3 Ways Mortgage Closing Costs Can Mislead You

Mortgage closing costs are charges that the lenders add to your loan as payment for preparing your mortgage loan. The process is not cheap, so it's only natural that lending companies want to be compensated. However, the closing costs are not always what they appear to be. Many lenders will assume that you don't understand what the closing costs actually entail and charge you more then they have to. I f you know what you're getting into, you will have a better chance of securing a loan with closing costs that cover the lenders' services without needlessly draining your finances.

Understand the Nature of the Closing Costs

Closing costs can be broken down into a number of fees. Different lenders may charge different fees. However, only four types of fees are absolutely necessary in order to prepare a mortgage loan.  They include:

  • Attorney fees--cover the costs of paying an attorney to prepare and record official documents. This is done to ensure that the documents are legally sound and comply with existing federal and state laws.
  • Title fees--cover the cost of searching the history of the property that you're buying, including all past real estate transactions it was involved in. This may be done by either an attorney or a title search company. If it's the former, the title fees are included in attorney fees. 
  • Government recording fees--cover the cost of recording the title transfer with state and/or local government. The fee is different depending on the location.
  • Pre-paid fees--cover the costs of first-year premiums for your home's property insurance. This includes mortgage insurance, fire insurance and various types of disaster insurance.

All of the other fees are known as lender fees. They are optional and will vary considerably depending on the lender. You should try to find a policy with the cheapest lender fees possible. To figure out what they are, ask the lender to provide a good faith estimate before you buy their policy. The good faith estimate is an approximate breakdown of what kind of fees the lender will charge and how much each fee with be worth. While the actual costs may wind up slightly higher (or lower), the good faith estimate would give you a general idea about what kind of closing costs you can expect from that lender.

Watch out for Yield Spread Premiums

Yield Spread Premium is essentially a kickback that a lender pays to a mortgage broker for persuading you to get a loan with a higher-than-usual interest rate. The premium is included in the closing costs. If the Good Faith Estimate contains a Yield Spread Premium, consider it a sign that you are getting a bad deal and that you should get your mortgage somewhere else.

Avoid Mortgages with No Closing Costs

Some lenders will try to persuade you to buy their mortgage by claiming that they have no closing costs. However, as mentioned before, some closing costs are necessary. The lender will cover them by increasing your interest rates and other fees. In other words, the lack of closing costs can be just as misleading as their presence.

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