Buying Costs & Fees Explained
When you are financing a home purchase rather than paying cash, you need to be prepared to pay some initial fees aside from your first monthly mortgage payment. In general, the fees associated with a home purchase include closing costs, loan discount points and prepaid items.
The amount you will pay in closing costs varies by location and typically costs between 2% and 3% of the loan amount. Closing costs are not calculated on a percentage basis, but instead are based on specific line items related to your loan application and lender fees.
Unless you have negotiated to have someone else pay these costs, they are your responsibility to pay at the settlement.
- Some examples of closing costs include:
- Loan origination fee
- Credit report fee
- Loan application fee
- Title services fee and lender’s title insurance premium
- Owner’s title insurance premium
- Survey fee
- Appraisal fee
- Government recordation fees and transfer taxes
- Attorney fees
Loan Discount Points
A discount point is equal to 1% of your loan amount. You may or may not have agreed to pay points for your loan in order to lower the interest rate. If you chose a loan with discount points, then you will pay the point or points at the closing.
Most lenders require an escrow account to be established with your loan to cover your property taxes and homeowner’s insurance. Each of those bills will be estimated and then, as part of your monthly mortgage payment, you will pay a portion of those bills to your lender. When the insurance and tax bills come due your lender pays them for you.
Lenders prefer this method of paying those two bills because your home serves as collateral for your mortgage. If you end up with a tax lien for unpaid bills or you lack insurance to make repairs or to replace your home if it’s destroyed, then the lender loses part or all of the collateral.
An origination fee is what the lender charges the borrower for making the mortgage loan. Origination services include taking and processing your loan application, underwriting and funding the loan, and other administrative services.
When you make an offer by signing a contract, you’ll also pay a deposit called earnest money, usually 1- 5% of the purchase amount, to show that your interest in the house is serious. Paid by the buyer, earnest money is a portion of the purchase amount that is held by the escrow company while the transaction is in process. When the transaction closes, the earnest money is transferred to the seller as a portion of the original purchase amount. It is not an additional fee.
The down payment is a portion of the purchase price that the buyer is paying in cash. Down payments can range between 3.5% and 100% and each buyer, working with their lender, determines the best scenario for their particular purchase.
How Does This All Work?
Upon entering into a contract to purchase a home for $200,000 (purchase amount) with earnest money of $5,000, the buyer’s earnest money check is deposited into the escrow company’s trust account. The buyer’s decide on a mortgage program with a 5% down payment ($10,000) and their closing costs total $3,750. The buyer will also pay prepaid taxes and insurance etc. The mortgage will be for 95% of the purchase amount ($190,000).
Down Payment $10,000
Closing Costs $3,750
Prepaid Taxes & Insurance $1,000
Earnest Money Credit ($5,000)
Additional Amount Collected $9,775
From Buyers at Closing
Purchase Amount $200,000
Buyer’s Closing Costs $3,750
Prepaids/Tax & Insurance $1,000
Total Cost to Buyer $204,750
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