Don’t be Shocked by Mortgage-Related Closing Costs
Once you get to the final stages of your mortgage, be prepared to pay for the closing costs. The amount of money you'll have to pay in closing costs varies a lot by region. If you live in a high tax area, for example, your closing costs will be higher. Also, realtors, lenders and attorneys have differing fee scales depending on the markets they are in. Typically, you will pay anywhere from 3 to 6 percent of your total loan amount in closing costs -- that means $6,000 to $12,000 if you get a $200,000 loan. Of course, you can and should shop around and negotiate the fees. The Real Estate Settlement Procedures Act requires lenders to provide you with a good faith estimate of closing costs within three days of receiving your application.
These costs cover items that were part of the loan application process and can include the processing fee, document preparation fee, attorney fees, loan origination fee, loan discount points, appraisal fee, inspection fee, credit report fee, assumption fee, prepaid interest, escrow accounts, title search fees and title insurance.
Do You Qualify?
Here are few things to remember that can help you save money on your mortgage:
- Negotiate before the fact. It never hurts to try to negotiate with a lender for a better rate or a waiver of fees (particularly fees like the document preparation fees, or the lender's attorney fees). The "real" costs of the loan include the appraisal, title fees, processing fee, private mortgage insurance (if needed), credit report fees, and inspection fees. These are all things the lender makes no money on. The rest of those fees do equate to more money in your lender's pocket so don’t be afraid to negotiate.
- Make extra payments that will go directly to the principal of the loan. This means that the actual principal of the loan is knocked down by that extra amount you pay, rather than having the bulk of your mortgage payments paying interest. By doing this, you can cut your mortgage down tremendously. In fact, you can reduce your mortgage by almost 10 years simply by making one additional mortgage payment each year.
- Bi-weekly payments, just as making an extra payment will shorten the life of your loan, so will shifting your payment schedule to bi-weekly as opposed to monthly. What this schedule does is build in an extra payment each year without it "feeling" like an extra payment. Your mortgage payment can simply follow your paycheck schedule—if you get paid every two weeks, that is. With bi-weekly payments, a 30-year fixed mortgage will be paid off in about 23-and-a-half years.
- Avoid private mortgage insurance and try to put down at least the minimum 20 percent so you can avoid paying PMI. If you are already paying PMI, make sure you watch your equity and drop the PMI once you hit 20 percent.
- Make sure paying points will save you money. In some cases, paying points can save you money
, but not always. Many of the major lending institutions have online point calculators that show you how points will impact your interest rate and monthly payment. Make sure that what you pay will be recouped within the time you plan to spend in the home.
