Most people associate closing costs as finance charges levied by mortgage lenders. Closing Costs are costs to close the transaction. Finance charges are closing costs directly associated with obtaining a mortgage loan.
These charges will vary among lenders, so it’s best to shop around for the best combination of mortgage rate and term along with the closing costs for each program:
Origination Fee – This is the lender's admistrative charge to process and provide the mortgage loan services. This fee can be negotiated, and sometimes even eliminated based on the loan program you choose. The results are typically seen in the interest rate offered similar to Points described below.
Credit Report – Most lenders require a credit report on you and your spouse, or an equity partner.
Points – One point is equal to 1% of the amount borrowed (loan amount). Points can be used to BUY DOWN INTEREST RATES often to LOWER THAN MARKET. Costs of Points can be shared with the seller which can be negotiable in the purchase offer. The seller can pay part or all of the buyers closing costs- including points- with some restrictions and limitations. Some lenders will let you finance points which will add to the mortgage cost. If you pay the points up front they are typically tax deductible in the year they are paid- on a primary residence.
Lender or Title Company Attorney's Fees – For an attorney to draw-up documents and to ensure that the title is clear. This is a standard fee and in additional to any other attorney you wish to employ on your behalf to review this work.
Document Preparation Fees – There are several documents and papers prepared during the home-buying or refinance process, ranging from the application to the closing. Lenders may charge for this specifically or the fee may be included in other fees. Title Company's and Attorney's may have this fee as well.
Preparation of Amortization Schedule – Some lenders will prepare a detailed amortization for the full term of your mortgage. This is usually done for fixed mortgages or adjustable mortgages. At Financial One this is complimentary.
Land Survey – Lenders may require that the property be surveyed or the title company to provide a Survey Endorsement to the title policy. In either case the Title Company will typically need to order a survey to ensure the property has not been encroached and to verify the location of the structures and improvements to the property. Some title companies will allow a seller to provide a prior survey to the transaction and affirm no construction or changes have been made in order to help reduce costs. On a refinance transaction this is almost certain to be the case, you will likely certify an existing survey already on file for example.
Appraisals – Professional Appraisers can do a comparison of the value of the property to that of other recently sold neighborhood properties. Lenders want to be sure the property's estimated value meets the mortgage loan Loan to Value Ratio requirements.
Lender's Mortgage Insurance – If your down payment is less than 20%, most lenders require that you purchase Private Mortgage Insurance (PMI) for the loan amount. If you should default on your loan, the lender will recover money through the insurance. These insurance premiums will continue until your loan meets a 78% Loan to Value Ratio. Some loans require Mortgage Insurance to continue for the life of the loan- until the loan is paid in full through a pay-off or refinance transaction. The premiums are usually added to any amount you must escrow for taxes and homeowner's insurance monthly. There are often options to pay this insurance in one lump sum at the commecement of the loan through your lender.
Lender's Title Insurance – Even with a title search for any property obstacles, liens or lawsuits, many lenders require insurance to protect their mortgage investment. This is a 1-time insurance premium usually paid at closing, and is for the benefit of the lender only, not the homebuyer. However, there are always options for the homebuyer to obtain their own policy at the same time the Lender obtain theirs in order to receive the same benefits for themselves.
Release Fees – All mortage liens typically have nominal release fees on their pay-offs. Releases are documents prepared and filed with your county recorder to evidence a debt/lien has been paid in full and satisfied. This applies to any property lien. For example IF the seller has worked with a contractor who put a lien on the house and is expecting payment from the proceeds of the house sale, there may be fees to release such a lien. The seller typically pays these fees which are normally negotiated or included in the terms of the contact/purchase offer.
Inspections Required by Lenders – The lender may require a Termite Inspection if you apply for an FHA or a VA mortgage loan. In many rural areas a water test may be required to ensure the well and water system will maintain an adequate water supply to the house; for quantity not quality. Depending on the sales contract and property type, additional inspections may be required.
Prepaid Interest – The first regular mortgage payment is typically due sometime between 4 and 8 weeks from the closing. However, interest costs begin at closing time, per dien or per day. The lender will calculate the interest owed for that period of time, and that fraction of interest, or interest per day, is due at closing.
Escrow Account – Lenders often require that you set-up an Escrow Account, where you will make monthly payments for taxes, homeowner's insurance, and sometimes PMI (Private Mortgage Insurance). The amount placed in this account at closing depends on when property taxes are due and the timing of the settlement transaction. The lender can give you a cost approximation during the application process of your mortgage loan. Borrowers will lower Low to Value Ratios can sometimes have the options for an Escrow Waiver. If you opt for an escrow waiver for your loan it is prudent to open and operate your own escrow account to insure you budget and save for your taxes and insurance adequately to insure you are prepared to pay the often annual and semi-annual bills.