Closing Costs and the myth behind the truth.

So you are looking to buy a home! Congratulations on the big decision. You've met with your realtor to select a home and they requested that you get pre-approved. How hard could this be? So you strike out to get a mortgage. So you call your golfing buddy , "the Mortgage Bomber," and he calls you back to go over your loan estimate.

The first thing you notice is - WOW, it's a little higher than you estimated, and perhaps it is a lot higher. At first you think that the Mortgage Bomber has accidentally shanked one into the woods, then you look closer and the conversation begins.

There are typically two types of closings costs, those that you can see and those that are hidden. Lets deal with the easier of the two first.

The first type of closing costs associated with a mortgage transaction are those that you can see up front. The fees in this group can be broken down, analyzed and easily defined. Generally they can be broken down into , Lender fees, State and Local taxes, Appraisal, Title Fees , and escrow.

Appraisal Fees: The appraisal is required for almost every home mortgage, unless you are among the few that receives a appraisal waiver from Fannie Mae or Freddie Mac, which happens occasionally but I wouldn't hold my breath. The appraiser in a traditional mortgage transaction is a non affiliated third party contractor. In Today's lending environment, they are acquired usually from a Appraisal Management Company, randomly. This is to insure that the property value is not being influenced by a relationship with the bank or mortgage company. Appraisal fees can be paid up front, at the table or they can be paid in the undisclosed costs section we will talk about later. Appraisal fees can range from $350.00 to $550.00 and can be higher if the property is investment, multiple unit or commercial.

Home Inspection: The home inspection is a service that you can obtain to inspect the property for defects, wear and tear or faulty appliances. The home inspection is different from the appraisal because the appraisal addresses the value of the home. The home inspection addresses the functionality of the home and its parts. The Home inspection is not necessary for lending and generally should not be provided to the lender. The home inspection, more often than not is still a important item used in negotiations with the buyer and seller. This can get tricky and can be a strong argument on one more reason that a good realtor is worth their commission. At the end of the day, the result of a home inspection could determine rather the home buyer continues forth on the contract or decides to back out if the seller does not make the appropriate improvement. Inspections can range from 350.00 to $550 and they are not included generally in the closing costs of the transaction.

Application Fee: This is a fee that some banks require up front for taking the application. The application fee helps the bank cover their up front costs. Buyer should beware of application fee's since this is not a normal fee and could be a junk fee. If there is a application fee then the buyer should question the loan officer with a high degree of confidence knowing that there are other places that do not charge this fee up front. Traditional banks are more likely to charge these fees.

Assumption Fee: This is a fairly rare fee since the interest rates have been low, but as we increasingly come back to earth to experience normal interest rates we may run into these again with more regularity. Some mortgages are assumable, this fee helps to "assume" the remaining balance of the sellers mortgage. FHA,USDA and VA loans are assumable. All mortgages are potentially assumable.

Loan Origination Fee: ( mortgage broker fee, processing fee, underwriting fee, administrative fee) This is the fee associated with the loan officer and the institution which they represent. Some companies charge this fee and some do not. As opposed to viewing it as good or bad, you should look at the total transaction . You are going to have to pay for the services of your Mortgage Lender, the question becomes which is the least costly. Generally those that charge Loan origination fees tend to have lower interest rates. Beware, sometimes they can be associated with firms that have high closing costs and higher interest rates . Expect to pay up to 1 percent. Since the Financial Regulatory Reform Act was enacted, fees can no longer vary so banks were required to establish the fee they were going to charge - this has some unintended consequences which bear down the hardest on the smaller loans.

Loan Discount Fee: A Discount fee is the amount you would need to pay to obtain a specified rate. These are also known as "Points." They can be used to lower your mortgage payment, but once again buyer beware. When you buy down rates, make sure to calculate the length of time it will take for the investment to pay itself back. This can be the most expensive way to get a rate, and often they can also be used to entice borrowers to a particular bank or mortgage company without the borrower understanding the real costs associated with the overall transaction.

Up Front Mortgage Insurance Fee: For Government loans ( FHA, VA, USDA) . This helps to fund the government programs and for their overall continuing operations without the need to further tax to supplement their operations. USDA generally charges 1 %, FHA charges 1.75%, VA charges will vary depending on several factors not discussed here. These fees do get updated and can change, but the lender may not overcharge for these fees.

Sometimes for Conventional loans you can pay a Up Front Mortgage fee to lower or eliminate the need for monthly insurance fees. This was commonplace but has largely been replaced with the most common method of paying a monthly mortgage insurance premium.

Property Taxes, Assessments, Home owners assessments: Taxes are ... well what they are. Taxes can up in the form of transfer, transaction and for the establishment of the escrow. Homeowners associations may have fees associated with them as well depending on where you are buying. If you are establishing a escrow you will be required to establish a minimum of 2 months and a maximum of 3 months of pro-rated taxes in your escrow account at the time of the closing. Obviously this is not a lenders fee.

Title Search Fee: A title search is performed by the title company of your choice. This is to see if there are outstanding liens against the property, perform a chain of ownership. This is a Title Fee associated with the Title company which you choose. Title Search fees range around $200.00. This is not a lenders fee.

Closing Fee, or Attorney Fee: Depending on the State and the Title company this can vary. This pays for the time for the Attorney or closing agent at the closing. They tend to cost similar to the going Attorney rates in the area. This is not a lenders fee.

Lenders insurance policy: Most lenders ( Fannie, Freddie, VA, USDA, VA ) require a lenders insurance policy. It insures the lender for defects in the Title. This varies based upon the amount.This is not a lenders fee.

Owners Policy: This protects the owner from defects in the title. Usually, if their is a lender's insurance policy, the title company will work out a discounted rate for the owner ( ie. the borrower). I will only say this - if the lender is protected and requires that they are protected, it makes sense to consider this to protect your investment. You will only need to buy this once for the length of time that you own the home. Beware lenders highlighting that this fee is not required. No lender requires this, responsible lenders communicate the value of this. This is not a lenders fee.

Various Title fees: Any related costs associated with the purchase, sale or transfer of the property. These can include overnight fees, tax transcript fees, and a variety of fees that the title company indicates that are associated with your locality. Your mortgage adviser or Realtor can help you to shop for the right title company for you. These fees are dependent upon the title company you choose.

Insurance, Homeowners: A homeowners insurance policy is required if you have a mortgage on property upon purchase. It is also required while the property has a lien or a mortgage attached to it. At the time of the closing a policy which covers 1 year in advance will need to be obtained from a insurance agent of your choice. If you are going to escrow then you will also be required to keep at least 2 months and no more than 3 months in the escrow account at all times. These fees are dependent on the insurance company you choose.

Finally, let us talk about Hidden costs associated with a mortgage. Since lenders and thrifts generally will hold the mortgage for at least a day, they are not required to show their yield spread premium paid for that associated type of loan. This is not necessarily good or bad, it just is the landscape that is our lending environment today. I recently heard a Large Realty company bragging that their in house lender saved millions of dollars in fees. While this is at its face true, what they did not relay is that their costs associated with those savings ended up costing the consumer more in the form of a higher interest rates. Buyer beware! ( Caveat Emptor) when someone tells you that something is for nothing, it usually means that there is a catch. There is no free lunch, and usually when one is advertised in that way , there is a problem with transparency and it creates a ripe environment for the consumer to lose. The most expensive loan is often the one without closing costs, because you are financing those costs over 10, 15 or 30 years at a rate that most would not agree to. Have a real conversation about what you are trying to obtain with a Mortgage professional that you trust. The trustworthy professional is not afraid to bear all and have a adult conversation with a consumer to help them to obtain the financing that fits their families needs.

*Fred Duff is a licensed Mortgage professional in Kentucky and Ohio and has been involved in the Mortgage industry in a variety of capacities for the last 23 years. He is currently a Branch Manager he can be reached at (502)345-0682 or (513)445-9811 or frederickduff@gmail.com. No solicitations please. www.pre-qualifymymortgage.com