Closing costs and fees.

What to expect for closing costs

Closing on a property is a very challenging time for a would-be homeowner. Being informed, either through your mortgage broker, your real estate agent, or through self knowledge is the best thing you can be when going through this procedure.

A good real estate agent can help you tremendously. They should know the local market well enough to help you save money in whatever way they can. Since closing costs are handled differently in different areas, having a professional with experience in that area is your best bet. They can give you a better idea of what costs are customarily paid by the buyer, and which ones are paid by the seller.

The mortgage broker you deal with can make a big difference in your closing costs too. Have them show you several programs suited to your needs. There are lots of ways to structure closing costs based on your points and down payment.

After finding a property, you will want to get qualified by your mortgage broker. Your mortgage broker will send you a Good Faith Estimate within 3 days as required by law. A GFE is a list of your closing costs from your lender. There may be additional closing costs that the lender does not control, so always be prepared to pay for other items also. A good number to be prepared to pay would be to double the GFE amount.

Closing costs on average are from 3% to 5% of your loan amount, and the exact amount will be told to you the day before the closing. All closing costs are to be paid at the settlement of the mortgage loan.

There are two types of closing costs

Non-recurring closing costs are the ones that you pay once and never have to pay again.
Recurring closing costs you pay repeatedly over the course of your home ownership. These would be items like property taxes or homeowner insurance. Property taxes placed in escrow are one of the largest expenses at closing.

Some items listed here may not be on your GFE.

Closing Cost and Fees Associated with Loan

Loan Origination Fee

Commonly referred to as a "Broker Fee," this is the fee that the Mortgage Provider or Broker charges you in exchange for placing your loan with the wholesale lender.

Mortgage Broker Fee

Same as the Loan Origination fee, you should never pay both.

Loan Discount Fee ("Points")

The percent of the loan amount paid to a lender in exchange for a lower rate. You should typically pay 0 Points upfront unless you are going to keep your loan for a longer time horizon.

Yield Spread premium/rebate

Money paid to the Mortgage Broker by the lender in exchange for selling you a higher rate than that for which you qualified. For example, if you qualified for 6% but the broker sold you 6.5%, then the lender would pay the broker additional compensation for selling you the higher interest rate. This is above and beyond any other fees the broker is charging you. ** A note of caution about Yield Spread: You should always ask if you are being charged a Yield Spread and definitely get an answer why if you are being charged one.

Be aware, however, that if you choose a "No Closing Cost" option, or are reducing your closing costs with your mortgage, a Broker will charge you a Yield Spread, which will be reflected in a higher Wholesale interest rate and monthly payment. This option means that you would not have to pay the Closing Costs directly associated with your loan upfront at close of escrow. The Yield Spread would be used to cover the closing costs directly associated with your loan. There are certainly scenarios where this option makes more financial sense than either paying your costs up front or borrowing. Our Break Even Calculator can help you determine if this option makes sense for you.

Appraisal Fee

This fee reimburses the Mortgage Broker or Lender for the amount charged for the appraisal on your property.

Credit Report Fee

This fee reimburses the Mortgage Broker or Lender for the cost of pulling your credit.

Tax Service Fee

This fee applies in states that charge mortgage tax.

Loan Processing Fee

The fee that the Mortgage Provider or Broker charges you to pay his/her processor to handle the paperwork associated with the loan. This is in addition to the Loan Origination Fee.

Underwriting Fee or Lender Inspection Fee

This is what the lender charges to evaluate and make a decision on your loan.

Wire Transfer Fee

The charge for wiring your funds to either your current mortgage company or creditors you are paying.

Title Charges

Closing or Escrow Fee

The amount the title company charges you in order to hold your closing documents and close your loan on the lenders' behalf.

Document Preparation Fee

Depending on the lender, this is a fee the wholesale lender charges to prepare your loan documents.

Notary Fees

The fee the title company charges in order to notarize your loan documents.

Attorney Fees

Legal services provided to the lender such as an examination of the title binder. Occasionally, the seller will agree in the sales contract to pay part of this fee. The cost of your attorney and/or the seller's attorney may also appear here.

Title Insurance

This is a policy the wholesale lender requires you to purchase from the title company in order to protect their lien position on the title. For example, if you are refinancing your home with a new first mortgage, then the new wholesale lender is assuming they will be the first lien on the title. If, for some reason, this was not the case, this insurance policy covers any loss they may sustain for that reason.

The pricing depends on a number of factors and is tied to your loan amount and is usually a tiered pricing structure.

Title Exam Search

The research done at the county courthouse to verify the legal description of the property, the property taxes, whether they are paid, who holds title and what liens are currently on the property.

Government Recording & Transfer Charges

Recording Fees

The cost of recording your new mortgage at the courthouse.

City/County Tax/ Stamps

Some cities and counties require you to pay a tax on the mortgage you take out. This money does not go to the wholesale lender or broker, but directly to the government agency imposing the tax.

State Tax/Stamps

Some states require you to pay a tax on the mortgage you take out. This money does not go to the wholesale lender or broker, but directly to the government agency imposing the tax.

Additional Settlement Charges

Pest Inspection

An inspection to see if the property is free of infestation.

Flood Certificate

All lenders require that a search be done on the property being financed to determine whether or not it is in a flood zone.

Courier Fee

May be required to reimburse the Mortgage Provider for their cost of transporting documents.

Endorsement Fees

Some wholesale lenders require certain endorsements on the title insurance policy they make you purchase. Of course, these require you to pay additional fees. Some examples would be an EPA endorsement.

Binder Fee

This is a charge for the physical binder that your title insurance policy is kept in.

Items Required by Lender to Be Paid in Advance

Pro-Rated Interest

When you close a loan in the middle of the month, but do not have a payment due until the 1st of the next month, the bank collects in advance the interest due until the end of the current month. For example, if you closed March 15th, your first payment would not be until April 1st. That leaves 15 days in March that the bank would collect interest for at closing.

Private Mortgage Insurance Premium (PMI)

Typically required by lenders if the LTV is greater than 80% of the property's value. You can usually choose to pay this upfront or as part of your monthly mortgage payments. It usually makes sense to buy out the monthly payments. You will usually be better off getting a 1st mortgage at 80% LTV, and borrowing the rest with a 2nd mortgage.

Hazard Insurance Premium

Insurance to protect you and the lender against loss due to fire, windstorm, and natural hazards. Lenders often require borrowers pay for the first year's premium at settlement.

VA Funding Fee

Often required by lenders for Veterans and personnel on active military duty.

Reserves Deposited with Lender

All of these items are only applicable if you decide to escrow these assessments and are dependent on what your taxes and insurance are.

Hazard Insurance Premium

Mortgage Insurance Premium Reserve

School Tax

Tax and Assessment Reserves

Flood Insurance Reserves

Your closing procedure will go smoothly when you are armed with the right information and guided by the right professionals. Good Luck & Happy Buying!