

The home buying process can be complicated, but if you take things step-by-step, you will find owning your own home is easier than you thought!

Steps to buying a home:

1. Figure out how much of a mortgage you can afford
2. Shop for a loan
3. Learn about home buying programs
4. Shop for a home
5. Understand the neighborhood & schools
6. Make an offer
7. Get a home inspection
8. Shop for homeowners insurance
9. Sign papers

Step 1: Figure out how much of a mortgage you can afford

What size mortgage you can afford depends on your income, credit rating, current monthly expenses, down payment and the interest rate.

Step 2: Shop for a loan

You will save money by doing some homework. Talk to several lenders, compare costs and interest rates, and negotiate to get a better deal. Consider getting pre-approved for a loan.

Step 3: Learn about home buying programs

There are many program out there for you. Some FHA loan programs offer lower down payments and are a good option for first-time homebuyers. Take the time to find what fits you the best.

Step 4: Shop for a home

If you choose a home in a neighborhood with a Home Owners Association (HOA), be sure to request a copy of the HOA packet, so you can review before closing. Take your time there are bargains out there. Do your research and consider your families growth when choosing the home that fits you best.

Step 5: Understand the neighborhood & schools

You know what they always say... location, location, location are the three most important factors in buying real estate. Take into consideration school quality, taxes, commuting distance, safety of neighborhood.

Step 6: Make an offer

Discuss the process with your real estate agent. If the seller counters your offer, you may need to negotiate until you both agree to the terms of the sale. Don't be afraid to bid low, you can always increase you price.

Step 7: Get a home inspection

Make your offer contingent on a home inspection. An inspection will tell you about the condition of the home, and can help you avoid buying a home that needs major repairs. Think about it, you are about to make the biggest purchase in your life, doesn't it make sense to make sure it's a worthwhile investment. A qualified inspector will point out areas of concern and sometimes you can use their finding to reduce the purchase price.

Step 8: Shop for homeowners insurance

Lenders require that you have homeowners insurance. Be sure to shop around. Prices vary greatly based on coverage scope, flood plains as well as deductible amounts.

Step 9: Sign papers

You're finally ready to go to "settlement" or "closing." Be sure to use an attorney and read everything before you sign!