Home Closing Costs Explained

It is very important for a first time home buyer to choose a right mortgage when buying their first home, which might have been a long term cherished objective for the person. This will have an impact on their home closing costs. Read this article to find out how these costs are related to your loan.

It is very important for a first time home buyer to choose a right loan when buying their first home, which might have been a long term cherished objective for the person.

Recently I met one of my neighbors in a restaurant and decided to join him, as both us were sitting alone. After the customary family related questions and answers, our topic of discussion turned towards home loans and the home closing costs associated with it. My neighbor had recently purchased a home for his son in a place near Atlanta. He was telling me how he chose his lender and I found it quite interesting. I wanted to share some of his key points, which will be very helpful in choosing the right institution.

Apart from the interest rates, which is going to be a recurring expense on a monthly basis, there is another important one time cost to consider. This is the most important cost required to evaluate institution in the one time cost category, the home closing cost. Every institution has some standard closing cost items which will vary from lender to lender. One example of a standard closing cost is the document recording fees, where the borrowers will pay the local government.

Apart from those standard costs, there are other costs collected. As a borrower you can negotiate with the mortgage lenders regarding these costs. These varying home closing costs incurred by the borrower can include the following:

• appraisal fee
• origination fee
• credit reporting fee
• processing fee
• underwriting fee

You can expect these home closing costs to range from between 3%-5% of the loan amount.

Origination Fee

Now, coming back to the varying closing costs, the first fee in that list is the origination fee which is nothing but the fees for getting the initial quote details using the borrower's data. Sometimes this fee might be used by the lender for some other purposes. This is usually between .5% - 1.75% of the loan amount.

Appraisal Fee

Next in this list is the appraisal fee. This is the fee paid to an external appraiser, usually appointed by the institution. The appraiser will inspect your home and provide the current market value for your house to the lender. This is required to safeguard the lending institution from any unscrupulous borrowers or in case of any interest payment defaults. Most of the lenders charge around $350 for the appraisal fee.

Underwriting and Processing Fees

The underwriting and processing fees are collected for providing services. The underwriting service is used to gauge the credit worthiness of the borrower by looking at the borrower's credit level, assets, and debt to income ratio.

All the above mentioned fees vary in price and in some cases the borrower can do some bargaining on these fees. By law the loan officer has to provide an estimate of all these fees upfront. This estimate is known as the Good Faith Estimate.

Every institution should provide a list of home closing costs as a Good Faith Estimate right upfront. Some lenders might take some time to provide these estimates as they are trying to buy some time to arrive at the rates favorable to them. It's always advisable for the borrower to request this estimate as early as possible. Borrowers can then compare this estimate with estimates provided by other lenders. This will give the option of bargaining for a good rate with the mortgage lender. But remember, this is only an estimate. Some mortgage closing costs will change before closing, so watch this.

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