Buying a house almost requires a whole new vocabulary. It’s a process with a lot of steps. That step between making an offer and moving in, called the closing, can be a one of the most stressful parts of buying a home. This is when you’ll sign loan papers and reviewing the contract one last time. There’s a lot to know about closing and closing costs. Let us break it down for you.
Good faith estimates
The good faith estimate will come before the actual closing. This estimate takes your different loan options and expenses related to closing into consideration to give buyers an idea of what their monthly payments will be and how much cash they need to bring to closing. Just like the name suggests, those dollar amounts are not set in stone, but it is a good faith estimate, to the best of your lenders ability.
There are a number of different costs associated with closing that will be included in your good faith estimate. Let’s go over a few of the most common ones:
Some buyers choose to pay points on their mortgage so they can get a better interest rate on their loan. One point is equal to one percent of the total loan amount. Basically paying points means that the buyer is paying more for the home upfront and financing less of it. This will result in a lower monthly payment for the buyer.
Buyers who have a lot of money saved up for down payments and closing costs may want to pay for points and have a lower monthly payment. However, points are only advantageous on long-term loans, if you aren’t going to be in the home for more than a few years, paying points might not make sense. If buyers don’t have a lot of money saved for a down payment but can afford a higher monthly mortgage bill, then points may not be the best way to go either.
When you get your good faith estimate, you lender can go over all the options and help find the right one for you.
Another way points may come up during closing is if your lender charges fees in terms of points or a certain percentage of the total loan. These points you have to pay.
The lender will need to see an appraisal of the property before giving a home loan. They need to know that the property is worth what they are loaning out. As the buyer, you probably want to know that too. Hiring an appraiser to check out a house costs money, and those fees are passed on to the buyer or seller, sometimes both.
Escrow accounts are opened when a buyer signs a purchase agreement and a deposit has been made. Escrow fees are fees associated with the transfer of the property from one owner to the next. Money, documents and instructions for the transfer are deposited with a neutral third party to ensure that the lender releases funds at the time the deed is signed over to the new owners. It may also include the cost for notarization
Private mortgage insurance (PMI)
Buyers putting down less than 20% for a home are at higher risk for defaulting on the loan. You can still get a mortgage without putting that 20% down, but your lender may ask you to take out private mortgage insurance to protect them from default.
Many first-time buyers don’t have 20% saved to put down on a home; PMI helps them secure loans for houses they want without that big down payment. And, although PMI may increase your monthly payments, buyers can sometimes drop the PMI after they’ve shown a strong history of paying their mortgage without difficulty. PMI is there to protect your lender, and it helps give them confidence to get you the loan you need even if you can’t put 20% down.
As always, you don’t need to navigate a home closing on your own. An experienced real estate agent can help you understand everything you need to know and ensure that the process runs smoothly.