The Costs of Getting a New Home Loan

Almost every day I am asked about the anticipated costs for getting a ‘purchase money’ mortgage loan.  Sometimes with any luck, the builder, developer or seller will agree to pay at least some of these expenses for you.  But regardless of who pays them, these costs are part of the price of buying your next home, so let’s take a look at the breakdown of the mortgage loan costs.
They consist of closing costs, loan discount points and prepaid items.

1 Closing Costs: The Closing Costs are the actual expenses that the lender incurs in the origination of a new home loan. Some of the costs are related to your loan application, such as the expense of newly updated credit reports on all applicants.  Other fees are related to the house itself, such as the appraisal of the property.  Some of the other costs are payment to the lender for processing your application, such as the loan origination fee.  All these costs are lumped into a broad category called “Closing Costs.”  Unless the seller offers to pay them for you, the Closing Costs are usually paid by the buyer, and often runs between 2 and 3 percent of the total amount being borrowed.  Because different states have different fees and taxes that are a part of the Closing Costs, it’s impossible to generalize the ‘Closing Costs’ fees nationwide.  So it’s important that you talk with a reputable lender ahead of time about what Closing Costs you can expect to pay in your part of the country.  Your Realtor is always available to help you with this subject.

2 Loan Discount Points: The Loan Discount Points are, in essence, a form of prepaid interest.  One Discount Point is exactly equal to one percent of the amount being borrowed.  It is paid in cash at closing, to the lender as a form of interest.  Discount Points have the effect of lowering the stated interest rate you will pay on the loan you obtain. 
For example: a lender might offer you a 30 year fixed rate loan at 8%, with zero points, or the same loan at 7.5% with 2 Discount Points.  Because the Discount Points are considered interest, the yield to the lender is approximately the same.
So why would I want to pay points?  Sometimes new home builders or developers will offer to pay Discount Points as an incentive, or on a special sale, and sometimes employers offer to pay relocation fees in Discount Points.

3 Prepaid Items: Most Banks and other mortgage lenders will want you to set up what is called and “escrow” account.  This is nothing more than a savings account that the lender holds.  Every month you will, in addition to your regular loan payment, deposit a sum for property taxes and for home owners insurance into this account.  When a bill comes due for taxes or insurance, your lender will make the payment for you. This way the lender knows those costs are being paid and on time.  The reason that all this matters today is that, on the day of your purchase, you will be required to set up an escrow account, with about 9 months worth of taxes and about 2 months worth of insurance payments. 
In addition, you will have to pay for the first year’s insurance policy in full. 
All of these costs are called Prepaid Items, and you must pay for them yourself.
Because regulations and customs vary from state to state, the amount you need at settlement may be more or less than the amounts I have discussed here. I suggest that my clients talk to a reputable mortgage lender to get an accurate estimate of what will be needed to buy your next home. Your Realtor is always available for advise on this, and on the other matters discussed here.

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