Most people associate closing costs with finance charges levied by
mortgage lenders. The charges you pay will vary among lenders, so
it’s good to shop around for the best combination of mortgage
terms and closing, or settlement costs:
Origination Fee – For processing the mortgage
application there may be a flat fee, or a percentage of the mortgage
Credit Report – Most lenders require a credit
report on you and your spouse, or an equity partner. This fee is
often a part of the origination fee.
Points – One point is equal to 1% of the
amount borrowed and can be payable when the loan is approved either
before or at closing. Points can be shared with the seller which is
negotiable in the purchase offer. Some lenders will let you finance
points which will add to the mortgage cost. If you pay the points up
front they are tax deductible in the year they are paid. Different
deductibility rules apply to second home loans.
Lender's Attorney's Fees – For your attorney
to draw-up documents and to ensure that the title is clear, and for
representation at the closing.
Document Preparation Fees – There are several
documents and papers prepared during the home-buying process ranging
from the application to the closing. Lenders may charge for this, or
the fees may be included in the application and/or attorney’s
Preparation of Amortization Schedule – Some
lenders will prepare a detailed amortization for the full term of
your mortgage. This is usually done for fixed mortgages or
Land Survey – Lenders may require that the
property be surveyed to ensure it has not been encroached and to
verify the buildings and improvements to the property.
Appraisals – Professional Appraisers can do a
comparison of the value of the property to that of other recently
sold neighborhood properties. Lenders want to be sure the property
is worth the value of the mortgage loan.
Lender's Mortgage Insurance – If your down
payment is 20% or less, many lenders require that you purchase
Private Mortgage Insurance (PMI) for the loan amount. If you should
default on your loan, the lender will recover their money. These
insurance premiums will continue until your principal payments, plus
the down payment equal 20% of the selling price and may continue for
the life of the loan. The premiums are usually added to any amount
you must escrow for taxes and homeowner's insurance.
Lender's Title Insurance – Even with a title
search for any property obstacles, liens or lawsuits, many lenders
require insurance to protect their mortgage investment. This is a
1-time insurance premium usually paid at closing, and is for the
lender only, not the homebuyer.
Release Fees – If the seller has worked with a
contractor who put a lien on the house and is expecting payment from
the proceeds of the house sale, there may be fees to release the
lien. The seller usually pays these fees which could be negotiated
in the purchase offer.
Inspections Required by Lenders – The lender
may require a Termite Inspection if you apply for an FHA or a VA
mortgage loan. In many rural areas a water test may be required to
ensure the well and water system will maintain an adequate water
supply to the house; for quantity not quality. Depending on the
sales contract and property type, additional inspections may be
Prepaid Interest – The first regular mortgage
payment is usually due from 6-8 weeks from closings; however,
interest costs begin at closing time. The lender will calculate the
interest owed for that period of time, and that fraction of interest
is sometimes due at closing.
Escrow Account – Lenders often require that
you set-up an Escrow Account, where you will make monthly payments
to, for taxes, homeowner's insurance, and sometimes PMI (Private
Mortgage Insurance). The amount placed in this account at closing
depends on when property taxes are due and the timing of the
settlement transaction. The lender can give you a cost approximation
during the application process of your mortgage loan.