Mortgage Closing Costs Explained
As first-time homebuyers quickly discover, there are countless things to understand during the mortgage process. You have to figure out how much home you can afford, gather all of your paperwork to apply for a mortgage, and find the best mortgage lender. One often overlooked aspect of buying real estate – and obtaining a mortgage – is the added expense of closing costs on a home. Here are some answers to frequently asked questions about home loan closing costs. It’s likely, however, you’ll also want to speak to someone with expertise on the topic, and First Federal Bank’s local mortgage experts are ready to help.
What are closing costs?
Closing costs vary state by state and institution by institution. Some websites list as many as 27 possible charges, but very few consumers pay all of these. At First Federal Bank, we strive to limit closing costs and keep home loans as affordable as possible.
How many types of closing costs are there?
Typically, interest rates for cash-out loans are lower than credit cards and have fixed rates, making it a good option for large purchases. Interest on Cash-out Refinance Loans is tax deductible* and can offer borrowers big savings come tax season.
How much can closing costs on a home purchase add to a real estate transaction?
The national average of closing costs is between 2% and 5% of the mortgage. So, on a $100,000 mortgage, closing costs can add up to $2,500.
What is included in closing costs?
To cover their expenses in processing loan applications, mortgage lenders often charge an application fee and loan origination fee. Some origination fees are a flat rate, and some are a percentage of loan value. On a $100,000 mortgage, the two fees usually total between $500 and $750.
Are “points” on a loan part of the closing costs?
Points on a loan can be part of closing costs. Formally called “discount points,” they are technically prepaid interest on a loan. Each point equals 1% of the loan value. But it’s more useful to think of points as a way of “buying” a lower interest rate. One example: You are looking at a 30-year fixed mortgage at 4.00% APR. If you are willing to pay an additional point – that is, $2,000 on a $200,000 loan – the rate drops to 3.75% APR. Those willing to pay 2 points ($4,000 in this example) get a rate of 3.5%. Try crunching your own numbers with our Mortgage Points Calculator.
Do all closing costs apply to services offered by the lender?
Closing costs often include fees beyond your lender. For example, an appraiser chosen by the lender will visit the property you want to buy and estimate its value. The reason? If you run into financial trouble, the lender wants to be sure they can sell the property for enough to repay the loan. Another common closing cost is a title search fee, paid to a company that does research to ensure that no one else has a legal claim to the property being purchased.
Can I get a breakdown of closing costs before I commit to a loan?
You can get a rough estimate of closing costs by using one of the many closing costs calculators online. An even better idea is to contact a local mortgage expert at First Federal Bank. Like all reputable lenders, we will provide a form called a “Loan Estimate” that details the closing costs for the mortgage you’re applying for. You should always understand exactly what you will owe.
I want to apply for a Federal Housing Administration (FHA) mortgage. Is there anything I should know about FHA closing costs?
The federal government defines which closing costs are allowable as a charge to the borrower and sets limits on those fees. There are caps on the amount of fees that are charged so FHA loans can remain affordable.
How do I pay the closing costs?
Closing costs should be paid from your savings account the day you close on your mortgage, or you can ask if your lender will roll them into your loan total. The latter approach will make your monthly mortgage payments higher but can ease the initial cost of buying a home.
Where can I find more information about closing costs in OH, IN or MI?
First Federal Bank’s home loan officers are a reliable source of information about closing costs in Ohio, Indiana and Michigan. We encourage you to set up an appointment with your local mortgage rep so they can explain all the details and help you find the best mortgage for your needs.