About Mortgage Closing Costs

What are Closing Costs?

Closing is a process that begin weeks before closing, and follows an outline set largely by a buyer's original offer on the house. That sales contract, once it's signed by the seller, covers the key elements of the settlement or closing.

Types of Closing Costs

Charges for Establishing and Transferring Ownership
These include title search, title insurance and related escrow fees.

Amounts Paid to State and Local Governments
These include city, county and state transfer taxes, recordation fees, and prepaid property taxes.

Costs of Getting a Mortgage
These include appraisal, credit checks, loan documentation fees, notary charges, loan origination, underwriting, commitment and processing fees, hazard insurance, interest prepayments, and lender's inspection fees.

Title Insurance

When it comes to houses, providing clear title is not simple. Moreover, your lending institution will not give you a mortgage loan on a house unless the seller can prove that he owns it. The proof comes in the title search.

In many parts of the country, public records affecting real estate title are spread among several local government offices, including recorder of deeds, county courts, tax assessors, and surveyors. Records of deaths, divorces, court judgments, liens, and contests over wills (all of which can affect ownership rights) also must be examined. The title search will be carried out by a title company, a lawyer, or other specialist. In addition to a formal title search, your will require a title insurance policy. The policy guards the lender against an error by whoever searched the title. Let's say, for example, that a long-lost relative of the seller turns up with indisputable evidence that the relative - and not the seller - holds legal title to the property. Though it should have been found in the public records, the relative's claim was missed somehow. Errors are rare, but they do occur.

The cost of the policy (a one-time premium) is usually based on the sales amount. The title insurance required by the lender protects only the lender. To protect yourself against unforeseen title problems, you may also want to take out an owner's title insurance policy. Normally the additional premium cost is only a fraction of the lender's policy, but this can vary from area to area. Some final advice on keeping title insurance costs low: if the house you are buying was owned by the seller for only a few years, check with a title company. If you can obtain a re-issue rate, the premium is likely to be lower than the regular charge for a new policy.

Government Imposed Costs

While there is no way to avoid paying these taxes, you must do this when you make your offer to purchase the property. Towns impose a seller transfer fee and possibly a buyer transfer fee.  Each town is handled differently. 

Processing Fee

Imposed by your lender, this charge covers the initial costs of processing your loan request.

Appraisal Fee

This fee pays for an independent appraisal of the home you want to purchase. The lender requires this opinion or estimate of the market value of the house for the loan.

Origination Fees & Discount Points

The origination fee is charged for the lender's work in evaluating and preparing your mortgage loan. Discount points are prepaid finance charges imposed by the lender at closing to increase the yield to the lender beyond the stated interest rate on the mortgage note. The greater the discount points paid, the lower the interest rate. One point equals one percent of the loan amount. For example, one point on a $100,000 loan would be $1,000. In some cases - especially with refinances - the points can be financed by adding them to the loan amount.

Mortgage Insurance

Buyers who make down payments less than 20 percent of the value of the house may be required by lenders to take out mortgage insurance. The policy covers the lender's risk in the event the buyer fails to make the loan payments. Premiums are typically paid annually from an escrow or reserve account, or in a lump sum at closing.

Insurance: Homeowners & Hazard

A form or protection against physical damage to the house by fire, wind, vandalism and other causes. Your lender will expect you to have a policy in effect at closing.

Home Inspection Fee

For an analysis of the structural condition of the property by an home inspector, engineer or consultant, and for termite inspections.

Various Expenses Between Buyer & Seller

Some of the adjustments may involve large amounts. Local property taxes, annual condominium fees and other lump-sum service charges, for instance, may be split between you and the seller to cover your respective periods of ownership for the calendar year or tax period.  These are called 'per diem' charges.

How to Better Anticipate Closing Costs?

With such a long list of potential charges at settlement, it is important to know what to expect. Your mortgage lender is required to supply you with a Good Faith Estimate (GFE) of all your closing costs within three business days of your application for a loan. In addition, a statement of your actual costs should be given to you at or before settlement. Within the same three days, the lender is required, under the Truth in Lending Act, to provide you with a disclosure estimating the costs of the loan you have applied for, including your total finance charge and the Annual Percentage Rate (APR). The APR expresses the cost of your loan as a yearly rate. This rate is likely to be higher than the stated interest rate on your mortgage because it takes into account discount points, mortgage insurance, and certain other fees that add to the cost of your loan.