Closing Costs

Overview

Closing costs consist of both recurring and non-recurring fees. When you first apply for your loan, you will receive a Good Faith Estimate of Settlement Charges and a booklet explaining these costs. Generally, you can expect closing costs to equal from 2-5% of your purchase.

The Good Faith Estimate

The Good Faith Estimate of loan closing costs are made pursuant to the requirements of the Real Estate Settlement Procedures Act (RESPA). These are settlement cost estimates which the buyer will be responsible for along with the settlement of the mortgage loan. There are two general categories of closing costs, non-recurring and recurring. Non-recurring closing costs are items that are paid once, while recurring costs are items paid repeatedly over the life of the loan (property tax, insurance, etc.).

The following is an explanation of such costs:

Recurring Closing Costs

• Homeowners Insurance Impounds – The lender will divide the annual premium by twelve to determine the estimated monthly payment to the impound account. Since the lender is allowed to keep two months of reserves in the account, the borrower will need to deposit two months’ premiums into the impound account in the beginning.  The dwelling coverage part of hazard insurance covers costs to rebuild your home, while the liability coverage protects you against accidents.  When purchasing a condominium, the Homeowner’s Association Fees normally cover this insurance.
• Property Tax – This amount varies according to when the real estate transaction closes and when the taxes are due.
• Mortgage Insurance (PMI) Impounds – When required, lenders allow this premium to be paid monthly. However, a borrower may be required to put two months’ worth of mortgage insurance payments into the impound account.

Non-Recurring Closing Costs

Not associated with the Lender:

• Closing/Escrow Fee – The fees associated with the closing
• Title Insurance – Title Insurance assures the homeowner that they have clear title to the property. The lender also requires it to ensure that their new mortgage loan will be in first position.
• Notary Fees – Most loan documents have multiple sets that must be notarized.
• Recording Fees – Certain documents are recorded with the local County Recorder’s Office.
• Pest Inspection – This is also referred to as termite Inspection. This inspection tests for pest infestations and other items such as wood rot and water damage. If repairs are required, the amount to cover those repairs is usually covered by the seller, but it is a negotiable item. Usually, the pest inspection fee is paid by the seller and is not normally reflected on the Good Faith Estimate.
• Home Inspection – Since it is the homebuyer’s choice to obtain a home inspection, this cost may not be reflected on the Good Faith Estimate depending on if it is paid through escrow or outside of escrow
• Home Warranty – This is an optional item, but highly recommended. A Home warranty usually covers such items as the major appliances, should they break down within a specific time. Often this is paid by the seller and is highly recommended for buyers.
• Homeowner’s Association Transfer Fee – When buying a condominium or a home with a Homeowner’s Association, the association often charges a fee to transfer all of their ownership documents to the buyer.

Associated with the Lender:

• Loan Origination Fee – Often referred to as “points,” one point is equal to one percent of the loan. If you are willing to pay more in points, you will usually get a lower interest rate. Anything in addition to one point is referred to as “discount points.”
• Loan Discount Fee – Any points in addition to the origination fee are considered discount points.
• Appraisal Fee – This is a one-time fee for a statement of property value required on most loans. An independent appraiser performs the appraisal. Unique and more expensive homes usually have a higher appraisal fee. Since the property serves as collateral for the mortgage, lenders want to be reasonably certain of the value, and therefore, require an appraisal. The appraisal is used to determine if the price you are paying for the home is justified by recent sales of comparable properties.
• Credit Report Fee – This fee covers the cost of your credit report, which is processed by an independent credit-reporting agency.
• Lender’s Inspection Fee – This is associated with new construction and is what is called a 442 inspection. Since the property is not finished when the initial appraisal is completed, the 442 inspection verifies that construction is completed satisfactorily to the lender.
• Mortgage Broker Fee – A majority of loans originate through mortgage brokers and sometimes the points associated with the loan here versus Loan Origination Fee. The purpose is to clearly indicate how much is being charged by the wholesale lender and by the broker. Wholesale lenders offer lower interest rates and costs to mortgage brokers than you can obtain directly, so you are not paying “extra” by going through a mortgage broker.
• Tax Service Fee – During the life of the loan the borrower makes monthly property tax payments, either on one’s own or through an impound account with the lender. Since property tax liens can sometimes take precedence over a first mortgage, it is in the lender’s best interest to pay an independent service to monitor property tax payments.
• Title Insurance Fees – There are two title polices. A buyer’s policy protects the new homeowner and a lender’s title policy protects the lender against loss due to a defect in the title.
• Misc. Title/Escrow Charges – These are fees for a title policy insurance and escrow services. These may include charges for document preparation, notary fees, recording fees and a settlement of closing fee. Local custom by county will dictate whether buyer or seller pays all or a portion of these fees and is negotiable with the seller.
• Flood Certification Fee – The lender must determine whether or not the property is located in a federally designated flood zone. This fee is usually charged by an independent service to make that determination.
• Flood Monitoring – From time-to-time flood zones are re-mapped. Some lenders charge this fee to maintain monitoring on whether this re-mapping affects the property.
• Document Preparation Fee – There may be a separate, one-time fee that covers preparation of the final loan papers, including the note and the deed of trust.
• Underwriting Fee – A fee charged for the cost of underwriting the loan.
• Administration Fee – This fee is usually in lieu of an underwriting fee
• Appraisal Review Fee – Even though a borrower will probably not see this fee on a Good Faith Estimate, it is charged occasionally for lenders to review appraisals as a quality control procedure.
• Warehousing Fee – Sometimes lenders have a warehouse line of credit and add this as a charge to the borrower, however, it is rare.
• Prepaid Interest – Mortgage loans are usually due on the first of each month. Since loans can close on any day, a certain amount of interest must be paid at closing to get the interest paid up to the first of the month.
• VA Funding Fee – On VA loans, the Veteran’s Administration charges a fee for a loan guarantee. Based upon the use of the borrower’s VA eligibility, the fee is either two or three percent of the loan balance. Instead of paying for this as an expense, commonly it is financed into the loan balance.
• Up Front Mortgage Insurance Premium (UFMIP) – This is charged on FHA purchases of single-family residences or Planned Unit Developments and is 2.25% of the loan balance. Like the VA Funding Fee, it is normally added to the balance of the loan.
• Refinancing Costs
  • Interest – When closing the transaction on a refinance, there may be outstanding interest due on the old loan.
  • Reconveyance Fee – This fee is charged by the existing lender when they “reconvey” their collateral interest in the property back to the borrower.
  • Demand Fee – The existing lender may charge a fee for calculating payoff figures.
  • Sub-Escrow Fee – This fee is actually charged by the Title Company.
  • Loan Tie-in Fee – This fee is charged by the Escrow Company.