Closing Costs Explained

(Home Loan Financing for All Situations)

Closing can be one of the most confusing aspects of buying a home or refinancing a loan. The process begins with your bid, the sales agreement and your loan application. It ends the day of closing when all of the necessary documents are reviewed and signed, and corresponding fees are paid. Usually, it takes between 60 to 90 days to complete the closing process.

Several individuals are involved in the closing process in addition to you and the seller, including attorneys and mortgage and title company representatives. Your attorney will coordinate with each participant to choose a closing date. Keep in mind that it takes time to gather all of the documentation, and if the paperwork is not completed on schedule, it is possible that the closing date can change. This uncertainty can be particularly stressful for buyers who are also selling a home, since the closing date generally dictates moving arrangements.

For your closing, you will need to be prepared with photo proof of identification for each buyer, your new homeowner's policy, as well as various other documents which your attorney will advise you of. And, don't forget your checkbook! The closing is where most fees are settled.

Closing Costs

Real estate practices and closing costs vary widely in different areas of the country, and from lender to lender. However, buyers and sellers are free to negotiate certain fees. It's best to do your research before you make any offers, so you're in the best position to negotiate with the seller. In most states, you can also cut costs by shopping around for providers of settlement services.

Generally, you can plan to spend an additional 3 to 5 percent of the loan amount in settlement expenses (for example, $3,000 to $5,000 on a $100,000 mortgage). In higher-tax areas, 5 to 6 percent is more realistic. The exact figure depends upon the location of the property you are purchasing.

Ask Your Lender for an Estimate of Closing Costs

Experienced loan officers will provide a rough estimate of closing expenses before you apply for your loan to make it easier for you to shop around. Once you apply for your loan, The Real Estate Settlement Procedures Act (RESPA) requires your lender to provide a Good Faith Estimate of all closing costs within three business days of your application. The lender is also required, under the Truth in Lending Act, to provide a disclosure estimating the costs of the loan you applied for, including your total finance charge and the Annual Percentage Rate (APR), within the same three days. Finally, you will receive a statement of actual closing costs from your lender at or before settlement.

Closing costs fall into three general categories: loan costs, title fees and government fees. Below is an explanation of each category and specific fees you can expect to pay. Cost estimates and ranges are provided for your planning purposes only. Your actual closing costs will vary depending on the property you are purchasing, the area in which you live and the service providers involved.

Loan Costs
The fees required to obtain your mortgage may include:

* Application Fee & Credit Report
Imposed by your lender, the application fee covers the initial costs of processing your loan request, and usually includes a credit report check. The application fee with a credit report can range from $400 to $525. If it is handled separately, the cost for your credit report will be about $75 to $150. If you are self employed, you will also need a business report that costs between $50 and $100.

* Appraisal Fee
This fee covers an independent appraisal of the home you want to purchase. The lender requires this estimate of the market value of the house in order to make the loan. The appraisal fee varies depending on the purchase price and size of the home. For a $100,000 home, the minimum fee would be approximately $275.00.

* Attorney Fees
Settlements are conducted by lending institutions, title insurance companies, escrow companies, real estate brokers and/or attorneys. In most cases, whoever conducts the settlement is providing a service to the lender. You may be required to pay for these legal services. You should also retain you own attorney to represent you at all stages of the transaction. Attorney fees are usually based upon the purchase price of the home and the complexity of the sale. Attorney fees can range anywhere from $600 to $1,000 and up.

* Documentation Fees
Some lenders charge miscellaneous fees for various services, such as underwriting, processing and documentation preparation, which usually total under 1 percent of the loan amount.

* Home & Pest Inspections
A home inspection by a qualified engineer and pest inspection by a pest control specialist offer assurance that the home you are purchasing is structurally sound and free of termites and any related damage. The costs for these services vary depending upon the location and size of the property, and the professionals you choose.

* Homeowner's & Hazard Insurance
Homeowner's and hazard insurance offer protection against physical damage to your new home by fire, wind, vandalism and other causes. Most states require that the annual premium on your homeowner's insurance be paid in advance and put into effect at closing. Prices for homeowner's insurance vary depending upon the value of the home, the location and the insurance agency. For example, homeowner's insurance for a $200,000 property could cost between $600 to $700 annually.

* Interim Interest or Daily Rate of Interest
This cost is based upon your closing date and covers loan interest from the day you close through the end of the month. Therefore, it can range from 0-30 days' interest, payable to the lender.

* 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. Essentially, paying points is a means for the borrower to pay down the interest rate. Paying points can save thousands over the long term, so if you plan to be in your new home five years or longer and you have the cash up front, it's certainly an option to consider. One point equals one percent of the loan amount. For example, one point on a $75,000 loan would be $750. In some cases - especially with refinances - the points can be financed by adding them to the loan amount.

* Mortgage Insurance (PMI)
Buyers who make down payments that equal less than 20 percent of the value of the house may be required by lenders and, in some states, by law to take out mortgage insurance. The policy covers the lender's risk in the event the buyer fails to make loan payments. Premiums are usually paid annually from an escrow or reserve account, or in a lump sum at closing. A buyer whose mortgage is insured by FHA or guaranteed by VA will have to pay FHA mortgage insurance premiums or VA guarantee fees.

* Survey
At a minimum, the lender will require an independent verification from a surveying firm that no additional structures have been added to the lot since the last survey was conducted on the property. The lender may request a complete survey to ensure that the house and other structures on the property meet legal codes and regulations. Depending on the size of the property and the state you live in, surveys can cost between $250 to $450.

* Title Fees
In order to purchase a property, you must establish the seller's ownership and transfer ownership from seller to buyer. The following fees are required by a title search company to complete this process:

* Document Preparation Fee
This is usually a flat fee paid to the title company which can range from $50 to $200.

* Title Search & Title Insurance
It is necessary to prove to the lender that the seller owns the property you wish to purchase in order to get a loan. The title search provides this proof. The title search involves reviewing public records in local government offices, including recorders 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) must also be examined. The title search assures you and your lender that there are no claims against the property. The cost for a title search is based upon the purchase price, and may cost approximately $300 to $600.

In addition to the title search, title insurance protects you and the lender from an error in the title search. Such an error could mean that the lending institution loaned you money to buy a house from someone who didn't own it in the first place. Lenders' title insurance is approximately .2 percent to .5 percent of the loan amount, paid by the purchaser. Owner's title insurance protects you from title search errors, and usually ranges between .3 percent and .6 percent of the purchase price of the home.

* Government Fees
Government-imposed fees are usually the most costly fees you will incur at closing. These include city, county and state transfer taxes, recording fees and prepaid property taxes.

* Recording Fee
This fee, which is paid to the title company, involves recording the transfer of title with the county clerk's office. Recording fees vary from state to state and county to county, however, each county sets a fixed price per page which is usually about $50.

* Taxes
Most states require that four to eight months' taxes be collected at closing and held in an escrow account. An escrow account is a reserve account set up by your lender in which you deposit enough money to cover the first few months of mortgage insurance, hazard insurance and property taxes. The purpose of the escrow account is to ensure that sufficient funds are available to cover these expenses once you've purchased your home.

Helpful Hints: Questions to Ask Your Lender
Finding the right loan takes time, and the research can be complicated. Be sure to ask lenders any questions that arise as you explore your options and get the answers before you apply for your loan.

Does the application fee include the credit report, or is that a separate fee?
Some lenders include the credit report in the application fee, while others charge for the credit report separately. Find out how your lender handles it to avoid surprises during the application process.

Approximately how much should I factor in for closing fees?
Your lender is required by law to provide a Good Faith Estimate when you apply for your loan. However, experienced loan officers will gladly provide a rough estimate of closing expenses before you apply to make it easier for you to compare their loan against other options you may be considering.

How long have you been in the mortgage business?
Experienced loan officers will guide you through the application process and will know how to present your background and financial information to help you get approved.

Can I get pre-approved?
Many lenders can "pre-approve" you, which qualifies you for a loan by checking your income, credit and other financial data. The pre-approval will also indicate the price of a home you are qualified to buy. By getting pre-approved, you learn the price range you can afford and the loan amount you qualify for. Also, a lot of the initial legwork is done in advance and you'll be better prepared once you find the home you wish to purchase.

Can I lock into the interest rate when I want to, or is the offer time limited?
Since interest rates can change daily, there may be a time period in which you must lock in to ensure the interest rate you want. Many lenders will give you the option to lock in anytime. Find out when you must lock in before you make any commitments.

Will I be penalized if I pre-pay my mortgage?
Make sure that you can pre-pay your loan without incurring a penalty. You may not plan to make additional payments in the beginning, but remember that your financial situation can change during the term of your loan. The option to pre-pay can save you thousands over time, providing you aren't charged a pre-payment penalty.