Mortgage Terms

Don’t forget the closing costs

Often first time home buyers are caught off guard when the go to close their first mortgage. Even your realtor may forget to tell you about the closing costs of a home mortgage. It’s something they assume you know about or just forget to mention. Unlike a $100 fee a car dealer may try to throw in a the last minute, mortgage closing costs will be several thousand dollars.

How much can you expect to pay for closing costs? It can vary several thousands but typical fees include items such as Discount Points, origination points, appraisal fee, application fee, credit report, title search and title insurance, survey fee, flood certification recording, and transfer charges, attorney fees, interim interest and finally an escrow account must be setup. These closing costs can reach up to $10,000 or more!

Now you can see why closing costs could actually be a deal breaker for some eager first time buyers. Many times buyers don’t even have a down payment large enough to cover closing costs. Imagine how disappointing it would be to walk into a lenders office with $10,000 ready to close a mortgage loan, only to realize your entire down payment is going to be eaten up in fees. Not a single dime will be applied to the principal amount of the loan.

So, before you get too excited about closing your mortgage loan, be aware of all the fees you will have to pay. It may sound depressing, but if you are prepared for these fees going into the mortgage it won’t be so bad. Owning your own home is a big step so do your homework and you’ll be happy with your decision.

Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is basically a third party insurance policy that covers a lenders risk when the buyer doesn’t have at least 20% equity in a home. So if you don’t pay down 20% or you don’t purchase your home for 20% less than what it appraises for then you will usually be required to pay private mortgage insurance or PMI.

The creation of PMI has allowed many buyers to purchase homes that normally would not be able to own their own home. For as little as 3% to 5% down potential buyers can purchase a home without having to save for a large down payment.

One important aspect of PMI you should always keep in the back of your mind is that once you have 20% equity in your home you are no longer required to pay this insurance policy. Some lenders require this 20% to be from the original purchase appraisal and others will allow a new appraisal amount at the current time. This is a big benefit if your home has increased in value over a short period of time. Usually you will have to contact the lender once you have 20% equity in your home in order to cancel the PMI. However, usually lenders are required to automatically terminate PMI once you have paid down the mortgage to 78% of the original apprasial value.

There are ways to avoid paying PMI. The first and most obvious is by paying down at least 20% of the loan at the time of purchase. The second method is a piggy back loan or taking out a second mortgage at the time of purchase. Before you choose an option consider the pros and cons of each type of loan.