Quick Definition: Closing costs are costs
associated with the loan closing, while settlement charges include
closing costs, pre-paid interest, escrow reserves for taxes and
insurance, and the down payment (if the loan is a for a home purchase).
Closing costs and settlement charges are listed on the Loan Estimate
(LE) during the loan application and on the Closing Disclosure (CD)
before/at the closing.
Keep in mind that with the exception of lender costs (which vary based on the point structure of your loan), the actual closing costs at closing will be the same for all lenders - because the majority of costs go to third parties like title companies/attorneys, closing agents, title insurance, tax stamps, etc. Make sure you trust your mortgage company, the good ones will give you an accurate picture of closing costs. The less than trustworthy companies will put anything on a loan scenario to have you commit - and there is not penalty for them at closing if they are off by even $5000! Get a Loan Estimate (LE) as these are now locked down in terms of what can change.
Closing, or settlement, the term used for the process that finally makes you the official owner of the house you've purchased should be an exciting event. You have made an offer on the house, the seller has accepted the offer, you have been approved for a mortgage and taken care of other obligations necessary for purchase (home owner's insurance, etc.), and all that remains is to sign dozens of papers and pay your settlement, or closing, costs. Closing costs refer to the costs associated with purchasing and selling a property. It's the closing costs that dampens buyer's excitement at closing. This is largely due to the fact that people do not have a clear idea of what closing costs are or why they have to pay them. When you understand the individual fees, know the whys and wherefores of the fees, closing can again become an exciting event.
A lender's Loan Estimate provides you with the fees that you are likely to pay at closing. The lender will give you a Loan Estimate within three business days of receiving your loan application, as required by TILA-RESPA. When buyers have confidence in the business practices of their lender, then the faith is strong because they know there will be few surprises at closing. The fact remains that the Loan Estimate is only an estimate, and actual fees may differ from the estimate at closing.
To know exactly how much money you need to close, you will receive a Closing Disclosure (CD) at least three days prior to closing as required under TILA-RESPA. The closing costs/cash to close on this document should be as accurate as possible, but changes may occur before/at closing if information is received that was not previously known. Make sure to compare your last disclosed Loan Estimate to the Closing Disclosure you received to see what changes may have been made between the two documents. You’ll notice that they are very similar documents which makes for an easy comparison!
Closing costs can be confusing for four reasons:
- There is not an industry standard for the names of the various fees, and some state laws regulate the name of some fees.
- There is not an industry standard practice for charging all or any fees, especially 'junk' fees. (which goodmortgage.com does not charge)
- There is not a standard "cost" for these fees
- Closing costs are not just determined by the lender, but also include local state, county and city fees, attorney or title company fees, pre-paid interest based on what day of the month that you close, pre-paid escrows based on what month of the year you close, and underwriting fees may vary based on the type of loan, and the rate (more on that later)
For those of you here for a quick explanation - the fees are typically:
- Loan Origination or Broker Fee - 0-1% (depends on rate)
- Discount Points - depends on rate
- Administrative Fee - $0-250
- Commitment or Underwriting Fee - $450 - 750
- Processing Fee - $345 - 495
- Wire Transfer Fee - $30-45
- Document Preparation Fee - $50-150
- Atty or title fees - $200-500
- Tax Service Fee - $25-75
- Flood Certification - $16-45
There are even no closing cost programs available. The costs are still there (attorneys don't work for free), but the costs are paid by the lender. There is a catch, the rates are higher. See the details here.
But before you decide on what plan is right for you, it's always good to consult the advice of a professional tax advisor about the deductibility of mortgage interest and points.
Now for the details.
The single most important thing to understand about closing costs is that lenders only control lender-related fees. Lenders have no control over title-related fees, government-related fees, or insurance-related fees. When you are comparing the fees charged to obtain loans from various lenders, compare only the fees that the lender controls. These fees are often called "garbage fees" because they are the means by which many lenders increase revenues, especially when they offer a comparatively low interest rate.
This discussion will break closing costs down into four categories:
- Lender fees: the costs of getting a mortgage
- Title fees: the charges for establishing and transferring ownership
- Prepaid costs: not fees, but charges due at closing
- Impound/Escrow accounts: not fees, but money deposited into an account for future bills
The following lender fees may or may not be charged by various lenders.
goodmortgage.com is a lender, not a broker, and our fees are low compared to industry average. In the case of third party fees, we pass these fees directly to the borrower and do not increase these fees for profit. The typical costs associated with these fees are included with each fee description.
|Fee||Based On||Our Fee|
|Discount Points||Loan Amt||Buyer's Choice|
|Origination Points||Loan Amt||Buyer's Choice|
|Application Fees||Flat Fee||$95|
|Processing Fee||Flat Fee||$395|
|Credit Report Fee||Flat Fee||$0|
|Appraisal Fee||Sq Ft of House||$0 - 350 typical|
|Survey Fee||Flat Fee||$0-325 typical|
|Courier Fee||Flat Fee||$30-45|
|Flood Certification Fee||Flat Fee||$16-35|
|Tax Service Fee||Flat Fee||$35-85|
|Administration Fee||Flat Fee||$995|
|Underwriting Fee||Flat Fee||$0|
|Document Prep Fee||Flat Fee||$0 or $150 typical|
|Wire Transfer Fee||Flat Fee||$0-50|
|PMI Application Fee||Flat Fee||$0|
|Commitment Fee||Flat Fee||$0|
|Lender's Inspection Fee||Flat Fee||$0|
The second role of the title company is as a closing agent, or escrow officer. They follow escrow instructions from the lender on how the loan is to be documented and the funds disbursed. They will have collected all of the necessary exhibits from you, the seller and the lender. The closing agent will make sure that all necessary papers are signed and recorded and that funds are properly disbursed and accounted for when the closing is completed.
For these services, the title company will usually collect the following fees:
There are two required prepaid fees at closing:
The Escrow/Impound Account really functions as forced savings for the buyer to ensure that insurance and taxes will be paid. A portion of your monthly mortgage payment includes monthly premiums for homeowner's insurance, taxes, and private mortgage insurance (PMI), if applicable. The allotted portion of your monthly payment for these items is placed in an escrow/impound account. The lender uses the money from the escrow/impound account to pay your insurance and taxes.
Section 10 of RESPA limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements.
At closing, depending on the size of your down payment, you may be required to deposit money into an escrow/impound account for:
Lender Fee Descriptions
Loan Origination Points or Mortgage Broker Fee – About seventy percent of loans are originated through mortgage brokers. Wholesale lenders offer lower costs/rates to mortgage brokers than you can obtain directly, so you are not paying "extra" by going through a mortgage broker. Often you will earn a lower interest rate, and save time by having one firm "shop" rates for you. Many low rate lenders are wholesale only and do not have retail divisions for the public. The loan origination fee is measured in "points." One point is equal to one percent of the mortgage loan. A simple loan will often cost only one origination point. When situations are more difficult (i.e. recent credit issues) it is not uncommon for one to three loan origination points.
Other Lender Fees
This category can vary from lender to lender and cannot be associated directly with the cost of the loan. These fees cover costs of the lenders and are used to offset the fixed costs of loan origination. You will find some combination of these fees on your Mortgage Loan Disclosure Statement (MLDS) and the total usually varies between $550 and $1250. In some cases, many of these fees will be "lumped" together under "Lender's Fees".
Underwriting Fee – It is difficult to determine the exact cost of underwriting a loan since the underwriter is usually a paid staff member. This fee is usually in the neighborhood of $750 to $950. Sometimes this is lumped under administration fees.
Document Preparation – Before computers made it fairly easy for lenders to draw their own loan documents, they used to hire specialized document preparation firms for this function. This was the fee charged by those companies. Nowadays, lenders draw their own documents. This fee is charged on almost all loans and is usually in the neighborhood of $200.
Appraisal Review Fee – Even though you will probably not see this fee on your HUD, it is charged occasionally. Some lenders routinely review appraisals as a quality control procedure, especially on the higher valued properties in the San Francisco Bay Area. This fee is in the neighborhood of $150. In special (usually high property values) circumstances another full appraisal may be required.
Warehousing Fee - Some lenders have a warehouse line of credit in order to fund your loan at closing time. This is more common in specialty lending.
When goodmortgage.com charges an application fee, we do NOT charge an appraisal or credit report fee. The appraisal charge is paid to the appraiser, and any excess we collected is refunded.
goodmortgage.com charges a flat fee of $145 - $395 (by state) for loan processing.
Credit Report Fee
goodmortgage.com charges the exact fee charged by the a company that combines credit bureau reports, currently $18.
At goodmortgage.com, our appraiser's fee is dependent on the square footage of the appraised house. For a conforming loan for a single family home, the fee is typically $375 to $550. Regardless, goodmortgage.com charges the exact fee for the appraisal.
At goodmortgage.com, the processing fee includes the cost of courier services.
Flood Certification Fee
goodmortgage.com charges $22 for flood certification.
Tax Service Fee
goodmortgage.com charges $85 for tax service.
Sometimes the Underwriting Fee includes the Documentation Preparation Fee. Sometimes the Underwriting Fee is called an Administration Fee, and that Administration Fee may or may not include the Documentation Preparation Fee.
The lenders goodmortgage.com uses typically charge between $350 and $650. The lenders with the higher rates have the lower underwriting fees.
Documentation Preparation Fee
At goodmortgage.com, the Documentation Preparation Fee is typically $150. (There is no Documentation Preparation Fee for those lenders that absorb this fee into the Underwriting Fee.)
Wire Transfer Fee
goodmortgage.com works with only one lender that charges a wire transfer fee and that fee is $50.
PMI Application Fee
goodmortgage.com does not charge a PMI Application Fee.
Commitment Fee / Lender Rate Lock
Lender's Inspection Fee
Title Fee Descriptions
There are two types of title insurance: owner's title insurance and lender's title insurance. The owner's policy protects you, the buyer. The seller usually pays for the owner's title insurance policy. The lender policy protects the lender, or rather, protects the lender's collateral for the mortgage loan and benefits the lender. You pay for the lender's policy. Title insurance is a one-time charge.
Title insurance is non-transferable, even for a refinance. In the event of a refinance, lender's title insurance is still required, but usually at a reduced rate.
Escrow Fee/Settlement Fee/Closing Fee
For a refinance, this fee is normally reduced by one half of the normal charge.
Prepaid Fee Descriptions
The only interest that you prepay is at time of closing. At closing, you pay for the interest that will accrue from the date of your closing to the end of the month. So, if you close on January 19, you pay for interest from January 19 to February 1. The worst case scenario is that you are charged for 30 days of interest, if you close at the beginning of the month.
Your homeowner's insurance is then paid monthly, 1/12 of your insurance premium, as part of your mortgage payment. The lender places each monthly payment into an escrow/impound account. At the end of each year, the lender has collected your annual premium and pays your annual premium when the payment is due. More details about this under the Escrow/Impound Account details.
Escrow/Impound Account Descriptions
Homeowner's Insurance Impound
Property Tax Impound
In California, property taxes are paid semi-annually, with one payment in arrears and one in advance.
Your monthly mortgage payment includes 1/6 of your semi-annual property tax. Therefore, you will need to deposit the number of months worth of property taxes into the escrow account that will yield 6 months worth of property taxes in the account at the time that property taxes are due. For example, in Arizona, let's assume your first mortgage payment is due January 1. The next property tax payment is due in March. You will make three mortgage payments (January, February, and March) before property taxes are due. That means that your property tax payment will be short three months worth of payment. Therefore, you need to deposit three months worth of property tax into the escrow account. That way, come March, the lender can pay the property taxes.
More on fees vs rate
Can I drop closing costs?
What are lender fees?
Are there any other fees?
What are lender fees typically worth?
Refinancing Associated Costs
Interest - When you close the transaction on your refinance, there will most likely be some outstanding interest due on the old loan. For example, if you close on January tenth (and you made your last payment), you will have ten days interest due on the old loan and twenty days prepaid interest on the new loan (see section above for prepaid interest). Your first payment on the new loan would not be until March 1st since you have already paid all of January's interest when you closed the refinance transaction.