Finance and Lender Charges
Most people associate closing costs with the finance charges levied by mortgage
lenders. The charges you pay will vary among lenders, so it pays to shop around
for the best combination of mortgage terms and closing (or settlement) costs.
You may have to pay the following charges:
Origination or application fees: These are fees for processing
the mortgage application and may be a flat fee or a percentage of the mortgage.
Credit report: If you are making a small down payment (usually
less than 25%), most lenders will require a credit report on you and your spouse
or equity partner. This fee often is a part of the origination fee.
Points: A point is equal to 1% of the amount borrowed. Points
can be payable when the loan is approved (before closing) or at closing. Points
can be shared with the seller--you may want to negotiate this in the purchase
offer. Some lenders will let you finance points, adding this cost to the mortgage,
which will increase your interest costs. If you pay the points up front, they
are deductible in your income taxes in the year they are paid. Different deductibility
rules apply to second homes.
Lender's attorney's fees: Lenders may have their attorney
draw up documents, check to see that the title is clear, and represent them
at the closing.
Document preparation fees: You will see an amazing array of
papers, ranging from the application to the acceptance to the closing documents.
Lenders may charge for these, or they may be included in the application and/or
Preparation of amortization schedule: Some lenders will prepare
a detailed amortization schedule for the full term of your mortgage. They are
more likely to do this for fixed mortgages than for adjustable mortgages.
Land survey: Most lenders will require that the property be
surveyed to make sure that no one has encroached on it and to verify the buildings
and improvements to the property.
Appraisals: Lenders want to be sure the property is worth
at least as much as the mortgage. Professional property appraisers will compare
the value of the house to that of similar properties in the neighborhood or
Lender's mortgage insurance: If your down payment is less
than 20%, many lenders will require that you purchase private mortgage insurnace
(PMI) for the amount of the loan. This way, if you default on the loan, the
lender will recover his money. These insurance premiums will continue until
your principal payments plus down payment equal 20% of the sellling price, but
they may continue for the life of the loan. The premiums usually are added to
any amount you must escrow for taxes and homeowner's insurance.
Lender's title insurance: Even though there is a title search
for any obstacle (liens, lawsuits), many lenders require insurance so that should
a problem arise, they can recover their mortgage investment. This is a one-time
insurance premium, usually paid at closing; it is insurance for the lender only,
not for you as a purchaser.
Release fees: If the seller has worked with a contractor who
has put a lien on the house and who expects to be paid from the proceeds of
the sale of the house, there may be some fees to release the lien. Although
the seller usually pays these fees, they could be negotiated in the purchase
Inspections required by lender (termite, water tests): If
you apply for an FHA or VA mortgage, the lender will require a termite inspection.
In many rural areas, lenders will require a water test to make sure the well
and water system will maintain an adequate supply of water to the house (this
is usually a test for quantity, not a test for water quality).
Prepaid interest:Your first regular mortgage payment is usually
due about 6 to 8 weeks after you close (for example, if you close in August,
your first regular payment will be in October; the October payment covers the
cost of borrowing money for the month of September). Interest costs, however,
start as soon as you close. The lender will calculate how much interest you
owe for the fraction of the month in which you close (for example, if you close
on August 25, you would owe interest for 6 days). In ssome cases this is due
Escrow account: Lenders will often require that you set up
an escrow account into which you will make monthly payments for taxes, homeowner's
insurance, and PMI (mortgage insurance, if required). The amount placed in this
escrow account at closing depends on when property taxes are due and the timing
of the settlement transaction. The lender should be able to give you a close
approximation of these costs at the time you apply for your mortgage loan.