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ABCs of Mortgage Closing Costs

A guide to mortgage costs

April 23, 2015

By KIMBERLY J. HOWARD AdviceIQ - Tribune News Service

Taking out a mortgage is a costly enterprise, with fees you probably don't expect. It pays to know what you are in for when applying. Since the housing bust, many lenders tightened their standards, which means more hurdles for you.

Buying a home is the biggest financial investment most people ever make. Home buyers usually need a loan. Besides how much you borrow, there are expenses that go beyond it. Interest rates, terms and other fees decide the real cost of your mortgage.

Interest Rates
Because of the size of a mortgage, interest rates make a huge difference in the cost of your home.

Your credit score plays a large role in whether you can get a mortgage and how low an interest rate you qualify for. The better your score is, the lower the rate will be. Most lenders rely on reports from FICO. They might require a FICO credit score of at least 720 for the lowest rate, and some may require a score as high as 750.

If your credit is not so great or you have a bankruptcy in your background, you might still be able to qualify for a mortgage, but be prepared to pay a higher interest rate.

Lenders also look at your debt-to-income ratio -- the amount of debt you have as a percentage of your income -- to determine if you are creditworthy. A low debt-to-income ratio can help you get a lower interest rate.


The term of your mortgage directly affect the total costs. Most people get a 30-year mortgage, instead of a 15-year. The monthly payments are lower, but you pay more in interest in the long run. With a 15-year mortgage, you pay down the balance faster, and therefore, save on interest payments. A shorter mortgage term comes with slightly lower interest rates as well.

Another option is an adjustable-rate mortgage, which starts out with a lower-than-market interest rate and then adjusts after an initial term is over. If you get such a loan, you have to keep in mind which way interest rates are likely to go and what your payment could increase to once your initial term is up.

Private Mortgage Insurance
This is an additional monthly fee that adds to your mortgage if you don't have enough down payment.

If you get a conventional loan, meaning one that meets the standards of Freddie Mac or Fannie Mae, you have to have a 20 percent cash down payment. Some government programs, such as loans from the U.S. Department of Veterans' Affairs or the Federal Housing Administration, allow smaller down payments.

Closing Costs
Any loan you get has closing costs, which include prepaid taxes, insurance, inspection fee and loan origination fees. All together, they can be a large sum of money you might not budget for in advance when deciding to get a mortgage.

You can ask your lender to provide an estimate of closing costs. They usually add about 1 percent to 2 percent of your loan amount. Keep that in mind as you assess your out-of-pocket costs to secure the loan.

About the Writer
Kimberly J. Howard, CFP, CRPC, ADPA, is a Certified Financial Planner and the owner of KJH Financial Services, a Fee-Only practice in Newton, Mass., and Denver.

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