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Mortgage Costs

By Tabitha Naylor

When you buy a home there are a variety of costs you must be prepared to pay as part of the process to obtain a mortgage and close on a property. You can work with your realtor to find ways to minimize your closing costs.

Closing costs, or the fees incurred with the buying or selling of a home break down into three general categories.

Loan Origination Costs

Loan origination costs include the loan application fee, credit reporting fee and the preliminary processing fee.

Escrow Costs

These are fees the bank collects (as part of your monthly mortgage payment), holds, and pays for you every year unless you decide to pay them yourself. The benefit of escrow is that the costs for property taxes, Fire/Hazard Insurance, and HOA fees among others are spread out over 12 months and the bank pays them directly when they are due.

Final Closing Costs

  • These are all of the fees like prorated taxes, insurance that are due at the time of closing.

The fees that fall into one of these three categories include:

Home Inspection and/or Termite inspection (if required by the lender)

Often the lender will require a home inspection, an underground oil tank inspection and soil testing or termite inspection. Generally, it is recommended all buyers have a home inspection completed prior to closing to protect against unseen problems like structural instability, water damage etc.

Points

When homebuyers prepay points, they lower the amount of interest on the mortgage loan by paying more money at closing. According to bankrate.com, 1 point is equal to 1 percent of the loan amount. The number of points a lender may request in exchange for the lower rate can vary.

Mortgage Insurance

When a buyer makes less than a 20% down payment, the lender may require mortgage insurance. Mortgage insurance protects the lender in the event the borrower defaults on the loan. Once the buyer pays down the mortgage to less than 80% of the home's value the buyer can request the lender to cancel the insurance.

Interest

The lender is paid back the mortgage amount plus interest. The interest rate on a mortgage can be fixed, adjustable, rising or falling from time to time based on the type of mortgage loan and the prime rate or whatever index the loan is tied to. The interest is calculated into the monthly mortgage payment.

Title Insurance

Most lenders require title insurance. The policy is based on the amount of the loan. In most cases the buyer pays the costs but in some areas the seller is responsible for paying the title insurance. Sometimes the cost may be split between the buyer and the seller.

Homeowner's Insurance

Before the sale can close, the buyers must obtain a homeowners insurance policy that protects the property against damage and natural disasters.

Realtor Commissions

This is the percentage of the sales price that the real estate agents receive for their services in buying or selling a home. Generally, the seller pays the commission fees to the agents representing the sellers and the buyers.

These fees are representative of typical costs and not complete. Fees may vary based on the type of loan (FHA, VA for example), the state you live in, if the property is located in a flood zone. Your realtor can walk you through all of the basic costs associated with buying or selling a home. This should be done as soon as possible so you are prepared and don't have an unpleasant surprises late in the process.

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