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It is an experience familiar to many first-home buyers: you spend years saving for a down payment, months hunting for the right house and weeks of anticipation as you are applying for a mortgage.
At the end of all this, to say that closing costs are an unpleasant surprise is an understatement. Savvy buyers, then, are increasingly seeking out no closing cost mortgage deals.
Before you can chart a path to a no closing cost mortgage, it helps to understand what it is you’re trying to manage. So, what exactly are closing costs?
Closing costs are a catch-all term for the myriad fees and charges associated with the services and expenses required to finalize a mortgage loan; you have to pay the necessary closing costs whether you’re buying a home, or refinancing an existing property.
The bulk of closing costs fall in the lap of the buyer, but the seller typically also has to pay a few, too, such as the commission for the real estate agent.
For those unable to secure a no closing cost mortgage, the average closing cost for the buyer can run anywhere between 2% and 5% of the loan amount.
This means that on a $300,000 home purchase, you might pay anywhere from $6,000 to $15,000 in closing costs — that’s a steep fee on your already costly purchase!
When you begin your journey toward your first home purchase, it is vital that you know your entitlements.
Your lender is required to outline your expected closing costs in the Loan Estimate that you receive during the initial application for your loan, as well as in the Closing Disclosure document that you will receive a few days before the settlement.
Be sure to review these disclosures closely, and ask questions about sections you aren’t clear about before you sign on any dotted lines.
If you’re on the lookout for a no closing cost mortgage, here is a more detailed breakdown of the fees you should seek to control.
Property taxes: Buyers can be asked to pay two months’ worth of county and city property taxes at closing.
Homeowners insurance premium: Your lender will usually require that you purchase homeowner’s insurance before you settle, which covers the property in case of damage, vandalism, etc.
Some property associations include insurance in parallel maintenance fees, so be sure to ask about this early on in your search.
Annual assessments: If your homeowner’s association requires an annual fee, be aware that you might be asked to pay it upfront, or in one lump sum.
Mortgage insurance upfront: Occasionally lenders will ask you to pay your first year’s mortgage insurance premium upfront. Others might request a lump-sum payment that covers the life of the loan. These fees can include anywhere between 0.55% and 2.25% of the purchase price for mortgage insurance.
VA, FHA, and USDA fees: If the loan is insured by the Federal Housing Administration, you’ll need to pay FHA mortgage insurance premiums. If it is guaranteed by the Department of Veterans Affairs or the US Department of Agriculture, you will have to pay guarantee fees. Keep this in mind when searching for a no closing cost mortgage.
Mortgage insurance application fee: if your downpayment is less than 20% of your overall mortgage loan, you may have to take out private mortgage insurance.
Title search fee: A title search is often conducted to ensure that the person selling the house actually owns the property, and there are no outstanding claims against the property,
This can sometimes be a labor-intensive process, especially where real estate records may not be computerized. Title search fees are usually about $200 but depend on title companies by region. If you’re looking for a no closing cost mortgage, this can be a pesky step.
If you’re looking for a no closing cost mortgage, this can be a pesky step.
Owner’s title insurance: You should also consider purchasing title insurance to protect yourself in the event that case title problems or claims are made on your home after closing. The cost of the owner’s policy is about 0.5% to 1% of the purchase price.
Lender’s title insurance: The majority of lenders require a loan policy, which protects the lender in the event that there is a mistake during the title search and a claim of ownership is made on the property after it has already been sold.
Application fee: Some lenders will require that you cover the cost of processing your request for a new loan. This fee can include costs such as credit checks and other administrative efforts. This fee varies depending on the lender, and the amount of work it takes to process your loan application.
Attorney’s fees: Some states will require an attorney to be present at the closing of a major purchase, like that of a house. This fee will depend on how many hours the attorney works for you. Be aware when looking for a no closing cost mortgage: overlooking this fee can be a painful surprise at closing.
Loan origination fee: This is one of the biggest fees associated with your home loan. The loan origination fee is also known as the underwriting fee, processing fee or administrative fee.
The loan origination fee is a charge by the lender for evaluating and preparing your mortgage loan; this can be used to cover a range of services, such as document preparation, notary fees, and the lender’s attorney fees.
As you negotiate your no closing cost mortgage, be wary that you might have to pay about 0.5% of the amount you are borrowing; a $300,000 loan, for example, could shackle you with a $1,500 loan origination fee.
Home inspection: Most lenders will require that a home inspection be carried out, especially if you’re getting a government-backed mortgage like an FHA loan. Before awarding you your loan, a lender will want to be sure that the property is a truly valuable purchase.
If the inspection returns less than positive results, you may be able to negotiate a lower sale price. When looking for a no closing cost mortgage, be sure to check that your lender will include your home inspection fee in the deal.
Appraisal fee: Your lender will want to be sure that the property you are planning to purchase is actually worth the amount you want to borrow.
This is for two reasons: firstly, the lender needs to check that the amount you need for a loan is justified and, secondly, that it can recoup the value of your new home if you default on your loan. The average fee of a certified appraiser can range between $300 and $400.
After reading the above, you might be thinking that a no closing cost mortgage will do away with the aforementioned fees entirely.
In fact, the term “no closing cost mortgage” is a misleading one: a no closing cost mortgage actually means that rather than pay your closing costs upfront and out of pocket, these charges are rolled into your overall loan balance, or included in your mortgage interest rate.
You should also be aware that not every single one of your closing costs will be able to be rolled into your loan: while your due-at-signing might be reduced with a no closing cost mortgage, you might still be slapped with some settlement fees at closing. The specifics will vary depending on your lender.
No, not really. Closing costs must be paid one way or another. Your decision will be whether you pay them with cash at the time that you sign your loan, or whether you roll in the added expense to each monthly mortgage payment.
There are several ways to reduce your closing costs, at least. You can eradicate or renegotiate lender fees and third-party charges, such as the appraisal and title search fees discussed above. You could also qualify for closing cost assistance, or even housing grants via first-time home buyer initiative in your state. Many of these grants count as free money, meaning they don’t have to be repaid at the time that you move or refinance your home.
A no closing cost mortgage can work one of two ways. The difference between the two strategies is subtle, and the end result is ultimately the same.
If you’re planning on living in your new home for a long time to come, there is no doubt that you will be paying much more over the lifespan of your loan by refinancing your closing costs or agreeing to a higher interest rate.
Indeed, this path may costs thousands, or tens of thousands, more overall, depending on how many years you are stuck with your increase interest rate.
If you plan on moving or refinancing your mortgage within three to five years, however, a strategy of rolling closing costs into your loan might not actually be that big of an issue.
At the end of the day, a savvy strategy for any first-home buyer is to find ways of lowering your closing costs and negotiate your mortgage origination fee. If you’re hoping to move into your home for a lifetime, dig deep and pay those closing costs upfront.
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