Many first-time home buyers may be unaware of some of the hidden costs associated with getting a mortgage, especially those that arise at closing. Often, homebuyers think that the best mortgage is one with the lowest interest rate, but this is not necessarily true. We discuss some of the hidden costs of closing here, to help both veteran and new home buyers alike.

Almost all of the “hidden” costs from a closing relate to the set of fees that the mortgage lender is charged by other companies involved in the process. Usually, these fees are passed on to the buyer to deal with, though a few costs are assessed by the lender. Regardless, all of these fees are settled at closing, earning them the name “closing costs.”

These costs usually account for 2% to 5% of the total, but that may vary. Costs and fees typically come from payment of:

• The credit report

• Loan-origination

• Legal fees

• Home inspection, appraisal, and survey(s)

• Title insurance and searches

• Deposit for escrow

• Recording fees

• Underwriting

Additionally, the purchaser may increase his or her costs by using discount points to lower the interest rate of the loan, which does lead to saving over the long term. The buyer pays the majority of the closing costs; however, in some cases, other parties may pay some or all of the costs. One example of this would be a Veterans Affairs loan.

Some lenders actually offer mortgages with no closing costs. However, it’s important that homebuyers recognize that these costs will likely be built into the mortgage itself. Either the buyer or seller will pay these fees eventually.

Closing costs can significantly increase the amount of money required to be on hand when the purchase is finalized. Consider this example: a home sells for $250,000 with the buyer paying an initial down payment of 10% (so, $25,000). The buyer will need additional money at closing—around 5% of the purchase price, or $12,500, making the total required $37,500. The costs associated with closing increase the amount the buyer must pay at closing by almost 50% in this example!

Fortunately, lenders are required by law to provide a good-faith estimate (GFE) of these costs shortly after the loan application is submitted. Legally, the final settlement cannot stray from the GFE by more than 105%, at most. It’s still important to recognize, though, that borrowers can get an unpleasant surprise if they’re unprepared to pay at least something on closing.

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