Closing Costs - What to Expect When Buying or Refinancing a Home

When working with a Mortgage Lender or Broker you will generally receive a “Good Faith Estimate” of your closing costs. Many people think that these costs are directly associated with the Lender or Broker, however, this is not completely correct. They are making an educated guess of the costs that you will incur to close your loan, based on experience and prevailing market conditions.

With every real estate transaction there are recurring and non-recurring costs. Recurring costs are those that you will pay many times over the years, like homeowners insurance and property taxes. Items that are paid only one time are considered non-recurring closing costs.

Closing costs consist of various fees and expenses charged to the borrower for items related to the mortgage transaction, and include fees for loan processing and or administration, home inspection, appraisal, title insurance, and title search. The closing costs also include Document Stamps, Intangible Tax, Recording Fees, Pest Inspections, Survey, Origination Fees and or Loan Discount Points. If your particular loan is greater than 80% of the appraised value of the home you may be required to purchase Private Mortgage Insurance (PMI). If so, then you generally will be required to pay two (2) or three (3) month’s premiums in advance. You will also be required to pay for your first year’s homeowners insurance in advance as well as setting aside or “escrowing” two (2) or three (3) month’s home ownera insurance premiums.

Another substantial part of your overall closing costs are the real estate taxes. When purchasing a home you will generally be credited for the months that the seller has lived in the home for annual property taxes. Generally, real estate taxes become due in November or December each year and the new owner will be responsible to pay for the entire year’s worth of taxes at that time. To ensure that you have enough money to pay those taxes your Mortgage Lender or Mortgage Broker will coordinate with your Title Company or Real Estate Attorney to ensure that you have adequate funds in your escrow account.

It is always recommended that you consult with your CPA or Tax Preparer before and after a real estate transaction as some of the closing costs are tax- deductible. For instance, on a purchase the discount points you pay are tax deductible in the year they are paid. On a refinance however, those discount points are tax deductible in equal increments over the life of the loan. There are many nuances when it comes to the tax deductibility of any real estate transaction, so we strongly suggest that you take your HUD-1 settlement statement and allow your tax professional for review.

For planning purposes a good estimator of your total closing costs would be between three (3%) percent and six (6%) percent of your purchase price depending on the loan size. For larger transactions the percentage will generally be lower than for a smaller transaction since many of the real estate closing costs are fixed rather than based on the loan amount.

If you choose to compare Mortgage Lenders or Mortgage Brokers simply based on Good Faith Estimates then you need to do so accurately. It is unwise to compare the “total” costs; instead you should limit your comparison to the actual costs charged by each Mortgage Lender or Mortgage Broker in the upper portion of the Good Faith Estimate. To compare total closing costs is inaccurate since each Mortgage Lender or Mortgage Broker is only be making an educated guess pertaining to the other costs that they do not directly control.

At Global Lending Group, we understand that your real estate transaction is one of the most important and substantial financial decisions you will ever make. Because of that we are adamant that “Shopping Mortgage Lenders” based on Good Faith Estimates is a poor financial strategy. Because of the serious nature of the transaction, we strongly urge you to choose your Mortgage Lender or Mortgage Broker based on their ability to become your Trusted Advisor. For us, being a Trusted Advisor is calling – a quest to provide comprehensive financial advice with your particular strategy in mind.

Allow us the privilege of showing you just what that Trusted Advisor role looks like! Call us today and we would be delighted to answer any questions about closing costs, Good Faith Estimates, mortgage strategies and the concept of using a mortgage as a financial planning tool.

We desire to educate you and to keep you as informed as possible during the mortgage lending process. We look forward to serving you!