Buying a Home and Closing Costs

Closing costs may vary when you buy a new house or refinance your existing home. Your mortgage lender will provide an estimate of the closing costs associated with your real estate transaction, but having a clear understanding before you buy will offer peace of mind because there will be no unexpected surprises.

There are two categories of closing costs and they are non-recurring and recurring closing costs. Non-recurring closing costs are one-time costs while recurring closing costs are paid numerous times over the course of home ownership. For example, property tax and home owner insurance are both considered recurring closing costs. Some of the closing costs listed are hidden costs that lenders are not required to show buyers so be aware that they do exist.

Lender Associated Non-Recurring Closing Costs

Some lender associated non-recurring closing costs can include:

• Loan origination fee - often referred to as "points" where one point is equal to one percent of the mortgage loan. Paying more points will usually get the buyer a lower interest rate.
• Loan discount - the loan origination fee is generally one point or one percent of the loan. Any additional points to the loan origination fee are called "discount points". These points are usually included with the loan origination fee.
• Appraisal fee - lenders require a property appraisal because it is collateral for the mortgage. The appraisal determines if you are paying a comparable and reasonable price for the property. Appraisal fees vary depending on the value of the property and how difficult it is to assess the value.
• Credit report - lenders will review your credit history as part of the underwriting process. The credit report is a minimal fee ranging from $7 to $60, depending on the type of report requested by the lender.
• Lender's inspection fee - this fee is generally associated with new construction because the property may not be finished when the initial appraisal is completed. This inspection verifies that construction is complete.
• Mortgage broker fee - most loans are originated through a mortgage broker and they might list points under this fee instead of as a loan origination fee. Broker processing fees may also be included. These fees are necessary to show the buyer what is being charged by the wholesale lender and the mortgage broker. Mortgage brokers can lower costs and rates from wholesale lenders than buyers can, so you are not paying more if you use a mortgage broker.
• Tax service fee - as the buyer you will make property tax payments over the life of your loan. Since property tax liens can take precedence over a first mortgage, the lender may pay an independent service to monitor property tax payments which can run from $70 to $80.
• Flood certification fee and Flood monitoring - your lender may hire an independent service company to determine if you property is located on a designated flood zone. Flood zones are periodically re-mapped, so some lenders charge a fee to monitor whether or not the re-mapping affects your property.

Other Lender Non-Recurring Closing Costs

The following other lender non-recurring closing costs vary by lender and cannot be associated directly with the loan cost because these fees generate income for lenders and are used to offset the fixed costs of loan initiation.

• Document preparation - lenders used to hire document preparation firms to draw loan documents, but now they do their own documents. This fee is charged on almost all loans and is approximately $200, but varies by lender.
• Underwriting fee - the underwriter is usually a paid employee of the lender so this is an estimated cost at best. This fee can range from approximately $300 to $350.
• Administration fee - this fee may replace the underwriting fee, but this is not always the case.
  Appraisal review fee - this fee is charged occasionally as some lenders will review appraisals as quality control, especially for properties with higher values. This fee can range from $75 to $150.
• Warehousing fee - this fee is rarely charged, but some lenders use a warehouse line of credit and will charge the fee to the borrower.

Costs Requiring Payment before Closing

The following fees are closing costs that might require payment before the transaction is closed:

• Pre-paid Interest - Mortgage payments are usually due on the first of each month, but because 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 of the month.
• Homeowner's Insurance - this insurance covers any possible damages to the property and other items. If buying a house, the first year's insurance is generally paid when you close the transaction. If buying a condo, your Homeowners' Association Fees normally cover this insurance.
• Mortgage Insurance - some first-time homebuyer programs still require the first year mortgage insurance premium to be paid in advance, but this is becoming rare. Most mortgage insurance is simply paid monthly 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 making a minimum down payment, you may be required to deposit funds into an impound account or escrow account. The lender uses the funds to make the payments on your homeowner's insurance, property taxes, and mortgage insurance (as applicable). Each month, in addition to your mortgage payment, you deposit additional funds into your impound account, so the lender always has sufficient funds to pay your bills as they come due. Impound accounts are not required, but some lenders will reduce loan origination fees if you open an impound account.
• Homeowners Insurance Impounds - your annual premium is divided by twelve for an estimated monthly amount to be deposited into your impound account. To start the account, two months of payments must be deposited because the lender is allowed to keep two months of reserves in your account.
• Property Tax Impounds - the amount deposited towards taxes to start an impound account varies according to when you close your real estate transaction.
• Mortgage Insurance Impounds - most lenders allow this to be paid monthly, but you may be required to put two months of mortgage insurance as an initial deposit into your impound account.
• Non-Recurring Closing Costs Not Associated with the Lender.

The following non-recurring closing costs are not associated with the lender:

• Closing/Escrow/Settlement Fee - methods of closing a real estate transaction vary, as do the fees. For purchases, a general rule for calculating the 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 - this insurance assures the homeowner that he or she has clear title to the property. Lenders also require title insurance, so the new mortgage loan is in first position. Costs vary depending on whether you are purchasing or refinancing a home.
• Notary Fees - Most loan documents have two or three forms that must be notarized and this fee is approximately $40.
• Recording Fees - Certain documents are recorded with a local recorder. Fees vary according to your location.
• Pest Inspection - this inspection tests for pest, wood rot, water damage, etc. and can cost approximately $75. If repairs are required, the amount will vary. The seller may pay for the repairs, but this is negotiable.
• Home Inspection - this cost is usually the homebuyer's because it is his or her decision to have the home inspection conducted. However, some home sellers will offer to pay for the inspection to protect themselves from future legal actions.
• Home Warranty - this may be optional. A Home Warranty usually covers major appliances in case they break within a specific time. This fee is often paid by the seller.

Refinancing Associated Costs (Not Charged by the New Lender)

The following costs are associated with refinancing, but they are not charged by the new lender:

• Interest - when closing the transaction on a refinance, there is most likely some outstanding interest due on the original loan. For example, if closing on August 20th (and you made your last payment), you will have 20 days of interest due on the original loan and 10 days prepaid interest on the new loan.
• 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.
• Sub-Escrow fee - this fee is charged by the Title Company as an income-generating fee similar to some of the lender fees.
• Loan Tie-in Fee - this fee is charged by the Escrow Company.
• Homeowner's Association Transfer Fee - If buying a condo or a home with a Homeowner's Association, the association often charges a fee to transfer all of their ownership documents to you, the buyer.

Having the Seller Pay Closing Costs

It has become customary to have the seller pay for the closing costs when you purchase a new home. This is written up in the offer letter and must be accepted by the seller. The seller generally accepts because the buyer is probably paying slightly more for the property than he or she would if paying their own closing costs.

• If asking the seller to pay the closing costs, what they can pay will vary depending on the type of mortgage loan obtained by the borrower. For example, on conventional loans, you can only ask the seller to pay non-recurring costs and not those costs that must be paid in advance.
• Your down payment amount will also affect how much of the closing costs a seller can pay. If you put down ten percent or more, the seller can only contribute six percent of the purchase price. If you put less than ten percent down, the seller can only contribute three percent.

Most refinances will include the closing costs in the new loan amount. This is helpful as it requires little or no expense to close the deal.