What costs should I expect at the loan closing?
At the loan closing, you will be required to pay your down payment and other various closing costs and fees. Most of the closing fees are paid by the buyer, but some of the fees are prorated, by date, to the seller and the buyer. In order to be prepared to pay the closing costs, you may request a Good Faith Estimate from the lender. However, the estimate often differs from the actual closing costs, so it is important to understand what to expect.
Before you make long-term decisions about the terms of your mortgage, such as locking in an interest rate, you should review the Good Faith Estimate to determine if there are hidden costs that may change your decision.
Typically, total closing costs will be from 2-6% of your mortgage amount. Although the Good Faith Estimate is subject to change, under (RESPA) the Real Estate Settlement Procedures Act, you have a right to request a HUD-1 Settlement Statement (one day before the actual settlement or closing). The HUD-1 details the actual fees that will be required. It is important to review this statement to ensure that you agree with and understand all the costs and fees listed.
At times, fees such as the application fee, credit report fee, or the appraisal fee may be required with the loan application before the closing. Certain fees vary from lender to lender, but generally, taxes, appraisals, credit reports, and title insurance should be comparable for all borrowers. Sometimes, your fees may be included in the mortgage amount, depending on the terms negotiated. But generally, the buyer comes prepared to pay the related fees at the time of the loan closing. Common closing costs and fees that you may expect are:
Loan Origination Fee: a percentage of the mortgage (generally 1%), charged to set up and evaluate the loan application.
Application Fee: required by the lender to process your loan application, often required with the application, generally non-refundable.
Credit Report Fee: requested by the lender in order to evaluate your loan application (generally obtained from one of three major credit reporting agencies: Equifax, Experian, TransUnion).
Appraisal Fee: used to obtain an independent appraisal of the home to be mortgaged; the appraisal is a factor in determining the amount the lender will loan.
Survey Fee: may be required – verifies the legal position of the home on the property and ensures that there has been no encroachment on the property.
Title Search Fee: charged for a detailed search of the historical records related to a property to ensure that the seller is legal owner, that there are no liens, restrictive covenants, outstanding judgments, or other claims against the property (A certificate of title issued as a result of a title search does not necessarily protect against hidden defects which did not show up in the search – often the lender will require title insurance for protection against such claims).
Title Insurance: often required by the lender for protection against hidden title defects; a lender’s policy only protects the lender – a buyer may also opt to purchase an owner’s title insurance policy. (My advice to Buyers is to ALWAYS purchase an owner’s title policy!)
Discount Points: optional payment to lower the interest rate (each point is 1% of the mortgage amount – $120,000 mortgage discount point would cost $1,200 and typically lower the interest rate by 0.125 percent).
Recording or Transfer Fees: a small fee charged to cover the paperwork to record the home purchase and transfer ownership.
Interim Interest: interest from the closing date to the end of the month generally charged to the buyer.
Property Taxes: buyer’s prorated portion of state and local government property taxes already paid by the seller (such as annually paid taxes).
Escrow Account Payments: (often required by the lender) charges to cover costs or payments which will be due after the closing; escrow accounts are often set up to continue for the life of the loan, where a specified portion of the mortgage payment goes into escrow to cover certain on-going property-related expenses and payments such as taxes and insurance.