Home Buying Closing Costs
Home buying closing costs are the various fees charged by all who are involved with the sale of a house. There is the lender who is paid for processing the loan, the title company, surveyor, etc. The amount of these costs varies, but is typically 3-5%.
The first thing that you need to know about home buying closing costs is that they can be tricky, and you will probably not know their true cost for certain until well into the loan process. Lenders know that once you’ve done much of the work of securing a loan and begin to have your heart set on the house selected, you will anticipate, most of all, the approval of the loan, and then you will not let a few extra costs stop you. These few extra costs, however, are significant, and should be known. If you have managed to save a large down payment to reduce your monthly mortgage payment, these costs will most likely come out of that down payment, reducing how much of the house is yours and increasing what you will pay in interest for it. In other words, you can lose twice.
Some people have saved up a good down payment, shopped around for a good interest rate, sought low or no added points, and did all that others have informed them of, but then paid huge closing costs, because they never considered that this is the most expensive part of securing a mortgage loan. Be sure to know all of these closing costs. Yahoo has a page with a chart that lists standard closing costs here: closing cost chart.
The Good Faith Estimate
Federal law requires that a lender provides a Good Faith Estimate (GFE) which includes an itemized list of fees and costs associated with the loan, and that this list is provided within three business days of application for the loan. This GFE, however, is still only an estimate. The actual closing costs can be very different. Some lenders, sad to say, will lowball the GFE to hook the buyer into the loan process, anticipating that once under way, the buyer will pay the higher costs. Ask the lender about this GFE and how close their estimates have proven to be to the actual cost.
Yield Spread Premium – YSP
The Yield Spread Premium is a fee paid to a broker by a lender for a higher interest rate above the par interest rate. The borrower, although qualifying for a certain rate, is charged a higher rate and the broker pockets this as a commission. The original intention of the YSP was to spare the borrower some closing fees, but it can be misused to simply become but another fee. Review the GFE carefully to see if there is a Yield Spread Premium, and if there is, ask the lender to explain why. It is important to note here that brokers work with many lenders, and you may want to contact a broker for your loan. True, brokers receive a commission, but this does not mean that they will cost more than a bank. A broker can save you time in finding the terms that you are looking for and may even help you to secure a loan that you could not get from a bank.
When shopping for a new home, there are many things to consider in addition to home buying closing costs. We encourage you to navigate the other pages on our website to get more information on the home buying process. After all, it is always good to be both educated and prepared.