Keep close tabs on closing costs
By DIAN HYMER
© St. Petersburg Times
published May 25, 2002
Accumulating cash for a down payment on a house can be a challenge.
In addition to the down payment, fees associated with a home purchase, called closing costs, put a dent in your cash resources.
Closing costs vary from one region to the next. They typically include title insurance, fees charged by the closing agent, inspection fees, mortgage insurance premium, appraisal fee, points and fees charged by the mortgage lender, prorated interest, property tax proration, transfer taxes and hazard insurance premium.
It is possible to whittle down the closing cost bill.
Start with points, one of the biggest expenses. This is the term lenders use for their loan origination fee. One point equals one percent of the loan amount. On a $300,000 mortgage with a 1-point fee, you would pay $3,000 to the lender at closing. By choosing a no-point $300,000 loan, you could lower your closing costs by $3,000.
There are pros and cons, however, to no-point mortgages. As far as the IRS is concerned, points paid on a purchase mortgage are prepaid interest and are tax deductible in the year they are paid. You must itemize deductions to take advantage of this tax break.
There's an inverse relationship between points and the mortgage interest rate. The higher the points, the lower the interest rate, and vice versa. The longer you plan to stay in your home, the more sense it makes to pay points for a lower rate.
Prorated interest is collected at closing to cover the interest you owe the lender for the month in which you close on your new home. For example, if you close on June 5, the lender will collect interest at closing for the period from June 5 through June 30. The later you close in the month, the less prorated interest you'll owe. That's why so many buyers scramble to close in the last few days of the month.
Lenders charge miscellaneous fees, in addition to points. They can amount to $1,000 or more, depending on the lender. When you shop for a mortgage, ask for an itemization of the lender's fees. You may be able to save by choosing a lender with fewer fees.
State and federal agencies have begun cracking down on lenders who charge for services they did not perform or cannot document, such as marked-up credit report charges, appraisals, recordation fees, courier expenses, "processing" and administrative fees, among others. Buyers should demand to see their settlement sheets a day in advance, examine every fee and question anything that looks dubious, housing columnist Kenneth R. Harney suggests.
Some lenders require borrowers to pay private mortgage insurance if the mortgage amount exceeds 80 percent of the purchase price. In this case, a PMI premium may be collected at closing. To avoid PMI, use piggyback financing. This consists of a first mortgage for no more than 80 percent of the purchase price and a second mortgage to make up the balance you're financing.
HOUSE HUNTING TIP: The seller may be willing to pay some of your closing costs. Most lenders permit this with certain restrictions. Many lenders only allow a credit for the amount of the buyer's nonrecurring closing costs. These are costs that the buyer pays one time, like a transfer tax, points or title insurance. Most lenders also limit the credit amount to no more than 3 percent of the purchase price.
In a competitive seller's market, you could be at a disadvantage if your offer asks the seller for a credit. This is equivalent to asking the seller to accept a lower price.
You can save on your hazard insurance premium by agreeing to a larger deductible. Check with your lender to make sure you satisfy the lender's requirements.
THE CLOSING: Don't skip inspections to save money. The money you save could end up costing you if a significant defect went undiscovered.
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-- Dian Hymer is the author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out: The Complete Home Buyer's Guide" (Chronicle Books).
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