Crash Course in Closing Costs

Chances are you have heard the term “closing costs” even if you’ve never purchased a home before, but if you have paid them in the past, did you really understand what they are and how to know if you’re getting a good deal? Thanks to laws passed over the last decade or so, mortgage lenders are required to provide you with a Good Faith Estimate (GFE) detailing all of the potential costs of a mortgage, so it’s easier than ever to compare estimates from multiple lenders. But let’s start with understanding what they are in the first place: closing costs are everything you need to pay, above and beyond your down payment, in order to purchase a home.

• Loan Charges: Lenders charge certain fees to process your loan. These services often include pulling your credit report, getting a flood certification for the property, processing your application, underwriting the loan, paying the appraiser (sometimes you pay for the appraisal when it’s ordered rather than at closing), and recording the mortgage. Other loan charges that are more common now are “points,” essentially pre-paid interest to lower the interest rate for the overall term of the mortgage.

• Impounds: These costs are directly related to setting up your escrow account — that’s the portion of your mortgage payment that goes toward taxes and insurance. I usually see my clients pay at closing three months of their annual homeowner’s insurance, one to six months of property taxes depending on the time of year the closing takes place, and about three months of mortgage insurance if applicable. These amounts may be adjusted if the total impound amount is above the lender’s threshold, noted as an “aggregate adjustment” on the GFE, closing disclosure (CD) and/or settlement statement.

• Title & Settlement Charges: In Ohio and Kentucky, most real estate closings are handled via third party companies called title agencies. They charge fees to both buyers and sellers for guaranteeing the property is transferred with a clean title and that the monies are disbursed appropriately. Buyers usually pay for a portion of the settlement fee, closing protection coverage for the lender, a lender’s policy of title insurance or a title commitment, sometimes an attorney fee, certain endorsements that your lender requests, and an owner’s policy of title insurance if you choose to purchase one. Also, if you can’t be present for the closing, the title company may send you a mobile notary and there will usually be a fee for that service.

• Commission: Depending on your buyer agency agreement and the terms of your purchase contract, you might pay commission to the broker who represented you. Some brokers also charge administration fees that are separate from commission, and if you purchase homes from certain corporate sellers you might have to pay a “buyer premium” or “technology fee”. You should always verify that the amount of commission paid, whether by you or by the seller, matches the buyer agency agreement you have signed: if it’s higher, that is prohibited by law, and if it’s lower, you might be responsible for paying the balance outside of closing.

• Government Recording and Transfer Charges: In Ohio and Kentucky, the buyer is traditionally responsible for the cost of recording the mortgage and the new deed with the county in which the property is located. This fee varies by county but is usually dependent on the number of pages recorded. Some lenders have a standard mortgage on file in some counties to minimize the number of pages that need to be recorded for individual transactions.

• Homeowner’s Insurance Premium: If you didn’t already pay your first year of homeowner’s insurance when you ordered the policy, this will be included in your closing costs.

Depending on the lender, local and state regulations and customs, and your specific situation, your closing costs can vary quite a bit which is why it’s so important to ask about them when you are evaluating which lender to use. You can offset these costs in a few ways: gift funds from a family member or friend, local grants, or contributions from the seller. Knowing your financial needs and limitations up front will help you and your real estate agent negotiate the best terms possible, and help you avoid an unpleasant surprise when it comes time to close the deal.

How To Be A Well-Prepared Home Buyer

You want to buy a home, which is awesome. Home ownership is consistently ranked as a key indicator of personal wealth, and paying your own mortgage sure does sound better than paying your landlord's. But just as you should eat before going grocery shopping to avoid splurging on Oreos & Cheez-Its, there are some good ways to prepare yourself before you start touring the open house circuit.

1. Figure out what your credit situation is. You can get a free credit report once a year courtesy of the US government, or pay a few dollars to get the latest one if you already did that more than 30 days ago. Also, if you aren't already, try tracking your expenses with Mint or something similar so you know where your money is going. If your credit score could be improved by paying off some debt, do it!
2. Start adding to your savings account. Even if you only have $50 a month to spare, start setting up a nice sized savings account. This will make you more attractive to lenders, and you're going to need money for the down payment, inspections, closing costs, moving expenses, and home improvement items (because everyone changes something when they move in!).
3. Talk to at least three lenders and get pre-approved. Each lender should pull your credit, so make sure you do this within a 30-45 day period so it looks normal on your credit report. Remember, they want your money as much as you want a new house, so ask about incentives, down payment assistance, monthly payments, and closing costs.
4. Look at houses -- online, not in person. Now that you have an idea of how much you can afford to spend, think about where you'd want to live and what you absolutely must have in a home. Search for homes in your price range and area that meet your minimum criteria. If you have a good number of matches, that's a good sign. I recommend using Realtor.com because it has the most up to date information, but Zillow and Trulia work also. Save your favorites.
5. Find a Realtor you like and trust. Why use a buyer's agent? It doesn't cost you anything (they will get paid at closing out of the commission the seller pays to the listing broker), and you'll have greater access to properties on the market -- the listing agent might not have time to show the home to you, and they represent the seller. If you can provide your Realtor with your pre-approval letter and a list of homes you like in that price range, that agent will instantly have a better idea of what you're looking for.
6. Look at houses in person! Finally! I know, seems like you waited forever for this. But you're making a big decision and you want to be prepared, right? That way, when you find the right house at the right price you and your trusted real estate advisor will be ready to write an offer immediately!

For more advice, check out this article from Girl's Guide to Real Estate or this one from The Simple Dollar.

Is it time to refinance?

Picture this: you'd like to sell your home and move to a new one, but you haven't built up enough equity in your home for that to make financial sense. This is the case for many homeowners who may at one point have been underwater, but have watched home values slowly rise (or not so slowly, depending on what part of the country you're in).

There may be a solution -- not an instant fix, but nonetheless a smart step on that path to owning the new home you have in mind. Mortgage rates are still nice and low and qualifying should be easier than anytime in the past several years. However, rates are expected to rise this year which would once again make refinancing impractical for millions of homeowners. 

Refinancing helps you, when it's done intelligently, by helping you capture more of the equity in your home and locking in a lower monthly payment. For example, I purchased a home in 2009 with an FHA loan and refinanced in 2011 when I saw property values rising dramatically -- meaning that I already had more equity in my home just due to market activity. And since I was pretty sure I was moving within the next 3 years (I was right), I chose a 5/1 ARM at 2% interest, which cut my payment dramatically. I did have to pay closing costs out of pocket, which I was able to do, but I no longer had to pay mortgage insurance. Plus, I was able to pay bi-weekly which meant an extra payment a year...so when I sold my home in 2013 I was able to walk away with a good amount of cash.

For more information on refinancing, check out this article from TheTruthAboutMortgage.com or talk to your favorite lender -- and if you're looking for a lender in the Cincinnati area, check out my Helpful Information page for some referrals!