Navigating Closing Costs: How Understanding Fees Can Save You Money
Understanding Closing Costs: Where Does Your Money Go?
So that we start on the same page, let’s first start with a definition. Closing costs are the fees and expenses you pay when finalizing a
mortgage. Industry-wide, these costs cover various services required
to complete the transaction. Knowing what these costs entail is important for budgeting and negotiating effectively.
Breaking Down Common Closing Costs
There are many places where closing costs can quickly accrue, snowballing beyond your expectations if you’re not careful. Let’s take a
look at some of the typical types of closing costs and fees that you’ll want to be aware of. .
Loan Origination Fees
Loan origination fees are charges by lenders for processing new
applications for mortgage loans. These fees can include origination fees, which are based on a percentage of the loan amount charged for creating the loan; discount points, fees
paid to reduce the interest rate on your mortgage; and administrative and application fees that cover the costs of handling paperwork and processing
your application.
Credit Report Fees
Credit report fees cover the cost of pulling your
credit history
to assess your eligibility for a loan. These fees have been increasing, so it's essential to check what you're being charged.
Verification Fees
These fees can sometimes be charged by your employer if they use an automated service for processing these requests. The larger your employer is,
the greater the chance these will be applicable.
Tax Service Fee
This fee goes to a tax service agency that monitors your property tax payments, ensuring they are paid on time, which protects the lender's
investment. Some lenders include this fee in the origination fee, others charge a separate fee.
Appraisal Fee
An appraisal fee pays for a professional to determine the market value of the home, ensuring you're not overpaying and that the lender isn't lending
more than the property's worth.
Title Insurance and Related Fees
Title insurance protects against potential legal issues with the property's title. Fees in this category can include:
- Closing Fees: Fees charged by the title or escrow company for managing the finalization of your real estate transaction.
-
Lender's Policy: Title insurance that protects the lender's financial interest in the property against potential title defects.
-
Owner's Policy Endorsements: Additional coverages added to the standard owner's title insurance policy for specific protections
not included in the basic policy.
-
Miscellaneous Title Charges: Various additional fees related to title services, such as document preparation, notary services,
and title searches.
Some title companies also charge for facilitating the loan document signing.
Recording Fees
These fees cover the cost of filing and transfering the property ownership and new mortgage and with the local government.
Prepaid Expenses
Prepaid expenses are not actual closing fees but upfront payments for costs you'd pay regardless. A typical example is prepaid insurance, which is
paid a year in advance. Another is the setup of escrow, which collects for taxes and insurance. Your monthly payment will typically include an
amount being 1/12th of this combined annual cost. Initially funds are collected in advance to start the escrow account to ensure sufficient funds
are available to pay the upcoming expenses on your behalf.
Home Inspection Fees
While usually optional, inspections for radon, termites, water quality, septic systems, and roofs are highly recommended to protect your investment.
Smart Strategies to Manage Closing Costs
Maximizing your savings on closing costs doesn't have to be daunting. Here are some strategies to consider.
- Evaluate lenders carefully: Take the time to compare multiple lenders. Look for transparency in fees and open discussions.
-
Shop around for services: You can choose your own providers for some services like title insurance and home inspections. Compare
prices for potential savings.
-
Understand each fee: Ask your lender for a clear breakdown of each fee to ensure you're not paying for unnecessary charges.
- Negotiate where possible: Some fees can be negotiated. Always ask if discounts or fee waivers are available.
-
Consider seller contributions: Discuss with your lender and real estate agent if the seller can cover part of the closing costs,
If so, include during contract negotiations.
-
Shop around for insurance: There may be opportunities to save money with insurance providers, especially if you’re able
to bundle your home, auto, and other policies. Explore options with your agent on possibly taking a higher deductible, and compare the savings
vs. the risk of the higher deductible. Ask your agent to go through each coverage and decide what coverages you may or may not need. Don’t
be afraid to shop a few companies for comparisons too.
Making Informed Choices: The Key to Savings
Understanding the intricacies of closing costs empowers you to make decisions that can save you money. When you see a lower interest rate, be sure
that it does not include additional fees like origination or discount points used to buy down the rate. Sometimes a lower rate is not always a
better value. We are happy to help you compare your options.. That’s what being a community bank is all about!
It's essential to look beyond the headline numbers and examine the full breakdown of costs. This approach ensures you're comparing apples to apples
and choosing the best option for your financial situation. One way you can do this is by using the Consumer Financial Protection Bureau’s
Loan Estimate Explainer
tool. You can use this tool to review your loan estimates. If something looks different from what the lender said, insist on clarification.
Your Partner in Transparent Mortgage Solutions
Closing costs are an integral part of the home-buying process, but they don't have to be a source of stress. By understanding where your money is
going and how different lenders structure their fees, you can make informed decisions that save you money both upfront and over the life of your
loan.
At Dream First Bank, we're committed to helping you navigate the complexities of getting a
home mortgages. If you're ready to explore your options with a lender
who puts your interests first, contact Dream First Bank today for a consultation.