Closing Costs

Closing Costs

Aside from the monthly payments that lenders collect, most states allow lenders to charge several types of fees for their efforts toward closing loans. These non-recurring closing costs are one-time fees paid when obtaining the loan.

The fees can vary widely by lender, location, and borrower’s situation. In general, lenders estimate 2 percent to 6 percent of the loan amount in closing costs. You need to have enough cash up front to cover these basic costs plus your down payment. However, your lender may agree to add the fees to your total loan amount so you can pay them off in monthly installments.

Disclosing the fees

Federal law requires lenders to disclose fees on two main documents.

• Good Faith Estimate (GFE): You are supposed to get the GFE within three days when you apply for the loan. The document is an estimate of what closing costs the borrower will have to pay. While there's no penalty for understating costs on the GFE, reputable lenders and brokers will try to give people an accurate assessment of their final bill.
  
  
• HUD-1 Settlement Sheet: This is a standard form used at nearly all home loan closings. It provides details of all charges and payments made in connection with your loan, and shows to whom they are distributed.

The closing costs charged by one lender will not be the same as the costs charged by others. You can use the “Good Faith Estimate” to shop for lower costs. The settlement statement (HUD-1) is presented at loan closing, but by law you have a right to see a copy during the business day immediately before the day of the loan closing. This will give you time to compare the “Good Faith Estimate” and the settlement statement, ask the lender questions about charges and fees, and make it sure you are not overcharged.

Types of Fees

Here are typical closing fees you'll have to pay when you get your mortgage. They can be broken down into a few categories.

1. Lender fees
   The flat fees that a lender charges to process and fund your loan fall under a variety of names and can generally be lumped into one category the industry refers to as "junk or garbage fees". They include: loan application, underwriting, processing, administrative, document preparation, funding fees, wire transfer, tax service fees, and etc. You may negotiate with the lender to reduce or eliminate these fees.
   
   
2. Points
   A point is equivalent to 1% of the loan amount. Actual closing costs can be varied widely whether a borrower chooses to pay points or not. Points generally fall into two categories, discount fees and origination fees.
   
   
• Discount Points: one-time prepaid finance charge that a borrower elects to pay up front to buy down the interest rate on the loan. The interest rate goes down as points go up.
  
  
• Origination Points: also used to buy the interest rate down but is used to compensate the loan originator in the transaction, rather than accepting a higher interest rate where the lender funding your loan compensates the loan originator.
  
  More Info: Should you pay the Points?
  
  
3. Third-party fees
   These are fees paid to third parties for services ordered by the lender. Consumers willing to invest the time and effort may find they can save money by choosing their own closing-service providers.
   
   
   • Title Search and Insurance: to determine whether the title is clear of any liens and to obtain title insurance which protects the buyer from financial loss caused by defects of the title to the real estate.
   • Appraisal Fee: to show the lender a reasonable estimate of value for loan purposes.
   • Credit Report Fee: to run a credit check on the borrower to verify credit worthiness.
   • Home Inspection Fee.
   • Others: flood certification, termite and other inspections, notary fees, etc.

    

4. Government fees
   Government fees include recording taxes and other charges assessed by local and state agencies.
   
   
   • Recording Fee: to record the purchase of your home with your local government
   • Local city, town, or village property transfer tax; county transfer tax; state transfer tax.
   • Stamps: a tax imposed by the municipality, county or state upon sale or when a new mortgage is obtained

    

5. Prepaid Items
   In addition to the fees in above categories, you may be asked to make the first payment on a number of recurring costs at closing, which include:
   
   • Prepaid interest on the Loan: paid per day until the end of the month in which the closing occurs. To cut your closing costs, close toward the end of the month to pay less in prepaid interest.
   • Insurance Escrow: advanced payments to cover homeowner's insurance and private mortgage insurance, if any.
   • Tax Escrow: advanced payments of real estate taxes
     
     

   More Info: Mortgage Escrow Account

Tips for reducing closing costs

Closing fees are, in fact, necessary costs for lenders, appraisers, credit reporting agencies and other parties to a mortgage transaction to cover their cost of doing business and turn a profit. Still, borrowers shouldn't be afraid to ask for reasonable closing cost breaks. Here are some advices that may help you to reduce closing costs.

• Negotiate: Closing costs are flexible. By negotiating the costs with the lender, you may be able to cut some of the costs or finance them into the loan in case you are short of cash. You can also save money by negotiating with the seller. When negotiating a home’s price with the seller, you may ask the seller to split or pay outright some of the closing costs, points or fees.
  
  
• Be Aware of “No Closing Costs”: There are few loans that truly have no closing costs. Sometimes lenders will not charge application fees and they agree to pay the appraisal and title fees, but they may increase the rate. Lenders can also roll the costs into the amount of your loan. Still, it's called "no closing cost" loans because you're not paying costs up front.
  
  
• Look out for junk fees: Many closing costs are standard and won't vary from lender to lender. However, if there are fees that seems vague or questionable - so-called junk fees - ask the lender to reduce or eliminate them.
  
  
• Question the differences: Question the discrepancies between your initial "good faith estimate (GFE)" and your "HUD-1 settlement statement," Getting your HUD-1 sheet before the day of settlement is important to protect yourself from being overcharged.
  
  
• Close near the last day of the month: Because all mortgage loan payments are due on the first of the month, you can avoid or reduce the prepaid interest due by closing on or near the last day of the month.