How to Calculate Closing Costs That May Be Assessed by Your Lender
Closing costs can dramatically change the affordability of that property you thought you had a financial lock on. Learn what factors enter into what you will need to pay before you sign the mortgage contract and how closing costs can turn your home buying expectations upside down.
In a perfect world the price of your loan would be nothing more than the amount of money you borrowed from your lender, free from additional fees, costs, taxes or insurance expenses. For that matter the perfect world would also eschew interest payments and only require you pay back the principle of your loan, as possible, when it’s convenient for you.
But we don’t live in a perfect world. We live in a world with interest payments that tack tens of thousands of dollars (at least) on to the cost of your loan. We live in a world where monthly payments are rarely convenient and there are real consequences to taking your time paying back your home loans. And we live in a world where mortgages come packed with more than their fair share of fees. And these fees start piling up on day one with the host of expenses we collectively refer to as “closing costs.”
What are Closing Costs and What Am I Paying For With These Fees?
The term “closing costs” basically refers to all the extra expenses you’re going to need to pay to acquire your loan that generally have nothing to do with the principle of the loan itself. Examples of these expenses may include:
- Attorney Fees (prep/recording of documentation)
- Title Service Costs (title search, title insurance)
- Recording Fees (entering change of ownership record)
- Transaction Stamps and Taxes (excise tax on the transaction)
- Survey Fee (lot and structures)
- Brokerage Commission (for services rendered)
- Application Fees (processing the application)
- Points (pre-paid interest)
- Appraisal Fees (hiring the appraiser)
- Inspection Fees (hiring inspectors)
- Home Warranties (insurance against repair/replacement)
- Pre-Paid Property Insurance (properties require continuous insurance)
- Pro-rata Property Taxes, Dues, Interest (annual payments made upfront)
As you can see, this is a pretty hefty list of fees and expenses you might be accountable for when you sign on to a mortgage, which makes it very, very clear you need to take these expenditures into account before you start looking for a loan.
Understanding the Impact
Failure to calculate closing costs may dramatically alter the size of a loan you can acquire for two reasons.
First, certain fees are related to the total cost of the loan. For example, there are multiple forms of commission that can be included when you calculate closing costs, which determine as percentages off the size of your property’s principle. Taxes and insurance policies also shift in expense depending on the price, location, and other unique identifying factors of your property, which means mortgages of equivalent prices can have radically different closing costs.
Second, if closing costs are high enough they can cut into the money you’ve saved up for a down payment or to make your initial monthly payments. If you don’t take closing costs into consideration you might end up trying to sign on for a property you can’t actually afford right now, all things considered.
When you calculate closing costs as part of estimating your loan, it helps you determine what you can and can’t afford. This is a big reason why the government mandates lenders provide you with a GFE, or a Good Faith Estimate, within three days of applying for your loan. The GFE you receive from your lender will basically give you a breakdown of all of the fees you can expect to pay to purchase your property, letting you know whether you can really afford what you think you can afford and whether one lender is offering you a substantially better deal than another.
Closing costs are serious and need to be taken as such, so make sure you factor them into your home buying equations sooner rather than later. Plug the following numbers into a home mortgage calculator: the price of the home; taxes; homeowners insurance; private mortgage insurance; appraisals and fees; and all elements of closing costs.