When you get a mortgage, there are closing costs that must be paid. With a refinance, you can roll those costs into the loan; but with a home purchase, the closing costs must be paid at closing and cannot be rolled into the loan. However, the seller can pay the buyer’s closing costs if that is designated in the purchase contract. (The lender can also give you a credit toward closing costs if you choose to take a higher interest rate.)
The Three Types of Closing Costs
Lender Fees. This is what the lender charges for its profit and to pay for required third-party vendors that are chosen by the lender.
- Origination fee, underwriting fee, administration fee, processing fee, document fee
- Credit report, flood cert., tax service
- Appraisal, appraisal review, appraisal management fee
Third Party Fees. These are fees for vendors that you can shop for and choose.
- Title insurance
- Settlement closing agent (escrow agent or attorney)
- Recording fee
Prepaid Costs. These are not fees, but rather costs that are part of buying a home. These will be the same no matter which lender you choose, because they are not related to nor controlled by the lender.
- Property taxes
- Other taxes depending on your location, such as transfer tax, state stamp tax, county tax
Home owner’s insurance, which is your fire/hazard insurance
- Partial mortgage payment if you close in the middle of the month, called prepaid interest
Closing costs vary widely depending on the price of the property and the location. The East and West Coasts are more expensive, and middle America is cheaper for closing costs (as well as property prices).
Your initial cost estimate (this is what used to be called a Good Faith Estimate) will list the expected closing costs as well as the loan term, loan amount, interest rate, and monthly payment.
There are some exceptions to the information above. Most notably is that the FHA Upfront Mortgage Insurance Fee of 1.75% is rolled into the loan unless you ask for an exception.
Any questions about closing costs, please feel free to ask me. Thank you for reading my blog.
In addition to your down payment, there are closing costs that go into a mortgage. The down payment lowers your loan and goes toward the price of the house. The closing costs are fees paid for services rendered. Here are the seven most common and what they are for:
1) Origination Fee: The lender’s fee for processing, underwriting, and funding your loan.
2) Credit Report: Goes to the credit reporting agency that provides your tri-merge credit report to the lender. You have the right to know your credit score.
3) Tax Service Fee: Lenders use a third party service to ensure the property taxes are properly paid and posted. (You don’t want your property taxes going to the neighbor’s address.)
4) Flood Certification: Federal banking law requires lenders to determine whether or not the property is in a flood zone and needs flood insurance.
5) Escrow or Attorney: Federal law requires a neutral middle party to handle the disbursement of funds. They also sign and notarize your final loan documents, send the Deed of Trust to the county for recording, and perform other required tasks for your loan closing.
6) Title Fee: Insurance to protect your title against false liens and judgments, fraud, errors, and other incorrect encumbrances on your title.
7) Recording Fee: The local county charges to record your Deed of Trust.
None of the above fees are unnecessary, bogus, or junk fees. They are all costs for legitimate and required services.
Added, unnecessary fees would be things like Application Fee, Archive Fee, Doc Prep, Doc Fulfillment, Email or E-doc Fee, Wire Fee, and so on.
Discount Points are not a junk fee. This is when you choose to buy down your interest rate to a lower rate by paying a chunk of the interest up front. This is optional.
A no-fee loan means you are paying for the fees by taking a higher interest rate. One way or the other, you do pay required and necessary closing costs.
The seller may pay some or all of your closing costs. The real estate agent may not pay your closing costs, per federal banking law.
In addition to closing costs, there are “pre-paids.” These are not fees; but rather, your taxes and insurance as well as daily interest. (More about pre-paids in an upcoming blog post.)
There is a lot more information about fair and unfair mortgage costs than what I can put into a blog post. Feel free to check out my best-selling book that was chosen by The Washington Post as their Book of the Month (“Color of Money” book club). Mortgage Rip-Offs and Money Savers