In the maze of non-intuitive sounding phrases associated with a home purchase – ‘origination fee‘, ‘FICO score‘, ‘amortization schedule’ – one that invariably concerns buyers is ‘closing costs’.

More than concerning them, it sometimes prevents them from moving forward with dreams of buying their own place.

Particularly in the case of first time buyers, the idea of coming up with money for just the down payment seems daunting, forget about money for an attorney, lender fees, inspections and flowers for their agent.

No, wait. That last one is purely optional.

The truth is, closing costs can vary from region to region and will be impacted by the specific circumstances of the purchase. So trying to plan for them when starting the home-buying process can be hard.

A little information might help:

“Closing Costs” are precisely what the name says. They are the charges required to get the house ‘closed’, or finalized with the deed recorded at the courthouse. Both buyer and seller incur costs but the lion’s share are usually in the buyer’s column. If one is paying cash, the closing costs for the buyer will be minimal (attorney’s fee, appraisal if so ordered, deed recording, inspections if ordered, buyer’s share of property taxes for the year).

When the buyer gets a mortgage for the purchase, closing costs go up appreciably. This is because the lender will require certain things in exchange for loaning the money. These items will include charges for things such as loan origination fee, credit report, commitment fee, flood certification fee, mortgage insurance, title insurance, collection of tax and insurance money in advance in order to set up an escrow account, etc.,)

So, getting to the point, how much are closing costs? As a very broad rule of thumb, one can plan on closing costs equaling about 3% of the loaned amount. Here is a partial list of some customary charges in the Greensboro area.

If you’re quickly calculating the numbers and realizing that the minimum amount of down payment one can generally get now – 3.5% with an FHA loan – and adding to that the above mentioned 3%, you may be thinking there’s no way and consider clicking away from this site to go over to see what Perez Hilton has to say about Susan Boyle.

But don’t do it. And not just because gossip is not nice.

When making an offer on a house, a buyer can request the seller to pay for some or all of the buyer’s closing costs. In doing so, the buyer may need to adjust the purchase price amount to make up for the seller paying those costs. But an increase of $3,000 or $4,000 dollars in purchase price will raise one’s monthly mortgage payment a small amount compared to having to come up with those $3K-$4K up front. And if one buys before December 1st of this year, there is the ability to use the $8,000 first time buyer tax credit towards closing costs.

The moral of all this is “Don’t let fear of closing costs stop you from buying a house”.

Talk to a reputable lender and ask about all this. A good lender will provide you with a “Good Faith Estimate” of costs and a really good lender will be able to nail those numbers within $10.

There’s no harm, or cost, in asking the questions about buying a home. Deal with knowledgeable people. Don’t assume only OTHER people can buy a house. Give yourself a chance.

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If you have questions, comments or a good joke to share shoot me an email.  I’m a full time Realtor®, I love what I do and would be thrilled to hear from you.

Tags: $8000 tax credit, 1st time buyer, amortization schedule, closing costs, FICO score, Origination Fee, Perez Hilton, Susan Boyle

[This is a snippet of information about mortgages and lending. I've written previously about some of these details but this weekly installment will be on one aspect of the nuts and bolts  - not to be confused with the "nuts and dolts" whose shaky lending decisions helped get us into this fine mess -  of the borrowing process. If you have a particular topic or question, send it along]*

What is an “Origination Fee”?

In the simplest terms, this is money paid to get a lower interest rate. Some regions customarily quote this fee, some don’t.

An origination fee is essentially a loan discount – or ‘buy down’ – point and equals 1% of the amount borrowed (not of the purchase of the house). You can also pay a fraction of a point, but 1% is typical.

You don’t have to pay the fee, but you will probably pay a higher interest rate if you don’t. You’ll want to figure the up front cost of the point against the increased monthly payment of a higher interest rate.

If  you’re going to be in your house more than about three years, it probably makes sense to pay the point.

If cash up front is an issue for you, going with the higher interest rate may make more sense.

If you can get the seller to pay your closing costs (not an uncommon occurrence) you can get the best of both worlds by agreeing to the point and getting the lower rate.

How are you to know what your closing costs and monthly payments will be so that you can make an informed decision? Ask for a “Good Faith Estimate“. More about that and other mortgage terms in future posts.

For now, take away from that:

• an origination fee is charged to get to “buy down” the interest rate
• a customary charge is 1% of the borrowed amount, but can vary
• whether ’tis wiser to pay the fee or not depends on your current needs and future plans.

And don’t feel like a goof if you don’t know all this already. Why on earth should you? Ask your lender. Ask your real estate agent. Ask you cousin who just went through all this. Never be afraid to ask.

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If you have questions, comments or a good joke to share shoot me an email.  I’m a full time Realtor®, I love what I do and would be thrilled to hear from you.

* Mortgage lending practices can vary from region to region, lender to lender, and can be affected by market conditions. Lending criteria can change, and have. Often. The information I provide is based on my experience in my area. So, again, ASK QUESTIONS.

Tags: mortgage terms, Origination Fee