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Jun 2016

Mortgage Closing Costs: 5 Types You Need To Know

Your Loan Estimate from your lender will show these things called settlement costs (a.k.a. closing costs.) What are they and why do you have to pay them? Here’s a breakdown for you.

What are closings costs?

Closing costs are things that have to be paid in order to close on your home, like property taxes, homeowners insurance, title search fees, appraisal fees, etc.

Services completed and costs involved in the loan process need to get paid. All of those fees and expenses are lumped together under the umbrella of closing costs.

Now, although they are called closing costs, you may be asked to pay for them as the action happens – such as the home inspection or the appraisal. You may be able to negotiate as part of your sales contract that the seller of the property cover some or all of your closing costs (depending on the type of loan you are doing), but it doesn’t hurt to be prepared for them and understand them. In general, you can expect to see between 2-6% of your purchase price in closing costs. Because each state has different requirements, some items mentioned below may not apply to your specific situation. Things like transfer taxes, mortgage insurance, and title insurance are not flat-rate type costs. Be sure to ask your loan officer for more information on these items.

What kinds of closing costs will you see?

There are five main types of fees and costs that you will see.

1. Title fees (or attorney fees)

These are the fees that relate to making sure that the seller of the property can transfer the title (deed) of the property to you without also giving you any liens or issues also attached to the property. It also protects the lender from issues too. These fees include the title search fee and title insurance fees. Title fees also include the cost to record and register your ownership at the courthouse after closing, as well as the use of a notary that witnesses your official signatures on your closing documents. If you are using an attorney or settlement company to help you with your closing, you’ll be asked to pay them for their involvement, too.

2. Pre-paids and escrow (property taxes and homeowner's insurance)

Property tax pro-rations and homeowner’s insurance premiums will be included in your closing costs to make sure there are no gaps in coverage between when the seller stops paying and you start. Because you are paying them before your regular mortgage payment kicks in, they are often called “pre-paids.” This may also include pre-paid interest to cover the gap between when you close and when you make your first mortgage payment. If you plan on including your property taxes and homeowner’s insurance in your monthly mortgage payment (also called your escrow account), allowing your lender to pay these bills on your behalf in the future, you will need to make an initial deposit of funds for any bills that need to be paid soon after closing.

3. Mortgage insurance

If your loan type requires some type of funding or guarantee fee (most common with government-insured loans), you may have to pay the total amount upfront. Loans with a small down payment involve substantially more risk for the lender so mortgage insurance provides the lender protection in case you go into foreclosure. Although these upfront fees are usually rolled into the total amount you are borrowing, it will still be itemized separately on your Closing Disclosure when you’re at closing.

4. Loan-related fees (lender fees)

These fees include any origination charges, application fee, processing fee, credit report fee, and any discount points you want to pay for to get a lower interest rate. Some lenders also include underwriting fees, wire transfer fees, termite inspection fees, and your appraisal in this category.

5. Property-related fees (may also be found in lender fees)

During the loan process, your property will be appraised to determine its value. It may also be inspected for pests and for any other structural, electrical, or plumbing issues. The cost of these items may show up as closing costs if you haven’t already paid for them prior to closing. You may also see a survey fee if there is a need to confirm property lines. Both the lender and FEMA requires properties be evaluated for the need for flood insurance and there’s a fee for that as well. You may also see these items listed as lender fees or loan fees. Occasionally, you may also see miscellaneous closing costs that do not fit into these specific categories, such as a home warranty fee, courier fees, or wire fees. Everything is itemized though, and feel free to ask your loan officer to explain anything if you’re not sure what it is. Contact one of our mortgage bankers if you’d like to talk about your closing costs or if you need additional information.