One of the first questions I often hear from first-time homebuyers is "how much are the closing costs?"
Every purchase is different, so there is not one set amount. Typically closing costs run 2%-4% of the purchase price. Depending on the type of program you qualify for, your credit score may be a factor.
The following is a list of fees that you will typically see: origination fee, appraisal, documentation fee, title services and insurance, and the survey. You also have pre-paid items. These items include pre-paid interest, start-up of your escrow account for taxes and insurance, and PMI insurance (if applicable). Maybe you decided to purchase points to get a lower rate. This is also collected at closing.
To help you better understand and be prepared so there are no surprises, you will be provided with several disclosures early on. These are required by law and are there for your protection. The most important are the Good Faith Estimate and the Truth in Lending.
Three days after your application is submitted, you will receive the Good Faith Estimate (GFE). This is a summary of your mortgage terms and settlement charges. This is only an estimate and the actual charges may differ. The estimate defines limits on how much certain fees can change between the estimate and the actual costs. You can evaluate your mortgage application and even explore other possibilities before accepting.
The Truth in Lending (TIL) allows you to see the cost of your mortgage under the terms of your loan. It will give you the APR (annual percentage rate) which combines your interest rate and closing costs and discloses it as a single rate to give you a true cost of borrowing so you can compare. For example, a loan with a lower interest rate may be a bad value if its fees are too high. Likewise, a loan with a higher rate with very low fees may be an exceptional value.
Keep in mind the mortgage tax savings you may be entitled to, but be sure to consult your tax advisor as there are limitations. Points paid on acquisition for a residence is fully deductible in the year they are paid. Thereafter, interest paid on a mortgage is tax-deductible if you itemize on your tax return. These tax savings can affect the Effective APR. Again, be sure to consult your tax advisor on these issues.
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