Home Loans - Understanding The Costs

Posted by Nick Niesen on October 29th, 2010

When you decide to get a home loan, there are a number of costs that are involved. If you are fortunate, the seller of the home may agree to cover some of the expenses for you. Some of the expenses you will see when getting a home loan is the closing costs, prepaid items, and loan discount fees. Understanding these terms will make purchasing your next home easier.

The closing costs are the expenses that the lender will charge borrowers for a new home. While some of these fees may be a part of your loan application, others may involve the appraisal of the home. The lender may also charge you fees to process your application. All of these fees are placed together in what is called the closing costs. The borrower is likely to pay these costs, and they average about 3% of the total amount borrowed. Each state will have various costs that are different from other states.

To get information about these fees, you will want to check local lenders. Loan discount fees are interest that is prepaid. They are measured in points, and one discount point is the equivalent of one percent of the amount that is borrowed. You will have to pay it at the closing, and it will be charged to the borrower as interest. Discount points are good because they help lower the interest on the amount of money you borrow. You may not have to pay discount points, but sometimes sellers will offer discount points.

The last expense you will see is prepaid items. Most lenders will require you to setup an escrow account prior to giving you a loan. An escrow account is basically a savings account that is held by the lender. You will be required to deposit a sum of money into the account each month. The money that is placed in this account will be applied to such things as insurance and property taxes. When it is time to make payments for your expenses, the lender will use the money in the escrow account to make payments.

Most lenders today require you to setup an escrow account prior to purchasing your home. It will need to have enough money to cover a few months worth of payments toward taxes and insurance. Homeowners will also have the pay the insurance policy for the first full year. All of these expenses combined are called prepaid items. The cost of these fees will vary from state to state.

These costs should be included in the price that you will pay for your home. If you don't take them into consideration, you could find yourself short of the money you need at the closing. Many of these fees are necessary for the lender, and you will have to pay them. Getting a home loan is a financial procedure that you should take seriously. You don't want to end up in a situation where you default on your payments. Understanding the costs involved with a home loan will allow you to make better decisions.

Being able to have your own home is a great feeling. Despite this, many people go out and get home loans or mortgages without taking the time to look at the cost involved. They often end up in situations that put them in a great financial strain. By taking the time to educate yourself and learn the terms involved with getting a home loan, you can make financial decisions that can improve your life. While getting a home loan can help you, it is important to research your options carefully.