It is always an exciting time when you start to shop for your first home. However, a new home comes with a mortgage. And a mortgage has a huge amount of fees and…well, it is just a humongous contract with all sorts of stuff on there that you are bound to not understand.
One of the biggest issues that stymie first-time home-buyers is closing costs. It will help to gain an understanding of what is included in closing costs and what options you have for paying them.
What Are Closing Costs and How Do You Pay Them?
Closing costs or Closing Fees include the extra charges that go beyond the purchase cost of the house, condominium, or apartment. These costs will usually range between two and five percent of the price of the mortgage.
They will usually include your:
- Property taxes
- Charges related to title insurance
- Escrow costs
- Origination costs
- Appraisal fees
These costs will vary depending on your lender. The graphic below is an example of closing costs for a $500,000 home with a 4% APR.
Closing fees are calculated according to a variety of combined lender costs and third-party fees. There are usually set or limited fees for services such as inspections and appraisals, as well as fees that are adjustable and depend on the time that property tax needs to be paid according to your closing date.
You can usually get an estimation of what your closing costs will be, but these are usually an estimate and they can change dramatically. When you apply for your loan, the insurer will offer you an estimate of the number of closing costs that you will have to pay within three days of submitting your loan application so that you know early how much these costs will amount to. You’ll also be sent a final agreement before the closure of your loan that declares the final fee of closing costs to be paid.
What Are the Options for Paying Closing Fees?
Now that you have an understanding of closing costs, it is necessary to know how to pay closing costs. The good news is that there is a range of options available to you. Click here for more information.
Paying Closing Costs Straight Away
By choosing to pay closing costs up front from your own money at the closure of your loan, you will keep the rate of your loan intact and you will also avoid the need to increase your loan to pay for these costs, thus resulting in lower mortgage payments overall.
Whether you will be able to afford to pay your closing costs up front will likely depend on the amount of the loan as well as the price of additional costs. This money may also be put to better means by investing it or using it to cover the costs of relocating into the new house, so consider what best suits your situation.
Add Closing Costs into the Mortgage
You can decide to add the closing costs into the mortgage so that you do not need to have to find extra funds at this point in the loan. This may cost you less now but it will raise your loan payments.
Have Your Lender Pay for the Costs
You can also decide to have your lender pay for the closing fees. This is called a low-cost loan. If you choose this option, you will save now and it doesn’t raise the amount of your loan. However, these loans usually will have a higher interest rate, meaning that you will have to pay more each month.
Can I Use My Credit Card to Pay Closing Costs?
If you have made an offer on a house, the house has been inspected and you are ready to decide on your loan, you will likely now need to think of how you will pay your closing costs.
We have listed some sound options above, but, one thing to note, don’t expect to pay for these closing costs with your credit card.
Closing the costs for a loan is far from cheap and most buyers can expect to pay up to $4,000 on these costs. These costs may be even higher for you, depending on your situation, your location, and the size of your loan.
Below is another example of a closing costs breakdown with the down payment included:
You will also need to remember to pay for your down payment when you get to the closing table. The amount of the down payment often varies, but many buyers will end up paying between five and twenty percent of their loan.
You must pay for the closing costs when your loan closes, which usually takes place at your insurance offices. However, don’t bring your credit card or a personal check with you when you are paying these costs as your service providers will not accept these forms of payment.
When you are paying your closing costs, you will have to give a cashier’s check or send the money electronically when you are paying your loan down payment and your closing costs.
Your estate agent or lender will likely tell you before the closing date exactly how much you will have to bring on the date of closing. You should ensure that the closing costs that you are being charged match the amount that is listed on your settlement statement.
This shows you the services and fees that have been charged to you by your loan lender. You are legally allowed to examine this statement up to one day before your loan closes.
Once you have signed your loan documents, use your cashier’s check to pay for the closing costs as well as the down payment. The lender will likely send the funds to cover the loan to the title company. Then, you will be given the keys to your new home.