Mastering Your Mortgage: Understanding and Comparing Closing Costs

Hey there! It's David Xie from the Xie Mortgage Team at Power by Nexa Mortgage. Today, we're diving deep into the world of home loan closing costs. Buying or refinancing a home can be an overwhelming experience, flooded with paperwork and complex terms. But fear not, I'm here to simplify it for you.

Understanding Average Closing Costs

First off, let's talk numbers. In America, the average home sale price hovers around $220,000, with closing costs averaging about $8,000. That's roughly 4% of the sales price. But these figures are just the tip of the iceberg.

Shopping Around: A Must-Do

It's crucial to shop around and compare quotes from various financial institutions. Don't limit yourself to just direct lenders, mortgage banks, or brokers. Each has its pros and cons, and it's wise to get at least one quote from a major bank, a direct lender, and a mortgage broker.

The Loan Estimate: Your Comparison Tool

When comparing costs, focus on Section A of your loan estimate. This document, which lenders must provide within three days of your loan application, breaks down all the fees. Pay special attention to origination fees, processing fees, and the like. These are the areas where lenders differ the most.

Breaking Down the Fees

Understanding different fees is key. You have your lender's loan costs, prepaid taxes, and insurance, which ensure your escrow account is well-padded for future tax and insurance payments. Don't forget about prepaid interest, which covers the period before your first mortgage payment.

Understanding Discount Points and Servicing Charges

Discount points are upfront payments that can lower your interest rate over the loan's term. Servicing charges, like underwriting and document preparation fees, vary by lender and significantly impact your overall cost.

The Importance of the Annual Percentage Rate (APR)

The last page of your loan estimate reveals the APR, which includes all upfront charges. Even a small difference in APR can mean a lot, depending on your loan amount.

Third-Party Fees: The Inevitable Costs

These fees, including appraisal and flood certification fees, are generally uniform and non-negotiable. Lenders might overestimate these costs to avoid underdelivering if actual charges exceed estimates.

Prepaid Funds for Taxes and Mortgage Interest

Depending on when taxes are due, lenders collect several months' worth of taxes and insurance. This ensures there's enough in your escrow to cover these expenses when they come due.

Average Lender and Third-Party Fees

We've found that the average lender fee ranges from $1,380 to $1,400, mainly comprising the origination fee. On a $220,000 house, third-party fees can total about $3,200, covering title insurance, appraisal, and various other settlement charges.

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Regional Variations in Settlement and Escrow Fees

Settlement and escrow fees can vary significantly based on location. For example, places like Philadelphia might have higher fees due to additional taxes, while states like North Carolina may have lower fees.

Choosing the Right Lender

When selecting a lender, consider your options. Banks offer in-house underwriting but limited flexibility. Correspondent lenders provide more options but include middleman fees. Mortgage brokers, on the other hand, can offer more competitive rates and personalized service.

The Mortgage Triangle: Pricing, Product, or Speed

As a mortgage broker, we focus on what's most important to you, whether it's pricing, product quality, or speed of service. We aim to find the best fit for your specific needs and circumstances.

Conclusion

Navigating the maze of closing costs can be daunting, but understanding your options and shopping around is key to getting the best deal. Remember, there are various loan types like VA, FHA, conventional, and USDA, each with its own cost structure. If you have any questions or need assistance, feel free to reach out to me, David Xie, at 757-478-8493. I'm here to help you through this journey. Until next time, take care!