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7) A Look at "Closing Costs"

“Closing Costs” are the expenses over and above your down payment that most buyers normally face when it comes time to close a loan. And these costs generally are not included in your loan amount. Closing costs are therefore usually “out-of-pocket” money. And though you can do your best to get the other side to pay the closing costs, you’d better understand what’s included in that very loose term.

An advance warning: Be wary of television and Web ads from mortgage companies that promise “No closing costs and no points!”. These mortgage companies typically build in bigger penalties and penalty charges into their contracts.

Something to look for: One thing to look for when shopping for a mortgage lender is their willingness to tell you in advance what the specific closing fees and charges will be. Federal law requires that lenders give you a "good faith estimate" of closing costs within three days of applying for a loan and a copy of the HUD booklet "Settlement Costs—a HUD Guide." Looking for a lender that's willing to share clear estimates of these costs with you before you make any committment to the lender is a good goal. Most credit unions happily disclose their associated fees.


Lender's Fees

  • Loan origination fee: a fee charged by lenders to procure your mortgage loan. Most lenders charge an origination fee because it is an important source of income for the lender and helps to cover operational costs. The industry standard is 1% of the loan amount, however, since it is set by the lender, it can vary. This is not considered a “junk fee.” Not all lenders charge an "origination" fee.
  • Discount points: a fee charged to buy down the interest rate. When a lender or mortgage broker quotes you a rate, it doesn’t include any discount points unless you request them.
  • Appraisal fee: an independent written opinion that identifies the property’s market value. This document is generally required either by the lender’s regulator or if the loans are to be sold by the lender into the secondary market, which most are. The fee can vary widely depending on the type and location of the property. For homes located in urban areas, this fee usually runs $250 - $350. Many lenders will give you a copy of the appraisal if you request it.
  • Credit report: a document summarizing the applicant’s history of repaying debts. Credit reports usually cost $11 to $60, depending on the source. A credit report is required for all mortgage loans. Look for a lender that charges you only the actual cost of the report.
  • Mortgage broker fees: fees paid to individuals who produce mortgage loans for lenders, usually an independent contractor.
  • Tax related service fee: a fee required by lenders to cover the cost of annually researching tax records to insure that the borrower is current on their property tax payments. Not all lenders have such a fee.
  • Processing fee (also sometimes known as an application fee): a one-time fee to process your mortgage loan application. Like the loan origination fee, this is a source of income for the lender that helps to offset operating costs. If someone offers you a "no fee" or a lower fee than $100, they may be making up the difference by adding so-called “junk fees.” Be sure to compare the total cost for mortgage options.
  • Underwriting fee: a fee charged by many lenders to review and approve the mortgage application. Not all lenders have such a fee.
  • Flood certificate: fee charged to obtain the government-required document used to determine whether the subject property is located in a flood plain. Look for a lender that charges only their cost.


Items Required by Lenders to be Paid in Advance

  • Pre-paid interest: mortgage loan interest is paid in arrears. This is daily interest paid from the day your loan closes and you take possession of the home until the end of the month. For example, your mortgage payment made on April 1 pays for interest accrued from March 1st to March 31st of the previous month.
  • Mortgage insurance: if your loan is more than 80 % of the value of the property, lenders require this insurance premium. For certain loans, like FHA, this premium may be paid in a lump sum at closing. For most loans, this premium is paid monthly into your escrow account. Mortgage lenders typically require mortgage insurance if the loan is more than 80% of the property value. (This requirement many also be phrased in reverse—you are making a down payment of less than 20%.)
  • Hazard insurance premium: this is the annual premium for your homeowner’s insurance.


Reserves Deposited with Lender

  • Hazard insurance premiums: in addition to the annual premium collected at closing, the lender collects an amount equal to one or two months of hazard insurance as a buffer for any possible increases in premium. For the life of the loan, then, these funds are collected monthly along with the mortgage payment and held in an account until the lender receives, and pays, the bill for the hazard insurance.
  • Mortgage insurance premium reserves, school tax, property taxes, assessment reserves and flood insurance reserves: the lender collects an amount equal to one to three months of estimated taxes as a buffer for any possible increases in tax rates or property values. These funds are collected monthly along with the mortgage payment and held in an account until the lender receives, and pays, the tax bill.


Title Charges

  • Escrow fee, document preparation fee: these are fees collected by the title company or attorney handling the closing. The funds are collected and paid as part of the transaction.
  • Notary fees: a fee charged for having the signatures on all legal documents of the sale notarized. Some lenders don't charge this fee.
  • Attorney fees or Closing fees: fees paid to an attorney or title insurance company to prepare the closing documents.
  • Title insurance: provides insurance to owners of real estate to insure that they have clear title to the property they are buying, subject to any exceptions contained in the policy. Title insurance also insures the lender that they have an enforceable lien on the property, subject to any exceptions on the policy. Most lenders would never originate a mortgage without title insurance. The charge for title insurance is generally determined by each state’s Department of Insurance.
  • Tax deletion: fee to pay the title companies to determine that all current and prior years’ property taxes are paid.


Government Recording and Transfer Fees

  • Recording fees: fee charged by the county to record the Mortgage/Deed of Trust or any other legal documents in the real estate loan transaction.


Additional Settlement Charges

  • Pest inspection: required for an FHA loan by the government or possibly by the underwriter/investor as a condition of the loan.
  • Survey: document outlining the exact dimensions of the property. Usually required for a purchase or anytime improvements (e.g. deck, fence, pool, etc.) have been done since the last survey.


The Happy Ending

When you've shopped for a home and mortgage wisely, closing on your new home should bring a happy ending with no surprises. Somewhere in all the verbage is your "take possession" date—for most sales, that's the day of closing. With the right house and the right mortgage, those new keys will open the door to personal enjoyment, comfort and security of owning your own home or a new home—and the family budget will be happy, too.


Glossary

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