Once you reach an agreement on the purchase of a home, things start moving quickly. In the chaos, it is important to remember to budget for closing costs.
Budget for Closing Costs - Loan Origination Fees and PMI
Closing costs are fees associated with miscellaneous events associated with a home purchase, things such as property inspections. Even if you are purchasing a home for the first time, you are probably aware there are closing costs that have to be paid. Rarely, however, are you aware of just home much and how fast the can accumulate. If you have not budgeted for them, they can put a kink in the closing or even cause you to lose the home.
A couple of closing costs to keep in mind are origination fees for home loans and private mortgage insurance. The mortgage related costs are only a small part of the overall closing costs you can face, but deserve a closer look.
Origination fees for home loans can be a shock to first time buyers. Few realize they are going to have to pay such things. Origination fees are costs charged by a lender for services used to determine if the lender should give you a loan in the first place. For example, a lender will charge you fees for obtaining a copy of your credit report, having an appraisal done for the property. Infuriatingly, the lender will also charge you fees for processing the loan and preparing the loan documents. You may also have to pay points, which represent a percentage of the total loan, often one or two percent. On a $300,000 loan, the origination fees can quickly add up to thousands of dollars.
Private mortgage insurance, often called PMI, can also be a nasty little surprise. The magic number when considering PMI is 20 percent. If you make a down payment on the home that is less than this amount, you are almost certainly going to have to pay PMI. PMI is simply insurance that protects the lender should you default on the loan. The cost can add up to hundreds of dollars, so make sure you know what is expected of you.
Closing costs are aggravating, particularly when you feel like you are being nickel and dimed to death. Budget for them up front, and you will feel less aggravation.
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