Home Buyers Should Prepare for Closing Fees

As a first-time buyer, you may be unaware that you have to pay a considerable amount that is usually required at closing. Processing fees, insurance and interest can be included along with a number of other miscellaneous charges that are not part of the actual price of the home. Normally, your real estate agent should explain that closing costs could be around two percent of the total purchase price. You can even end up spending as much as three percent, depending upon the contract you have signed with the seller.

One thing that you can do to be prepared for closing is ask for a good faith estimate (GFE) once your application is in. By law, lenders have to tell you what they estimate closing costs will be, along with your annual percentage rate (APR) within three days of your applications submission. Subsequent negotiations and changes will probably alter the cost slightly after the first application, but you still have a right to know how much it will cost.

First Time Buyers May Have Fewer Options

Most lenders have at least a couple of different options for fee payment. Some institutions offer a "no cost" loan that permits you to purchase a home with little or no out-of-pocket cost, which is attractive to first-time buyers. Be warned that you will have a higher interest rate than the average mortgage borrower. Sometimes you also have the option to put more money down through buying points and therefore lower your interest rate. Shopping around for a better rate is ideal if you have the leisure time and resources, but many first-timers are more worried about coming up with closing costs. Discussing options line by line with your lender will provide you with the most valuable information.

Inform Yourself of the Home Buying Process

Lenders typically charge a one percent origination fee in addition to a processing fee. This processing fee can be anything from a few hundred to thousands of dollars. If you are using a mortgage broker, there will also be bank fees. Some of these bank fees include items like an underwriting fee or a "doc prep" fee, and usually runs between $600 and $995. When your lender gives you a GFE, it will have title fees and appraisal costs itemized as well. These fees will vary directly depending on the loan amount, and are usually between $1,000 and $2,000. An appraisal charge starts at $350. With the number of varying factors at play when purchasing a home, getting a GFE from your loan officer is requisite to the process.

Escrow is a Deposit Account for Tax, Prepaid Interest and Insurance Payments

Financing fees are only one part of the closing costs. To make sure you get funding for your home purchase, you must have proof of insurance as well as one year's worth of insurance premiums. In this way you will have secured your investment along with the banks. Tax on your new home and any prorated interest will be added to the closing costs.

Remember that, on average, you will have to come up with about three percent of the purchase price once all of the fees are taken into account. Examine at the fees and understand what they are for. If you do not understand them, ask your lender or realtor to explain them in depth. You may be able to negotiate with the seller of the property or the lender to come up with more advantageous terms. It is really tied to the market and the motivation of the seller or the buyer. No matter what type of loan you choose, prepaid fees will be part of the closing and it is better to be prepared for them and to know exactly what to expect.

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