Closing Costs

Closing Costs Explained

Closing costs are the actual expenses that the lender incurs in the origination of a new home loan. Some of the costs are related to your loan application, such as the expense of a credit report on all applicants. Other fees are related to the house itself, such as the property appraisal. Others are payment to the lender for processing your application, such as the loan origination fee.
Unless the seller offers to pay them for you, these expenses are charged to the buyer and often runs between 2 and 3 percent of the amount being borrowed. Because different states have different fees and taxes that are a part of these costs, it's impossible to generalize nationwide.
Common closing costs can include processing and underwriting fee, mortgage insurance premium, appraisal fee, the cost of a credit report, tax service fee, application, commitment, wire transfer fee, etc… Escrow accounts are often required for many loans for homeowners insurance, real estate taxes, and homeowners associations and require cash deposits at closing.
After your initial meeting with a mortgage professional, you should receive a Good Faith Estimate (GFE) that shows all of the closing costs associated with your mortgage application. If a credit report costs $100 at one shop and $20 at another, but the second lender's deal is better overall, point out the discrepancy and ask the preferred company to lower its charge. Just remember, any third party fees have been previously negotiated and established between the mortgage company and third party.

If you are shopping for a mortgage, and get more than one good faith estimate, it may be tempting to go with whichever one has the lowest amount in fees. However, you need to ask yourself, is it really such a good idea? It is very common for loan officers to lie about their fees in order to entice you into going with them. You may find out at the closing table that the fees suddenly increased. You need to decide which deal sounds more reallistic to you. If something sounds too good to be true, it probably is.

Don't get the wrong idea. There are a lot of bad people in the mortgage industry. But there are even more good people, who really want to help you with your home financing.

Prepaid interest and prepaid taxes and/or hazard insurance resrves are not to be confused with true (non recurring) closing costs.

Most lenders will allow the seller to pay 3-6% of your closing costs on purchase transactions. This can help you if you are putting money down, or if you are looking for a 100% no money out of pocket loan.

Closing costs are most often rolled back into the loan amount during a refinance. With a purchase it is not as common for the lender to allow a borrower to roll these costs into the loan, however it does happen sometimes. Generally with a purchase the borrower pays for the closing costs out of their own pocket or they receive a seller concession from the seller. With a seller concession the seller pays for the borrowers closing costs up to a pre-determined amount stated in the purchase agreement. Closing costs can also be paid from gift funds.

Lenders will often divide closing costs into two categories: recurring and non-recurring. Recurring closing costs are items such as property taxes and pro rated interest that the borrower will incure again in the future. Non-recurring are one time costs associated with the transaction such as processing, title and escrow fees. When there are seller contributions to closing costs lenders normally only allow them to apply to non-recurring costs.

Typical closing costs will include any origination or discount points, appraisal, credit report, processing, closing and title fees, recording, tax stamps (if applicable), escrow money and your per diem interest.

Closing costs vary from loan to loan. The easiest way to cover the costs is to wrap them into the loan if possible. If you have to pay your closing costs out of pocket for a purchase you can ask for a seller credit to help.

» DISCLAIMER: The information contained in this article on 'Closing Costs' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.