Closing Costs
I’ve mentioned closing costs in previous articles, but haven’t gone into much detail. Here, I will examine them a little more closely. The term “closing cost” itself covers a myriad of over two dozen fees that can and will be charged when your mortgage is finally closed. The total amount of closing costs vary from region to region and from lender to lender, sometimes by as much as thousands of dollars. Variance in closing costs can more than make up for differences in rates. Make sure you do your research prior to locking in a deal.
At the time of applying, your lender is required to present to you within three business days a good faith estimate of closing costs. This statement will not be exact, but it shouldn’t vary by much, unless there is a drastic change of the lender’s policies between application and closing.
The first major fee is the loan origination fee. This is a fee for processing the mortgage, usually around 1% of the entire loan. There are also loan discount points. These are almost entirely dependent on what the borrower is willing to pay. Think of this as an advance payment on interest. The more points you are willing to pay, the lower your interest rate will be.
Most lenders will also require an appraisal fee. This is the cost of an inspection of the property in order to determine whether its value is enough to secure the amount of the mortgage. This fee is normally a couple hundred dollars.
The last of the major closing cost fees is the credit report check. As mentioned earlier, this is a nominal fee, usually around $15. Don’t be fooled by its low cost, though. This is one of the most important steps in securing your mortgage.
There are many other fees that fall under the category of “closing cost.” Some of these include hazard insurance premiums, flood insurance premiums, city real estate taxes, settlement fees, and title examinations.
One fee that deserves a little more scrutiny is prepaid interest. This is the first month of the loan’s interest rate paid in advance. A daily interest rate amount is determined by the lender and then is multiplied by the amount of days left in the month. This is the one and only time during the life of the loan that you will be required to pay interest in advance.
All of these fees are explained in detail in the US Department of Housing and Urban Development’s pamphlet, A HUD Guide to Closing Costs. Lenders are required to hand out this pamphlet to the borrower.
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