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As many of you know, we’re in the process of buying a townhouse. We recently received the paperwork from our lender, including our truth in lending disclosure, a disclosure book, and our good faith estimate. The Real Estate Settlement Procedures Act (RESPA) requires that we receive these things within 3 business days of submitting our loan application.
As we get closer to closing, we’ll also receive a HUD-1 Settlement Statement, which is a form used in the United States for disclosure of fees that the lender or broker is charging. The purpose of the HUD-1 statement is to help borrowers understand the total costs of buying their home. These documents are a great resource to give you an idea of upcoming expenses and costs.
Always ask questions
I’ve heard from my friends and read from others that they wished they ad asked more questions when buying their home. Unfortunately, they usually come to this realization after they realize that they could’ve gotten a better loan. Instead of relying on what a lender tells you, check out these resources:
- HUD’s Site on Buying a Home and Closing Costs
- Consumer’s Guide to Mortgage Lock-Ins
- Consumer’s Guide to Mortgage Settlement Costs
- Five Tips for Shopping for a Mortgage
- Looking for the Best Mortgage: Shop, Compare, Negotiate
Remember, no broker or lender has to give you the best deal. They are trying to make a profit, and that might involve higher rates and/or fees than you would otherwise have to pay. Be sure to ask questions, and don’t be afraid to comparison shop. It’s your name on that loan, and you’ll be the one responsible for it.
Is your interest rate adjustable or fixed?
It’s in your best interest to understand the term of your loan, your interest rate, whether it is fixed or adjustable, and whether or not you will have any balloon payments in your future — you should generally avoid loans that require balloon payments.
Fixed-rate loans generally have repayment terms of 15, 20, or 30 years.
Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates.
Source: Federal Reserve
Run all your numbers before agreeing settling on a lender and loan. Ask them to walk you through and show you how much your monthly payments could be a year from now, five years from now, and so forth. In the case of a fixed-rate loan, the principal and interest payments won’t change over the life of the loan.
How much are your settlement costs?
Besides your down payment, there are a number of costs associated with closing on your new house. Becoming familiar with the typical costs and fees will put you in a better position.
Loan origination fees: Borrowers might be asked to pay this fee in return for the brokers/lenders handling your loan. It typically ranges from 1- 1.5% of the house’s cost, though some lenders offer lower flat rates.
Hazard/homeowners insurance premiums: Lenders expect you to pay your first year’s premiums in advance. Going forward, they will also (most likely) collect a portion of your annual premium along with your monthly mortgage payment and place it in your escrow account.
Title insurance: The title insurance come into play if there’s ever a dispute of who really owns the property. While you have to find a company that meets your lender’s requirements, you can search to find a good deal on your title insurance premiums.
Just make sure the coverage you get is adequate. Some cheaper policies may have exclusions that can hurt you — e.g., they might only protect the lender’s interests.
Pest inspection: Depending on where you live, your new home might need to be inspected prior to closing for termites and other pests that might damage your house.
Credit report: Lenders will pull your credit report to make sure you’re a financially worthy candidate. The cost for doing this is typically passed on to the borrower.
Other settlement costs: You also have to consider processing fee, underwriting fee, document review (I’m not kidding!), tax service fee, commitment fee, wire transfer fees, overnight shipping fees, and a few more. There are a lot of fees involved, so review your Good Faith Estimate carefully to see what you should expect.
If you’re thinking of purchasing a new home, keep the settlement costs in mind when formulating an offer. Remember, you’ll have to bring enough cash to the closing table for both your down payment and your settlement costs.
Your settlement statement will also give you a pretty good idea of your complete cost of home ownership. Of course, this doesn’t include incidentals like new furniture and your monthly utility bills, but it gives you a pretty good baseline.
And remember… If you have any questions about fees, ask before you sign anything. Don’t be afraid to negotiate a better deal — if something doesn’t make sense to you, try to get it reduced or removed. Being an informed buyer is the best course of action.
If you’ve bought a home, what surprised you about the settlement costs and/or the closing process? Do you have any tips or tricks? Anything that we should be sure to do/avoid? Please share your thoughts in the comments.