If the various terms and fees associated with closing costs intimidate you, you're not alone. Until you started house hunting, you probably never heard of GFE, YSP, PMI and other terms. I'll explain what these terms mean and more importantly, what they mean to you.
What Are Closing Costs?
The closing costs on a home mortgage are simply the collected little fees from everyone involved in processing the loan. Unfortunately these "little" fees can quickly accumulate into as much as 8% of your total investment. Generally, if you're paying that much you're probably paying too much. Some trick phrases to watch for are Good Faith Estimate (GFE) and Yield Spread Premium (YSP).
What Is GFE?
Don't pursue a loan too far if the lender doesn't provide you a GFE up front. The GFE is, well, the lender's good faith estimate on what your total closing costs will be. They should have an official estimate that you can use to compare against various online charts to make sure you're not getting fleeced. The final closing costs shouldn't be too far from the estimate, and they must provide explicit explanation for any significant differences between the final number and their GFE.
What Is YSP?
The YSP fee is something you want to avoid. If you see it in your paper work, feel free to give your broker a good cold glare. This is usually a kickback the lender is giving the broker for helping the lender secure a higher interest rate loan. When you see a YSP fee in your closing costs, in many cases you should stop signing right there and seek a better interest rate elsewhere.
What Is PMI?
PMI stands for private mortgage insurance. This is something you will have to pay if you make a down payment that is less than 20 percent of the value of the home you're financing. Its function is to insure the lender against a bad investment in case you default on your loan. PMI can add a significant amount to your monthly payment, which is why it behooves you to make as large a down payment as possible.
I hope I have helped clear some of mystery surrounding closing cost terms. GFE, YSP and PMI shouldn't look so obscure and odd to you anymore. Paying your closing costs is one of the more memorable experiences you'll have as it is the final step to the biggest investment of your life.
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