If you have considered financing your investment purchase, you may already be aware of the impact of closing costs. These costs are part of the process, but it is important to distinguish which costs are true closing costs and which are prepaid items. With closing costs you may have some wiggle room as to the amount you pay, but prepaid items are largely predetermined. Knowing the difference can save you time and money. It all starts with getting a good faith estimate from your lender and taking the time to go through it line by line.
One of the biggest changes to the mortgage industry over the past few years has to do with the closing costs. In the past, the good faith estimate you received at the outset of the transaction may have not had the same figures as when you got to the closing. Recent changes have made it unlawful for the costs to be over 1% higher than that of your initial estimate. Any changes in fees results in the borrower receiving a revised estimate and a holding period for three days until the loan can close. In short, what you think you are getting will be the actual closing costs. You will no longer have to guess exactly how much money you will have to bring to the closing.
Many more companies and lenders have gone to no point loans. Instead of getting money from the borrower, they receive their compensation directly from the lender. They can do this either from a volume agreement they have in place with the lender or by slightly increasing the interest rate. You will know the compensation on the initial estimate. Ask about how they are compensated and if the rate is the same regardless of rate. Aside from their compensation, the lender can no longer accept an application fee or any upfront fees. The appraisal is the only item that must be paid for before the loan is approved.
The lender will have an underwriting fee that is typically $500-$1,000. This should cover all of the lenders fees and expenses. The next major expense will come from your attorney. They will have three sets of fees including: title search, title insurance and closing fee. The title insurance is based on the size of the loan and can be knocked down if you simply inquire about it.
The bulk of closing costs come from prepaid property taxes which are not technically fees. If you escrow your monthly payment, the new lender needs to make sure the taxes are current and hold additional money in case there are changes to the taxes or the homeowners insurance. They will always hold additional money. In some cases, it can be up to six months of the monthly tax amount. While this is excessive, the lender will dictate this amount. If you don’t want to pay it, your only alternative is not to escrow your taxes, which could result in a higher interest rate.
Don’t be afraid to review your estimate with your lender and your attorney. If they cannot give you a breakdown of every expense, they may be trying to get one over on you. You have every right to question all fees. If you feel they are excessive, ask if they can offer any reduction. You never know what you can get unless you ask.