Mortgage Closing Costs
Posted on January 25, 2018
What are they?
Closing costs are fees that must be paid when the property title is transferred from seller to buyer. They include the cost for your rate, inspections required, title fees, prepaid homeowner’s (hazard) insurance, escrowed homeowner’s insurance, taxes, and mortgage insurance if required, as well as warranties, HOA requirements, and seller credits.
Did you know that you can help pay for your closing costs with the rate you choose? There are “lender credits” offered for each incremental rate beyond the “par” no-cost rate. While yes, you have a higher rate, it is a great option for those who didn’t get enough seller credits to cover closing costs and don’t have the extra cash!
Closing Costs Explained
Origination: The fee the lender charges the borrower for making the mortgage loan. Origination services include taking and processing your loan application, underwriting and funding the loan, and other administrative services. The Ehler Lending Team does NOT charge origination fees, but you will typically see this from the larger banks!
Points: Points are a percentage of a loan amount. For example, when a loan officer talks about one point on a $100,000 loan, this is 1 percent of the loan, which equals $1,000. Lenders offer different interest rates on loans with different point amounts. You can decide you don’t want to pay or receive points at all. This is a zero-point loan. You can pay points at closing to receive a lower interest rate (called discount points). Alternatively, you can choose to have points paid to you (called lender credits) and use them to cover some of your closing costs.
Underwriting: Paid to the lender, this fee covers the cost of researching whether or not to approve you for the loan. The Ehler Lending Team does NOT charge underwriting fees!
Appraisal: This charge pays for an appraisal report made by an appraiser.
Credit report: This fee covers the cost of a credit report, which shows your credit history. We use this information to help determine whether or not you qualify for a loan, which program will work best for you and what your rate will be.
Flood determination: This is paid to a third party to determine if the property is located in a flood zone. If the property is found to be located within a flood zone, you will need to buy flood insurance which is paid separately from the insurance in your escrow.
Pest inspection: This fee covers inspections for termites or other pest infestation of your purchase property. *Typically only required for a VA loan.
Lender’s title insurance: The cost of the lender’s policy, which protects the lender’s investment. Other title costs will include a Closing Protection Letter (CPL) and endorsements.
Owner’s title insurance: The cost of the owner’s policy, which protects the homeowner’s investment for as long as they, or their heirs, own the property.
Settlement: This fee is paid to the settlement agent or escrow holder. Responsibility for payment of this fee can be negotiated between the seller and the buyer.
Notary: This fee is charged for the cost of having a person who is licensed as a notary public swear to the fact that the persons named in the documents did, in fact, sign them. *Typically only charged if you require a mobile notary as this cost is wrapped into settlement fees.
Recording fees: These fees may be paid by you or by the seller, depending upon your agreement of sale with the seller. The buyer usually pays the fees for legally recording the new deed and mortgage.
Homeowner’s insurance premium: This insurance protects you and the lender against loss due to fire, windstorm, and natural hazards- also called hazard insurance. Lenders often require the borrower to pay for the first year’s premium at settlement as well as 3 months into the escrow account.
Mortgage insurance premium (MIP): The lender may require you to pay your first year’s mortgage insurance premium or a lump sum premium that covers the life of the loan, in advance, at the settlement.
Prepaid interest: This is the money you pay at closing in order to get the interest paid up through the first of the month based on your close of escrow date. Ex: 30-day month, your property closes on the 25th, you would prepay 6 days of interest.
Property taxes: Usually six months of county property taxes are required.
Home warranty: Fee for an insurance policy to protect you from the cost of unexpected failures to the major systems and appliances in your home. Negotiated within the purchase contract to determine whether the buyer, seller, or both pay for it.
HOA Transfer Fees: Fee for the HOA to transfer the property from the seller to the buyer.
Seller Credit: A credit from the seller to help cover your closing costs or pay down your rate (discount points). These are negotiated by your realtor during the initial contract phase, but also may be added through an addendum later in lieu of repairs after the inspection.
Earnest Deposit/Cash on Sales Contract: This is the amount of money you pay when your contract is accepted and is held by the escrow company until closing. It is considered to be a part of your down payment. Ex: If your down payment is $10,000 and you pay $1,000 in earnest money, at closing you will be required to bring in the remaining $9,000 of your down payment.
As you can see, there are a lot of fees that make up your closing costs, but let’s quickly highlight where they come from.
- Property Selected: taxes and HOA
- Purchase Contract: seller credits, warranty, prepaid interest
- Lender: cost of rate (discount points or lender credit), appraisal, credit report, flood determination, prepaid annual homeowners insurance policy of your choice, mortgage insurance – dependent on how much of a down payment you make. Most lenders also charge origination, underwriting or application fees, we do not.
- Title: escrowed taxes and homeowner’s insurance, title fees (section C), recording fees
- You: homeowner’s insurance – you choose the policy, earnest deposit on the sales contract