Understanding Mortgage Closing Costs

Analyzing Good Faith Estimate Charges

Imagine what it would be like if you knew the one question that could save you huge amounts of money over the life of your mortgage.

Everywhere you go you're sensing the mortgage buzz. Current mortgage interest rates are the lowest in a lifetime.

Mortgage bankers are receiving phone calls from frenzied borrowers interested in refinancing or buying a house, especially in these times. Accordingly for many of us interest rates have never been this low and may never be lower again. It is a perfect time to take advantage of the current mortgage rate environment.

What Are Your Mortgage Interest Rates?

Undoubtedly most borrowers are asking one standard question. What are your mortgage interest rates?

Here is the problem. When borrowers don't end up with the rate quoted over the phone, they often feel they have been mislead. But there is a reason.

Mortgage interest rates vary not only from lender to lender but also between borrowers. The truth is lenders know that interest rates vary based on a borrower's credit and job history, amount of debt, and income.

In addition the value of the property versus the amount borrowed influences the interest rate.

So you can't hang your hat on interest rates quoted over the phone or viewed on the internet. This means at best these rates are merely ball park numbers.

How Much Are Your Mortgage Closing Costs?

Here is a little known secret. The most important question you need to ask your lender is what will it cost me? How much are the mortgage closing costs?

You probably can understand that multiple charges are incurred during mortgage origination. Certainly, one of those costs is the interest rate you are going to be charged. While the rate is an important consideration, you also need a break down of fees.

Consequently if you want to know the true cost of your mortgage, ask your lender to prepare you a Good Faith Estimate (GFE) upfront before you apply for a home loan.

Nonrecurring Mortgage Closing Costs

Did you know a good faith estimate is an itemized estimate of the costs to obtain a mortgage. You should ask for a GFE in the first conversation with a prospective lender whether you are buying a house or refinancing.

You can even ask for more than one if you want to compare different loan products. Just keep in mind it means more work for your loan representative.

Either way for refinancing or buying a house, there are costs incurred in connection to the loan such as loan origination fees, loan discount points, appraisal, credit report, processing fees, underwriting fees, tax service fees, and others.

Equally important there are also mortgage closing costs related to title and escrow such as closing fees, preparation fees, notary and attorney fees, as well as title insurance.

Other fees included are related to government recording and transfer charges.

These charges are referred to as nonrecurring costs because they are one time fees.

Recurring Mortgage Closing Costs

Other costs are called recurring costs such as prorated interest to be paid in advance, depending upon what day in the month you close. Lenders call this prepaid interest.

Other prepaid mortgage closing costs may include reserves required by the lender for homeowners insurance, private mortgage insurance, real estate taxes, or flood insurance.

Yield Spread Premium Is Part Of Mortgage Closing Costs

The third category addresses the need for the loan officer to be paid. The Good Faith Estimate should disclose the mortgage lender's compensation often referred to as a yield spread premium (YSP).

The yield spread premium is an amount paid by the lender directly to the mortgage representative. A yield spread premium raises an interest rate which in turn increases monthly house payments for the entire term of the loan.

Even though it is not added into the mortgage closing costs, yield spread premium is another cost to the homeowner. But do keep in mind your mortgage company deserves to get paid as long as it is disclosed and within reason.

Summarizing Mortgage Closing Costs

Move down to the end of the good faith estimate form where you can view the two final sections.

• Total estimated funds needed to close
• Estimated ongoing monthly house payments

This is your true cost of refinancing or buying a house. If your broker provided good faith estimates for more than one mortgage program, peruse them for differences in the funds to close and monthly house payments.

At this point, ask your lender to confirm that all the costs for obtaining a mortgage have been disclosed, including who is paying them and how much.

Final Mortgage Closing Costs

At the end of the transaction, plan for enough time when you go in to escrow or the attorney's office for signing documents. You will want plenty of time to compare the good faith estimate to the final calculations.