Understand Your Closing Costs
Whether a first time buyer or refinancing your loan, closing costs can send shock waves to any borrower. Though the closing can occur in as little as one hour, fees for this event begin to generate before you’ve even gone to contract. Being aware of the standard charges will ensure you aren’t blind sighted, and can ask the practical questions when comparing lenders.
While closing costs have generated sheer disbelief, you shouldn’t be in too much shock at the actual closing. The law demands that lenders provide you a “Good Faith Estimate” within 3 days prior to the event. Here are some of the costs that you may see listed.
Loan Origination Fee/Points - Many lenders, especially mortgage brokers, charge origination fees, known as points (see Refinancing 101), but also offer no point interest rate options. An easy calculation will help you decide which is better: Take the dollar amount of the points you are paying and divide by the difference in payment between the zero point option and the option you are considering. The result will be the breakeven point in months. If you anticipate being in the home at least this long, pay the points; otherwise choose the no point option.
Broker Fee – Broker fees are sometimes listed under loan origination fees, and can include processing fees. Make sure you clearly understand how much is being charged by the wholesale lender and how much is charged by the broker. You can usually save money on closing costs by going to the lender directly.
Credit Report – Your lender will review your credit history and collect this fee up front. The credit report normally runs between $21 and $60.
Appraisal fee- Collected up front from the lender and usually non-refundable, even if you are turned down for the loan, or choose another lender/property. Fees will vary, depending on the value of the home. The combined cost of the credit report and appraisal fee is usually your application fee. Beware of lenders who do not apply your application fee to the cost of the appraisal and credit report or attempt to collect other fees at the time of the loan application.
Appraisal Review Fee – This is charged occasionally and can run from $75 to $150. Some lenders routinely review appraisals as a quality control procedure, especially on higher valued properties.
Title search - Your lender will not grant you mortgage loan unless you can prove that the seller owns the house you are buying. To do so, you need to perform a title search.
Title insurance- The lender’s title policy insures his interest against loss due to title defects not discovered at the time of the sale, but offers no protection to you. An owner’s policy (most title agencies will provide this automatically) will protect you against title defects. A title exam isn't foolproof and you can spend a lot of money trying to clear this up after the fact.
Pre-paid 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 pay up to the first.
Homeowner’s Insurance –You normally pay the first years insurance at closing when buying a home. If buying a condominium, Homeowners’ Association Fees may cover this insurance. Flood
Certification Fee - Your lender must determine whether property is located in a federally designated flood zone. This is a fee usually charged by an independent service.
Flood Monitoring – Occasionally flood zones are re-mapped and lenders charge this fee to maintain monitoring on whether it affects your property Tax Service Fee - Since property tax liens sometimes take precedence over a first mortgage, your lender may pay an independent service to monitor property tax payments. This fee usually runs between $70 and $80.
Underwriting Fee – It is difficult to determine the exact cost of underwriting a loan since the underwriter is usually a paid staff member. This fee is usually in the neighborhood of $300 to $350.
Administration Fee - If an Administration fee is charged, there shouldn’t be an Underwriting Fee.
Wire Transfer Fee – Many mortgage bankers have switched to funding by wire, which provided an excellent opportunity to add a new fee to the list of closing costs.
You may ask the seller to pay some of the closing costs. In reality, you are financing them since you will likely pay more for the property than if you were paying your own costs. Here are a few simple rules (which may vary by location). On conventional loans you can only ask the seller to pay non-recurring costs, such as appraisal, broker fees, credit checks, tax service fees, and flood certification fees, but this does not include prepaid costs. If you are putting ten percent down or more, the most the seller can contribute is six percent of the purchase price. If you are putting less down, the most the seller can contribute is three percent.
When shopping around for rates and costs, make sure you are making accurate comparisons. Lenders often don't include expenses you will have to lay out prior to closing when quoting rates. Be firm on how much you are willing to pay in points and how long you want to lock in the rate. Even better, get a referral from a friend and then take your best quote to see whether he will match it.