Here is an overview of the types of closing costs you may incur on your loan. Some are one-time fees, while others reoccur over the life of the loan. When you apply for your loan, you should receive a Good Faith Estimate of Settlement Charges, and a booklet that will explain these costs in detail.
Loan Origination Fee: This fee covers the lender’s administrative costs in processing the loan. It is a one-time fee, often expressed as a percentage of the loan. The origination fee is typically 1% of the loan, but you can obtain a loan with no origination fee and a slightly higher interest rate.
Loan Discount: Often called “points”, a loan discount is a one-time charge used to adjust the yield on the loan to what market conditions demand. One point is equal to 1% of the loan amount. This fee is rare when interest rates are low.
Appraisal Fee: This is a one-time fee that pays for an appraisal, which is a statement of property value viewed by the lender. The appraisal is made by an independent fee appraiser and can cost a standard $400 to $500, or much more, depending on the home’s size and location.
Credit Report Fee: This one-time fee covers the cost of the credit report that is run by an independent credit reporting agency and is usually about $60-$100.
Title Insurance Fee: There are two types of title policies. A lender’s title policy (which protects the lender against loss due to defects on title) and a buyer’s title policy (which protects you). These are both one-time charges, but buyer charges typically cost about .15% of the cost of the home.
Miscellaneous Title Charges: The title company may charge fees for a title search, title examination, document preparation, notary fees, recording fees, and a settlement or closing fee. These are all one-time charges and can add up to about $200-$300.
Document Prep Fee: There may be a separate, one-time fee that covers preparation of the final legal papers, including the note and deed of trust. These legal documents run about $150.
Lender Fees: Other lender fees include an underwriting fee, a flood certification fee, an amortization schedule fee, and other miscellaneous fees that should be disclosed by your mortgage lender at loan application. These fees vary dramatically so check with your lender.
Prepaid Interest: Depending on the time of month your loan closes, this charge may vary from a full month’s interest to just a few days’ interest. If your loan closes at the beginning of the month, you will probably have to pay the maximum amount. If your loan closes at the end of the month, you will only have to pay a few days’ interest.
PMI (Private Mortgage Insurance) Premium: Depending on the amount of your down payment, you may have to pay an up-front fee for mortgage insurance (which protects the lender against loss due to foreclosure). You may also be required to put a certain amount into a special reserve account (an impound account) held by the lender for PMI.
Beginning of the Escrow Account: Your lender will typically have an account where your property taxes and property insurance will be held. This account will be started with taxes approximately equal to two months in excess of the number of months that have elapsed this year. (If 6 months have passed, they will collect 8 months of taxes.) Your property insurance will be collected one year in advance, plus two months will be kept in your escrow account. (Note: Requirements for establishing or waiving tax or insurance escrow accounts may vary based upon the buyer’s financial strength.)
Earnest Money Deposit: It is important to have an understanding of the earnest money deposit. When a written offer is presented, the seller will expect that proposal to be accompanied by “good faith” money showing the strong intent of the buyer. Thus, you’ll need to plan for including a personal check, cashier’s check, or wire-transferred funds. Upon offer acceptance, the agreed amount is deposited into the brokerage escrow account or the designated title company’s escrow account. Those funds will remain in escrow until the time of closing, unless otherwise mutually directed in writing by all parties to the contract. This amount is credited to the buyer at closing as a partial down payment and represents intent to purchase the property. This deposit reduces the buyer’s balance due at closing. If the offer is not accepted, checks will not be cashed and no funds deposited. Depending on the price of the property and its market area, you should anticipate an initial minimum deposit of $1,000 earnest money. Following the satisfactory completion of all inspections, attorney reviews and other due diligence matters, the earnest money is increased to a larger deposit agreed to by the parties. Earnest money is typically refunded to buyers when any agreed condition such as inspections, legal matters or financing cannot be satisfied. Do not expect earnest money to be refunded if you simply change your mind or refuse to close.
Title Insurance: When purchasing a home, both the buyer and lender, if any, will need a preliminary title commitment identifying the property’s recorded liens, encumbrances and recorded easements currently in effect. The title commitment will additionally identify the vested owner of record and any restrictions on the use of the property. Title insurance is, for all practical purposes, required on all property in most states and is normally a seller’s expense. However, the buyer is required to furnish the lender with a lender’s policy showing the lender as lien holder on that property. These charges will be incurred at the time of settlement as a part of buyer closing costs. Once the property has closed, and the title company has recorded the necessary documents, the title company will then issue a title insurance policy to you and the lender showing clear title to the property. For accurate information on buyer title charges, it is best to check directly with your title company. Title charges may vary slightly between title companies.
Reminder: Bring a driver’s license or other acceptable form of identification to closing. Be prepared to provide the remainder of your down payment due at closing, if any. Depending upon the amount needed, you may be able to submit a cashier’s check for the remainder of your down payment. Larger amounts of down payment will be required to be sent to the title company via wire transfer. If wiring funds, be sure to speak with your title company closer to verify correct wiring instructions in advance.
There’s certainly a lot to know! If you have additional questions, contact us and let us know how we can help!