Understanding Closing Costs

Understanding Closing Costs

Application fee - A fee charged by the lender to offset fixed costs related to mortgage loan processing such as appraisal, credit report and underwriting.

Closing fee - The fee by the closing company who prepares the closing documents and closes the loan on behalf of the lender.

Commitment fee - This is often called an origination fee.

Discount points - One point is equal to 1% of the mortgage amount.  The lender uses points to adjust the yield on the mortgage when it is sold to an investor.  By paying more points, the borrower can obtain a lower mortgage interest rate.

Funding fees - Normally applicable to VA loans only, equal to 1% of the loan amount.  The fee is due  at closing and may be added to the loan amount and financed.

Homeowners insurance - A 1 year premium is due in advance at the time of closing.

Mortgage Insurance - Insurance that is required by the lender when the down payment is less than 20%.  In the case of loan default, this insurance reduced the lender's loss.

Pre-Payables - are funds collected from you at the time of closing for (1) Prepaid Interest is the interest  that accumulates on the mortgage loan from the date of closing through the end of the month.  (2) A Reserve Account (sometimes called an "escrow" or "impound" account) is an account of funds held by the lender to assure future payments for items such as real estate taxes, hazard insurance, flood insurance, mortgage insurance and other assessments.  You will probably have to pay an initial amount for each of these items to start the reserve account at the time of closing.  A portion of your regular monthly payment will added to the reserve account.  Prepaids generally total from 1.5 to 2.5 % of the loan amount.

Processing fee - fees charged by the escrow processor, either working for the escrow company, title company or real estate company for administrative services performed from the point of contract through closing.

Recording fees - fees charged by state or municipal entities for entering the closing documents into the public record.

Survey fee - the title company checks the survey for encroachments from within or from outside the subject property.

Title insurance - Provides protection for lenders and homeowners against financial loss resulting from legal defects in the title.  For homeowners to be covered they have to buy coverage.

Underwriting fee - practices vary from lender to lender.  Check the good faith estimate for the amount of the underwriting fee.