Your offer has been accepted and your loan has been approved. There is one more step: the closing. Also called the settlement, the closing is the process of passing ownership of property from seller to buyer. At closing you will bring a check for the down payment and various costs associated with the closing. Below are some of the costs you may incur. Some are one-time fees, while others recur over the life of the loan. When you first apply for your loan, you will receive an Estimate of Settlement Charges and a booklet explaining these costs, to minimize surprises. Generally, you can expect closing costs to equal from 3 to 6 percent of your mortgage loan amount.
This is a one-time fee for an “appraisal,” a statement of property value required on most loans. An independent fee appraiser makes the appraisal. Unique and more expensive homes usually have a higher appraisal fee.
Credit Report Fee
This one-time fee covers the cost of your credit report, which is processed by an independent credit-reporting agency.
Document Preparation Fee
There may be a separate, one-time fee that covers preparation of the final loan papers, including the note and the deed of trust.
Loan Origination Fee
Often referred to as “points,” one point is equal to one percent of the mortgage loan. As a rule, if you are willing to pay more in points, you will get a lower interest rate. Anything in addition to one point is referred to as “discount points.”
Miscellaneous Title Charges
The Title Company will charge fees for a policy of title insurance and escrow services, which may include charges for document preparation, notary fees, recording fees and a settlement of closing fee. These are all one-time charges. Local custom by county will dictate whether buyer or seller pays all or a portion of these fees.
Private Mortgage Insurance (PMI) Premium
Depending on the amount of your down payment (generally less than 20%), you may be required to pay a fee for private mortgage insurance, which protects the lender against loss due to foreclosure. You may also be required to place funds into a special reserve account (called an impound account) for PMI, which will be held by the lender.
Depending on the day of the month your loan closes, this charge may vary from a full month of interest to just a few days of interest. If your loan closes near the end of the month, you will have to pay only a few days of interest.
Taxes and Hazard Insurance
Based on the month you close, property taxes will be prorated between you and the seller. You may also be required to pay a full year’s hazard insurance (or homeowner’s insurance) premium in advance. In addition, you may also be required to place funds into a special reserve account (escrow account) for taxes and insurance, which is held by the lender. You usually must have this to obtain a mortgage.
The “dwelling coverage” portion of your hazard insurance covers costs to completely rebuild your home, while the “liability coverage” protects you against accidents that occur on your property. “Personal Property Coverage” pays to replace your possessions and generally totals 50 to 75 percent of the dwelling coverage amount. Flood and earthquake insurance policies also are available and are recommended if you are in high-risk areas.
Title Insurance Fees
There are two title polices – a buyer’s policy, which protects the new homeowner, and a lender’s title policy that protects the lender against loss due to a defect in the title. These are both one-time fees.
ESTIMATE OF YOUR CLOSING COSTS
The Estimate of loan closing costs are made pursuant to the requirements of the Real Estate Settlement Procedures Act (RESPA). These are estimated settlement costs which the buyer will be responsible for in conjunction with the settlement of the mortgage loan. There are two general categories of closing costs, non-recurring and recurring. Non-recurring closing costs are items that are paid once, while recurring costs are items paid repeatedly over the life of the loan.
This is a detailed summary of costs you may have to pay when you buy or refinance your home. They are listed in the order in which they should appear on an Estimate you obtain from your mortgage lender. Elements of the Estimate are: (Costs will apply differently to each homebuyer and are not particular in total to all homebuyers)