When you're saving your down payment money there are a number of closing costs that you need to take into consideration. Moreover, there are some fees that are paid "outside" of closing and you will have to have the savings in place to pay them at the time you close on your new home. This is the second article in our series about the details of the home loan and home purchase process (in the last article we discussed the math behind home ownership). While these topics are not directly related to frugal down payment money savings tips, they are essential in your quest to own your own house. These are the perfect topics to master while saving up your down payment.
Types of Expenses
Following are the types of expenses that are typically lumped under "closing costs". Understanding these expenses will help you save and prepare for them. These costs in some cases can be rolled into your mortgage but if you can save the money to pay them at closing, you can save yourself more money over time by doing so (highly recommended).
Depending on the tax schedule that the city/town where you are purchasing your new home you may be dealing with property taxes for as much as three months. Generally these funds will be placed into an escrow account and disclosed on the HUD Settlement form.
Your homeowners insurance must be paid regularly while you have your mortgage. Most mortgage companies require that this amount be added to your monthly mortgage payment (versus paying it yourself on a monthly basis) and they will escrow an amount that is sufficient to cover (a) your first installation and (b) any installation that will be due before you have deposited enough with the mortgage company to pay a full installation.
Mortgage insurance is typically required on a mortgage though may be negotiable. This insurance is defined as "term" insurance as it pays only for as long as you are paying a mortgage. This insurance is in place to protect the lender.
Private Mortgage Insurance (PMI) - Save Up A Large Down Payment
Generally if you are putting down less than twenty percent down payment you'll be required have private mortgage insurance. You can read more about this in the FRB Consumer's Guide to Settlement Costs. At Save For House, we recommend saving up 20 percent or more, a large down payment. This will allow you to avoid PMI and also save money on mortgage interest over the long term.
If you have a loan that is insured by the FHA you will also be required to carry this insurance. Typically, there is an upfront fee of approximately 2.25% and then a monthly fee for the life of the loan. You can learn more about FHA insurance by reading FHA Single Family Home Insurance Premiums.
Loan Origination Fees
Lenders are required to disclose to you all fees that are charged to you for work in preparing your loan. Loan origination fees can be quite costly and are more often paid at closing (sometimes they are paid as part of your loan). Make sure you get a clear explanation of any origination fees.
Loan Discount Points
Loan discount points are paid to the lender to change your interest rate. If you reduce your rate one quarter to one half a percent the lender will normally charge approximately one percentage point for this "addition". These fees are paid "up front" but must be disclosed on the HUD Closing form.
These fees must be disclosed on your HUD Closing form even if you pay for the appraisal when it is done. Occasionally depending on your agreement with the seller of the property they may pay for it. Regardless of who pays, it must be disclosed on the closing statement and if it's paid before closing it will say "paid outside of closing" (POC) on the form. You should have a copy of your appraisal regardless of who paid for it.
Credit Report Fee
Usually a lender will ask you to pay this fee up front when you begin the loan origination process. Credit reports range from $25 to $100 depending on how comprehensive a report is requested by the lender. They may in fact cost more. If paid outside of closing they must be disclosed with POC noted.
These fees are required and are paid to protect you and the lender. The title search discloses if there are any other liens on the property and title insurance makes sure that the lender is protected in the event that a lien is discovered later. These services are charged by percentages and may be as much as x percent of your loan amount.
You will be required to pay interest based on the date of your loan closing until the first mortgage payment is due. This is done typically as part of closing costs and may very well be added into your mortgage.
Normally lenders will ask for a survey (current) outlining the boundaries of your new home with other homes that abut. This is to make sure the boundaries outlined in your deed and the survey match. The cost for a survey can be upwards of $500 and may in fact be required to be paid outside of closing costs (POC).
Before a lender will grant a loan, they may ask a certified home inspector to tour the interior and exterior of the home checking for deficiencies or other issues. The buyer and seller must agree on any items which are noted by the inspector as who is going to correct these deficiencies. Home inspection charges area always required to be paid outside of closing and can be as high as $500 depending on the home.
You may need to pay additional fees which may include processing, document preparation, document stamp taxes, recording a deed with the registrar or court, courier fees, loan assumption fees, flood plain certification (not in all areas), underwriting fees, wire transfer fees and generally attorney (or closing agent) fees.
All of these fees must be fully disclosed to you. You can read more about these in the information about RESPA that is offered by HUD.
While saving up your mortgage down payment, it's the perfect time to learn all about home loans and the first home purchase process. Continuing this series of articles, our next installation is all about understanding the home loan application process. Interested in learning even more about mortgage closing costs and fees? You may wish to check out How Much Answers article about mortgage fees.
This article is written by guest author Doreen Martel exclusively for Save For House.