Taking out a mortgage to purchase or refinance your home can be an intimidating process. Your loan-related expenses, especially when refinancing, influence how profitable your deal will ultimately be. Understanding mortgage costs can help you pay less and recoup costs faster. Here are the basics of understanding mortgage costs, and understanding them can help you pay less for your next home loan.
What is a Good Faith Estimate?
The Good Faith Estimate (GFE) is a standardized form that discloses basic information about the mortgage you're applying for. (Lenders have to issue one within three business days of your loan application, but many will give you one while you're shopping for a home loan.) The fees quoted on this document are estimates, given in "good faith" by the lender, and they must be accurate within specific percentages by law.
Your lender may require you to submit a loan application to get a Good Faith Estimate; however, this does not obligate you to lock or sign a contract with the lender.
Most Common Closing Costs
The Good Faith Estimate makes understanding closing costs easy. The loan origination fee can be found at the top of page two in box one of section "A." The less you pay for the origination, fee the faster you'll recoup your out-of-pocket fees when refinancing.
Another important cost found on your Good Faith Estimate is the discount points. Mortgage discount points may be charged if you want to secure a lower rate; paying discount points is often called "buying down" the rate. Paying points can make sense if you plan on keeping the mortgage for the long term. If you sell or refinance before breaking even, it can be difficult, even impossible to recoup your money.(Check out LendingTree's Refinance Break-even Calculator to see how this works.)
There are a number of fees found in section "B" of page two on the Good Faith Estimate that are paid to third parties. These include fees for appraisals, inspections, title insurance, escrow services and recording. These fees aren't all negotiable, but in many states you can and should shop for your title insurance and escrow services.
What if You Can't Afford to Pay?
If you can't afford to pay your out-of-pocket expenses at closing, there are options available to you. When refinancing, you may be able to wrap your closing costs into the new loan – this is called a "limited cash-out refinance."
Another way to eliminate out-of-pocket charges is the so-called "no cost" loan. In exchange for accepting a higher mortgage rate, the lender will pay many or all of your closing costs.
If you don't have the cash and only plan on keeping the loan for a short period of time, this can be smart choice. Just make sure there isn't a prepayment penalty if you plan on refinancing or selling soon. You can find the credit for accepting a higher mortgage rate in box 2 or section A, "You receive a credit of $x for this interest rate y%. This credit reduces your settlement charges."
If you're unsure if paying discount points or if accepting the settlement charge credit makes sense, there is a table on page three you can fill out to help weigh your options. Understanding closing cost is important before you start comparison shopping home loans. Comparing mortgage quotes from three or more lenders using the Good Faith Estimate can save you thousands of dollars.