Understanding Some Common Closing Costs

Application fee – A fee charged by the lender to offset fixed costs related to mortgage loan processing such as appraisal, credit report and underwriting.

Closing fee – The fee by the closing company who prepares the closing documents and closes the loan on behalf of the lender.

Commitment fee – This is often called an origination fee.

Discount points – One point is equal to 1% of the mortgage amount. The lender uses points to adjust the yield on the mortgage when it is sold to an investor. By paying more points, the borrower can obtain a lower mortgage interest rate.

Funding fees – Normally applicable to VA loans only. The fee is due at closing and may be added to the loan amount and financed.  Be sure to check with your lender for further details and exact fees, charges, etc.

Homeowners insurance – A 1 year premium is typically due in advance at the time of closing.

Mortgage Insurance – Insurance that is required by the lender when the down payment is less than 20%. In the case of loan default, this insurance reduced the lender’s loss.

Pre-Payables – are funds collected from you at the time of closing for (1) Prepaid Interest is the interest that accumulates on the mortgage loan from the date of closing through the end of the month. (2) A Reserve Account (sometimes called an “escrow” or “impound” account) is an account of funds held by the lender to assure future payments for items such as real estate taxes, hazard insurance, flood insurance, mortgage insurance and other assessments. You will probably have to pay an initial amount for each of these items to start the reserve account at the time of closing. A portion of your regular monthly payment will added to the reserve account. Prepaids can change based on the day of the year and month you close.  Be sure to check with your lender for the exact amounts.

Processing fee – fees charged by the escrow processor, either working for the escrow company, title company or real estate company for administrative services performed from the point of contract through closing.

Recording fees – fees charged by state or municipal entities for entering the closing documents into the public record.

Title insurance – Provides protection for lenders and homeowners against financial loss resulting from legal defects in the title. The cost of a standard owner’s policy is usually paid by the seller at closing.

Underwriting fee – practices vary from lender to lender. Check the good faith estimate for the amount of the underwriting fee.

All sellers with homes built prior to 1978 are required to fill out a lead-based paint disclosure form and provide you, the buyer, with a lead-based paint educational booklet in any sale (see link below). Lead is a highly toxic metal that was used for many years in products found in and around our homes prior to 1978.

Lead may cause a range of health effects, from behavioral problems and learning disabilities, to seizures and death. Children 6 years old and under are most at risk, because their bodies are growing quickly.

On the other hand, there are millions of homes with lead paint out there, and many have been painted and repainted several times so the lead paint is well covered up. When in doubt, have the paint tested and evaluated either at a local laboratory, or with one of the home test kits available at your local hardware store.

 

For the complete home buying EPA pamphlet on Lead based paint, click here