Why are my Closing Costs so high?

Well today is the big 1/11/11 and so far so good. I am not one of those that gets superstitious about things but I know that many are excited about the date thing today. What significance does it hold?

Over the years the one question that I hear over and over is "Why are my closing costs so high?" It is a very good question and actually the answer is simple.

First off remember that there are 3 main sets of numbers when buying a home; down payment, closing costs and pre-paids. Obviously when refinancing you would not have the down payment piece.

Closing costs  usually are fees that are made up of and charged by the lender, state or county, title company and 3rd party services such as the appraisal. Many of the costs are set numbers and are the same regardless of how large a loan you get. So for lower loan amounts the closing costs in comparison will seem high. In Minnesota for example, the origination fee, title insurance and county mortgage registration fees are all tied to the loan amount while the rest of the costs are set numbers or for the amount of service rendered/needed. The lender only charges a small amount of these closing costs for their services.

So when we want to do a no cost or low cost loan the interest rates can be higher for the lower loan amounts because of the set fees that do not change. This typically will be the case for a loan under $180,000.

Then you have the pre-paid items which many confuse as part of the closing costs for the loan. THESE ARE NOT CLOSING COSTS. These numbers typically will consist of per diem for the number of days that you will hold the mortgage for that given month and then setting up your escrow account. Your escrow account will normally consist of taxes and insurance that you pre pay for before they are due. The numbers that are collected for this will depend on what month that you close in. The mortgage company will collect enough to make sure that when the taxes and insurance come due again that there is enough money there to pay them and even cushion the account a couple months per lending guidelines. Since every month you are paying part of your payment towards taxes or insurance you are pre-paying for the bill that will come due. Hence the word pre-paids.

It can seem pretty basic but it can also seem very confusing and overwhelming. Make sure that you have your loan officer explain it to you so you do understand. As a matter of fact anything that may not be clear to you...ask them to explain it! One of the problems that we have at our end is that we do this every day and while it all makes sense to us (most of it) it may not make sense to the customer and they have the right to ask for explanations.

Adding even more confusion to this would be the new good faith estimate that the government created a year ago. This thing is so confusing even those of us that use it have to scratch our heads. I will talk about this topic in a later blog.

There are some truly amazing things out there that many of us can not explain and a friend of mine posted this link on facebook.....wow was all I could say;

http://www.komonews.com/sports/heroes/111892554.html

Have a Great Week!