Closing Costs

Closing Costs are quite simply the costs associated with completing your loan transaction. Homeowners spend an average of 3% to 6% of the outstanding principal balance to close home loans. Closing costs are generally estimated on a Good Faith Estimate, and finalized on the HUD-1 settlement statement.

Despite what advertisers may have you believe, there is no such thing as a loan with no closing costs, just like there's no such thing as a free lunch. No closing cost loans hide their fees in higher rates and penalties to give the appearance of costing nothing, however are generally much more expensive over time than the same loan with typical, fully disclosed closing costs. You are paying, in this case throug the nose, for the privilege of not coming out of pocket at closing. Today's smart borrower understands that all loans cost money to close, and that in refinance transaction and many purchase transactions, closing costs can be rolled into the loan itself with no out of pocket cost, at a much lower total cost than the typical "no closing cost" option.

Here are some typical closing costs you might expect in connection with your mortgage:

Appraisal Fee:
Nearly all mortgage transactions require an appraisal to be conducted by a licensed and certified appraiser. The appraisal generally evaluates the home being mortgaged and deterimnes its market value for purposes of lending, by comparing a variety of information sources such as public records, comparables sales in your area, and building costs. It is common practice for borrowers to pay appraisers directly at site outside of closing, and fees vary widely, from as low as $150 in some areas to as much $500 to $600 in high cost/high value areas.

Underwriting Fee:
An underwriting fee is normally charged by the lender to underwrite the loan file and this fee is usually anywhere from $400 up to $900 on average (depends on the lender and the type of loans they generally do). Underwriting a loan file is basically making sure the file is in accordance and meets with the lender's guidelines and lending policies and/or Fannie Mae or Freddie Mac's lending guidelines. When a loan closes the lender is able to charge the underwriting fee. It is very uncommon or unheard of for an underwriting fee to be charged on a loan that does not close. Therefore, a bank or lender may have hundreds of files underwritten on a daily basis but they only make money on the loans that close. Not all loans will close due to inadequate collateral, insufficient income, poor credit, or they may just not meet the lender's guidelines. A subprime lender, lender for people with bad credit, will usually have more loans fall out of their pipeline and not close due to the nature of their loans as opposed to a conforming lender, good credit lender, whose guidelines are more straight forward. Therefore, subprime lenders will generally charge more for underwriting since they underwrite more loans that do not close and since there is usually more work involved with the underwriting of these loans.

Origination Fees:
Contrary to common belief, these are NOT what are commonly called "points" even though the origination fee is sometimes expressed as a percentage. Just as there are costs for you to purchase or refinance a home, your mortgage company also incurs extensive costs in "originating" your loan and getting you the financing you need, ranging between 1% to 4% of the total value of your loan depending on its size. Be wary of lenders who claim to charge no origination, there is a good chance you're paying much more somewhere else, typically in your loan payments over time, if you're not covering the costs of orignating the loan through some form of origination fee.

Discount Points:
These ARE what are commonly referred to as "points", so named because they used to come in 1% increments of the loan balance. So on a $100,000, 1 point is $1,000.

Discount Points are paid to reduce the interest rate on a mortgage, and each point paid on a traditional 30 year fixed mortgage typically "buys down" the interest rate of the loan by one/eighth of one point. Because rates are so low, historically speaking, dicount or "buydown" points are less and less popular, but still may make sense in certain programs where promotionaol discounts are given making for drastic reductions in rate, or in cases where you will own the home for more than 5 years.

Many popular personal finance pundits have recently advocated avoiding "points" on their mortgage, and these are the points they are referring to. Their contentions have some merit in certain cases, as in most cases borrowers do not own homes long enough to reap the rewards of the lower rate, and paying discount points voluntarily is often a sign that you may be buying more house than you can afford. Discount points are not to be confused with origination fees, which cover necessary expenses in the mortgage process. Discount points are optional unless they are required for you to qualify for the loan payment due to a lower than required income or higher than expected expenses.

Mortgage Tax:
Certain states impose taxes on the mortgage a home buyer takes out. Mortgage tax is often levied as a percentage of the loan amount. It should also be noted that mortgage tax is different from transfer taxes, which is often paid by the seller as a percentage of the price of the property.

Preocessing Fee:
Generally when working with a mortgage broker and also with some lenders, you will be charged a loan processing fee. This fee is nominal and covers the costs incurred in setting up, processing and closing your loan file. There are many steps in the loan process and this closing cost is designed to help in covering those expenses. Some companies aslo will contract out the processing of your loan to a processing center.

Application Fee:
Fees that are paid upon application. An application fee may frequently include charges for property appraisal ($200-$400) and a credit report ($30-50).

» 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.