Closing Costs - Some Things You Should Know

Once you reach an agreement on the purchase of a home, things start moving quickly. In the chaos, it is important to remember to budget for closing costs. As part of any closing, you need to go through certain steps to make sure you are both getting what you think you have purchased as well as paying for it. Each of these steps has an associated cost, known as closing costs, and you have to pay them before you can take possession of the home. If you do not, the deal will not close and you will lose the home.

Closing costs are fees associated with miscellaneous events associated with a home purchase, things such as property inspections. Even if you are purchasing a home for the first time, you are probably aware there are closing costs that have to be paid. Rarely, however, are you aware of just home much and how fast the can accumulate. If you have not budgeted for them, they can put a kink in the closing or even cause you to lose the home.

A couple of closing costs to keep in mind are origination fees for home loans and private mortgage insurance. The mortgage related costs are only a small part of the overall closing costs you can face, but deserve a closer look.

Originating Fees
Origination fees for home loans can be a shock to first time buyers. Few realize they are going to have to pay such things. Origination fees are costs charged by a lender for services used to determine if the lender should give you a loan in the first place. For example, a lender will charge you fees for obtaining a copy of your credit report, having an appraisal done for the property. Infuriatingly, the lender will also charge you fees for processing the loan and preparing the loan documents. You may also have to pay points, which represent a percentage of the total loan, often one or two percent. On a $300,000 loan, the origination fees can quickly add up to thousands of dollars.

Prepaid loan interest
Prepaid loan interest is an ugly little surprise for many first time homebuyers. The lender will often require you to pay the interest that accumulates between the day the loan is funded and the day you are actually scheduled to make your first loan payment. Many people mistakenly believe they have roughly a month before they have to start paying. This is rarely the case, and the sudden requirement to pay a hundreds or thousands of dollars can be a nightmare. If at all possible, you should try to get the lender to fund the loan as close as possible to the actual closing date, even on it. Try to avoid closing the loan on a Monday. The lender will have to fund the loan the previous work week, which means interest will be growing.

Private Mortgage Insurance
Private mortgage insurance, often called PMI, can also be a nasty little surprise. The magic number when considering PMI is 20 percent. If you make a down payment on the home that is less than this amount, you are almost certainly going to have to pay PMI. PMI is simply insurance that protects the lender should you default on the loan. The cost can add up to hundreds of dollars, so make sure you know what is expected of you.

Homeowners insurance
Homeowners insurance is something you are going to need and most people expect as much when buying a home. If you are not informed, however, you will be surprised at closing when you find out you have to pay the full premium for the first year of the policy. Depending on the value of your purchase, this can add a couple hundred dollars to thousands of dollars onto your closing costs. Again, it is important to budget for this cost when putting funds together prior to purchasing a home.

If you are going to purchase a home, you are going to have to pay these items at closing. Make sure you budget for them to avoid running into cash flow problems.