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Closing Costs When
Buying or Refinancing a Home
This is a detailed summary of costs
you may have to pay when you buy or refinance your home. They are listed
in the order that they should appear on a Good Faith Estimate you obtain
from a mortgage lender. There are two broad categories of closing costs.
Non-recurring closing costs are items that are paid once and you never pay
again. Recurring closing costs are items you pay time and again over the
course of home ownership, such as property taxes and homeowner's
insurance. Some of the items that appear here do not traditionally appear
on a lender's Good Faith Estimate and lenders are not required to show all
of these items.
Non-Recurring Closing Costs Associated with the
Lender.
Loan Origination Fee - The loan origination fee
is often referred to as "points." One point is equal to one percent of the
mortgage loan. As a rule, if you are willing to pay more in points, you
will get a lower interest rate. On a VA or FHA loan, the loan origination
fee is one point. Anything in addition to one point is called "discount
points."
Loan Discount - On a government loan, the loan
origination fee is normally listed as one point or one percent of the
loan. Any points in addition to the loan origination fee are called
"discount points." On a conventional loan, discount points are usually
lumped in with the loan origination fee.
Appraisal Fee -
Since your property serves as collateral for the mortgage, lenders want to
be reasonably certain of the value and they require an appraisal. The
appraisal looks to determine if the price you are paying for the home is
justified by recent sales of comparable properties. The appraisal fee
varies, depending on the value of the home and the difficulty involved in
justifying value. Unique and more expensive homes usually have a higher
appraisal fee. Appraisal fees on VA loans are higher than on conventional
loans.
Credit Report - As part of the underwriting review,
your mortgage lender will want to review your credit history. The credit
report can be as little as seven dollars, but normally runs between $21
and $60, depending upon the type of credit report required by your lender.
Lender's Inspection Fee - You normally find this on new
construction and is associated with what is called a 442 inspection. Since
the property is not finished when the initial appraisal is completed, the
442 inspection verifies that construction is complete with carpeting and
flooring installed.
Mortgage Broker Fee - About seventy
percent of loans are originated through mortgage brokers and they will
sometimes list your points in this area instead of under Loan Origination
Fee. They may also add in any broker processing fees in this area. The
purpose is so that you clearly understand how much is being charged by the
wholesale lender and how much is charged by the broker. Wholesale lenders
offer lower costs/rates to mortgage brokers than you can obtain directly,
so you are not paying "extra" by going through a mortgage broker.
Tax Service Fee - During the life of your loan you will be
making property tax payments, either on your own or through your impound
account with the lender. Since property tax liens can sometimes take
precedence over a first mortgage, it is in your lender's interest to pay
an independent service to monitor property tax payments. This fee usually
runs between $70 and $80.
Flood Certification Fee - Your
lender must determine whether or not your property is located in a
federally designated flood zone. This is a fee usually charged by an
independent service to make that determination.
Flood
Monitoring - From time to time flood zones are re-mapped. Some lenders
charge this fee to maintain monitoring on whether this re-mapping affects
your property.
Other Lender Fees
We put these in a
separate category because they vary so much from lender to lender and
cannot be associated directly with a cost of the loan. These fees generate
income for the lenders and are used to offset the fixed costs of loan
origination. The Processing Fee above can also be considered to be in this
category, but since it is listed higher on the Good Faith Estimate Form we
did not also include it here. You will normally find some combination of
these fees on your Good Faith Estimate and the total usually varies
between $400 and $700.
Document Preparation - Before
computers made it fairly easy for lenders to draw their own loan
documents, they used to hire specialized document preparation firms for
this function. This was the fee charged by those companies. Nowadays,
lenders draw their own documents. This fee is charged on almost all loans
and is usually in the neighborhood of $200.
Underwriting
Fee - Once again, it is difficult to determine the exact cost of
underwriting a loan since the underwriter is usually a paid staff member.
This fee is usually in the neighborhood of $300 to $350.
Administration Fee - If an Administration fee is charged,
you will probably find there is no Underwriting Fee. This is not always
the case.
Appraisal Review Fee - Even though you will
probably not see this fee on your Good Faith Estimate, it is charged
occasionally. Some lenders routinely review appraisals as a quality
control procedure, especially on higher valued properties. The fee can
vary from $75 to $150.
Warehousing Fee - This is rarely
charged and begins to border on the ridiculous. However, some lenders have
a warehouse line of credit and add this as a charge to the borrower.
Items Required to be Paid in Advance
Pre-paid
Interest - Mortgage loans are usually due on the first of each month.
Since loans can close on any day, a certain amount of interest must be
paid at closing to get the interest paid up to the first. For example, if
you close on the twentieth, you will pay ten days of pre-paid interest.
Homeowner's Insurance - This is the insurance you pay to
cover possible damages to your home and other items. If you buy a home,
you will normally pay the first year's insurance when you close the
transaction. If you are buying a condominium, your Homeowners' Association
Fees normally cover this insurance.
VA Funding Fee - On VA
loans, the Veterans Administration charges a fee for guaranteeing your
loan. If you have not used your VA eligibility in the past, this is two
percent of the loan balance. If you have used your VA eligibility before,
it is three percent of the loan. If you are refinancing from a VA loan to
a VA loan, it is three-quarters of a percent of the loan amount. Instead
of actually paying this as an out-of-pocket expense, most veterans choose
to finance it, so it gets added to the loan balance. This is why the loan
balance on VA loans can be higher than the actual purchase amount.
Up Front Mortgage Insurance Premium (UFMIP) - This is
charged on FHA purchases of single family residences (SFR's) or Planned
Unit Developments (PUDs) and is 2.25% of the loan balance. Like the VA
Funding Fee it is normally added to the balance of the loan. Unlike a VA
loan, the homebuyer must also pay a monthly mortgage insurance fee, too.
This is why many lenders do not recommend FHA loans if the homebuyer can
qualify for a conventional loan. However, condominium purchases do not
require the UFMIP.
Mortgage Insurance - though it is rare
nowadays, some first-time homebuyer programs still require the first year
mortgage insurance premium to be paid in advance. Most mortgage insurance
(when required) is simply paid monthly along with your mortgage payment.
Mortgage insurance covers the lender and covers a portion of the losses in
those cases where borrowers default on their loans.
Reserves
Deposited with Lender
If you make a minimum down payment, you
may be required to deposit funds into an impound account. Funds in this
account are your funds, and the lender uses them to make the payments on
your homeowner's insurance, property taxes, and mortgage insurance
(whichever is applicable). Each month, in addition to your mortgage
payment, you provide additional funds which are deposited into your
impound account.
The lender's goal is to always have sufficient
funds to pay your bills as they come due. Sometimes impound accounts are
not required, but borrowers request one voluntarily. A few lenders even
offer to reduce your loan origination fee if you obtain an impound
account. However, if you are disciplined about paying your bills and an
impound account is not required, you can probably earn a better rate of
return by putting the funds into a savings account. Impound accounts are
sometimes referred to as escrow accounts.
Homeowners Insurance
Impounds - your lender will divide your annual premium by twelve to
come up with an estimated monthly amount for you to pay into your impound
account. Since a lender is allowed to keep two months of reserves in your
account, you will have to deposit two months into the impound account to
start it up.
Property Tax Impounds - How much you will have
to deposit towards taxes to start up your impound account varies according
to when you close your real estate transaction. For example, you may close
in November and property taxes are due in December. Your deposit would be
higher than for someone closing in May.
Mortgage Insurance
Impounds - When required, most lenders allow this to simply be paid
monthly. However, you may be required to put two months worth of mortgage
insurance as an initial deposit into your impound account.
Non-Recurring Closing Costs not associated with the Lender
Closing/Escrow/Settlement Fee - Methods of closing a real
estate transaction vary from state to state, as do the fees. For
purchases, a general rule of thumb that usually works in calculating this
closing cost is $200 plus $2 for every thousand dollars in price. For
refinances there is usually a flat fee around $400 to $500.
Title Insurance - Title Insurance assures the homeowner
that they have clear title to the property. The lender also requires it to
insure that their new mortgage loan will be in first position. The costs
vary depending on whether you are purchasing a home or refinancing a home,
so we will not provide a range here.
Notary Fees - Most
sets of loan documents have two or three forms that must be notarized.
Usually your settlement or escrow agent will arrange for you to sign these
forms at their office and charge a notary fee in the neighborhood of $40.
Recording Fees - Certain documents get recorded with your
local county recorder. Fees vary regionally, but probably run between $40
and $75.
Pest Inspection - also referred to as a Termite
Inspection. This inspection tests not only for pest infestations, but also
other items such as wood rot and water damage. The inspection usually runs
around $75. If repairs are required, the amount to cover those repairs can
vary. The seller will usually pay for the most serious repairs, but this
is a negotiable item. Usually (not always) the pest inspection fee is paid
by the seller of the home and is not normally reflected on the Good Faith
Estimate.
Home Inspection - Since it is the homebuyer's
choice to obtain a home inspection or not, this cost is not usually
reflected on a Good Faith Estimate. However, it is recommended. Keep in
mind that the home inspector has a certain set of standards he uses when
inspecting a home, and those standards may be higher than required by
local building codes. An example is that an inspector may note there is no
spark arrestor on a chimney but the local building code may not require
it. This sometimes leads to conflicts between buyer and seller.
Home Warranty - This is also an optional item and not
normally included on the Good Faith Estimate. A Home Warranty usually
covers such items as the major appliances, should they break down within a
specific time. Often this is paid by the seller.
Refinancing
Associated Costs (but not charged by the new Lender)
Interest - When you close the transaction on your
refinance, there will most likely be some outstanding interest due on the
old loan. For example, if you close on August twentieth (and you made your
last payment), you will have twenty days interest due on the old loan and
ten days prepaid interest on the new loan. Your first payment on the new
loan would not be until October 1st since you have already paid all of
August's interest when you closed the refinance transaction (since
interest is paid in arrears, a September payment would have paid August's
interest, which has already been paid in closing).
Reconveyance
Fee - this fee is charged by your existing lender when they "reconvey"
their collateral interest in your property back to you through recording
of a Reconveyance. This fee can vary from $75 to $125.
Demand
Fee - your existing lender may charge a fee for calculating payoff
figures. If they do, this fee may run in the neighborhood of $60.
Sub-Escrow fee - though it sounds like an escrow fee, this
fee is actually charged by the Title Company (and I've never been able to
figure out exactly what it is for). Assume it is an income-generating fee
similar to some of the lender fees mentioned above. Title representatives
who want to explain this fee can send us an email.
Loan Tie-in
Fee - though it sounds like a lender fee, this cost is actually
charged by the Escrow Company (like the sub-escrow fee, I've never been
able to understand this fee, either). Escrow officers who want to explain
this fee can also send an email.
Homeowner's Association
Transfer Fee - If you are buying a condominium or a home with a
Homeowner's Association, the association often charges a fee to transfer
all of their ownership documents to you.
Asking the Seller to
Pay Closing Costs - Rules and Advice.
It has become common to ask
the seller to pay some or all of the closing costs when you purchase a
home. Essentially, this is financing your closing costs since you will
probably pay a little bit more for the property than you would if you were
paying your own costs.
Keep in mind a few simple rules. On
conventional loans you can only ask the seller to pay non-recurring costs,
not prepaids or items to be paid in advance. If you are putting ten
percent down or more, the most the seller can contribute is six percent of
the purchase price. If you are putting less down, the most the seller can
contribute is three percent.
On VA loans, you can ask the seller
to pay everything. This is called a "VA No-No," meaning the buyer is
making no down payment and paying no closing costs.
On FHA loans,
the seller can pay almost any cost, but the buyer has to have a minimum
three percent investment in the home/closing costs.
Most
refinances include the closing costs and prepaids in the new loan amount,
requiring little or no out-of-pocket expenses to close the deal.
If you didn't get bored as you read through this, now you know
everything...a lot, anyway...about closing costs.
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