The fees and charges you pay when you close are referred to as closing costs. There may be other fees that you must pay prior to getting your mortgage closed. Besides, there are recurring costs that become a part of your payment once you close on your mortgage and move to your new home. Together, they all make up the total cost that a home buyer typically has to bear during the term of the loan.
The Fees Payable at Closing
Depending on the lender and the local law, you may have to pay one or the other fee, some of which go to the lender while the others will go either to the local government or to a third party.
Also known as discount points, they are charged by the lender in lieu of a reduction in the interest rate for fixed-rate as well as adjustable-rate mortgages. Typically, one point equals one percent of the principal amount. On an ARM, the discount in interest rate applies only during the initial fixed-rate period. After the discount period, the rate adjusts depending on the index rate and applicable margin.
This is the fee that a lender collects for originating a loan, and can equal 1 to 2 percent of the loan amount. An origination fee helps a lender cover the administrative cost also also earn profit on the mortgage loan being made.
The money goes to a government agency that records the deed.
No lender will be willing to approve a loan without a property appraisal, which ascertains whether or not the amount you intend to borrow is less than the value of the property. A lender is not likely to approve a loan amount more than the value of a home. A certified appraiser is appointed by the lender and the borrower has to pay the appraiser’s fee, which can range between $225 and $450, at closing.
The closing is usually held at a title company or at the office of an attorney. The borrower needs to pay for that. This fee is referred to as a closing fee, which can be anything between $150 and $400.
A detailed title search is needed to ensure there is no problem associated with the property you are going to buy. A title company may charge between $150 and $400 to do the search for you.
Your lender may order a survey of the property to verify its boundary lines and to ensure there is no encroachment on the lot. The survey fee can be anything between $150 and $400.
Flood Determination Fee
A lender may want to ensure that the property is not located in a federally designated flood zone. If this is the case, you will be required to buy flood insurance. The flood determination fee may typically range from $15 to $25.
There can be separate insurance policies for lenders and borrowers. A title insurance policy can protect a lender from lien disputes. The homeowner, on the other hand, can get the assurance that nobody can challenge his or her legal ownership of the home.
In some states, the closing is done at the attorney office. The attorney prepares and reviews all of the closing documents.
An escrow account is established to pay for property taxes and insurance premiums when they are due. The borrower must pay a fee to open that account.
Some lenders require you to pay for the cost of evaluating a mortgage loan application. Though you may not be able to avoid the underwriting fee altogether, you can negotiate to have it lowered significantly.
Private Mortgage Insurance (PMI)
If you are paying down less than 20% of the cost of home purchase price, then you may be required by a lender to buy private mortgage insurance. Please note, this insurance policy protects the lender and not the borrower in case of a default on mortgage payment.
Other Settlement Costs
There can be a number of other costs and charges that make up the rest of the closing cost. These may include courier fee, tax service fee, and transfer taxes.
These fees may also be paid before the loan is closed.
Not many lenders charge an application fee, which is usually required to process a loan application. Depending on the lender, you may have to pay it at the time of application or at closing. An application fee may be inclusive of a credit report fee.
Credit Report Fee
A lender must pull a copy of your credit report from one of the three credit reporting agencies to ensure you can comfortably afford a mortgage loan. While you are entitled to receive one free copy every year, the lender must pay for it. The lender will, in return, charge you a credit report fee (between $15 and $30), which you must pay either at the time of application (usually with application fee), or at closing.
You are often required by the lender to get your home inspected before you can close. Even if it is not required, you are recommended to hire a qualified home inspector and get your home evaluated for structural and other damages. By investing a few hundred dollars on home inspection, you can avoid spending hundreds of thousands later on home repair.
You may need to pay for pest inspection as well, especially when you are buying an old home.
A portion of your payment goes toward the premium of homeowners insurance, which can protect you from possible damage to your home, such as in the event of a fire. You may need to pay the first year premium (no less than $300) at closing.