Real Estate Loans: Points and Costs

Costs Associated with a Home Loan can get quite detailed. The closing costs include the points paid with the home loan.  The following will explain what all goes into the cost of a loan.

There are a multitude of costs that are associated with getting a new home loan. There are many instances where you may be able to get the seller or builder to help foot the bill for some or all of these costs. The costs are a guaranteed part of getting a home loan no matter who ends up with the responsibility for paying them. These costs include the loan discount points, any prepaid items, and the largest of all, the closing costs.

The closing costs, if you’re not aware, are the costs that the lender has for the creation of the loan. A few of these are directly incurred when the loan application is filed such as obtaining a copy of your credit report or reports if there are numerous applicants. Some others may be a result of inspecting or appraising the home to determine its value. A few others may also be lender charged for processing and actually doing the work with getting you the loan. To keep things simple, all of them get bunched into a category referred to as the closing costs. These are quite hefty and in most circumstances the buyer is responsible for paying them.

On average, expect them to be about 2 or 3 percent of the overall loan amount. You cannot get a guarantee on how much they will be because the laws, regulations, and taxes vary so much between the states. Always discuss any questions or concerns you may have directly with your lender who will be able to give you a more accurate approximation of your costs.

One type of prepaid interest is the loan discount points. One percent of the amount borrowed is the equivalent of one point. This must be paid when closing occurs in cash to the lender for interest. The points are able to lower your overall interest rate on the loan itself. You may get a loan for 30 years at 7% interest rate with no points at all or get a lower rate of 6.5% with 2 points. You will pay the points at closing instead of during the life of the loan. The amount you pay may be equal in funds overall so sometimes it is questionable as to why you would want to pay points in the first place.

The last, but certainly not least, item of consideration are the prepaid items. The great majority of lenders will require that you set up a savings account called an “escrow” that the lender is holding. The account requires payments in addition to your mortgage and may be used for expenses such as home owner’s insurance, private mortgage insurance if you have paid less than 20% of the home’s cost, or property taxes. When these expenses are due for the month or year the lender uses the funds here to make the payment. This is typically required to be opened when the closing of the loan occurs and you may be required to put roughly 9 or 10 months of property taxes and a year’s worth of insurance into it right from the beginning. They are prepaid and you must pay them on your own when the home loan closes.

These amounts should only be considered ball park estimates because rules and regulations may vary and policies can be ambiguous for each institution. Always discuss these figures with your lender so that you are aware of how much it is truly going to cost you to purchase a home.

Lori English is a Los Angeles real estate agent, broker and internet business woman. As a web expert, she writes about Los Angeles homes for sale, as well as for other websites. With her experience, certificates, and degrees, she understands real estate, the internet business, and how to invest in properties.