The most confusing aspect of obtaining a
mortgage loan can be interpreting mortgage
closing costs and fees. Because of this, two
major mistakes are common.
Mistake #1: Comparing mortgage rates only,
while not considered the closing costs
associated with each particular rate.
Mistake #2: Choosing a rate based on a
verbal "total" of closing costs instead of
asking for a breakdown in writing, or a Good
Faith Estimate.
Both mistakes can lead to confusion because
of lack of information. To avoid these and other
mistakes associated with mortgage closing costs,
education is key. The better educated you are,
the more likely you will make the best decision
regarding the rate and fees for your mortgage
loan.
This guide will provide you with information
regarding the types of closing costs charged by
mortgage lenders/brokers, what to expect on a
Good Faith Estimate, and how to use the Annual
Percentage Rate (APR) as you shop for a
mortgage.
Types of Closing Costs
Mortgage
closing costs can be grouped into 5 categories.
After reviewing each category, you will able to
determine the purpose of each closing cost or
fee.
Lender Fees
Lenders/Brokers charge different fees for
assisting you in obtaining a mortgage along with
fees to help you buy down a rate (if desired).
Some lenders/brokers may charge all the fees
listed or they may only charge a few.
Origination Fee - A fee charged by a
lender/broker as compensation for providing you
with a mortgage loan.
Discount Fee - "Points" you can pay to
buy down an interest rate. The more points you
pay, the lower the interest rate.
Application Fee - Lenders/Brokers may
charge this fee up front to offset the cost of
processing your loan.
Processing Fee - A fee to cover the
costs to process your loan.
Underwriting Fee - A lender/broker fee
charged to determine if the lender is willing to
lend you money based on your application for a
mortgage.
Administrative Fee - Similar to the
Processing Fee, this is a fee to cover the
expenses of processing your loan.
Document Preparation Fee - A fee to
prepare your specific loan documents to be
signed at closing.
Courier Fee - This fee may or may not
be charged by a lender/broker. It covers the
cost of sending your loan documents to different
parties.
Wire Transfer Fee - This fee may or
may not be charged by a lender/broker. A wire
transfer is the way lenders provide your loan
funds to the closing agent for disbursement to
various parties.
Title Fees
When a lender/broker agrees to mortgage a
piece of property, the lender/broker needs to
guarantee that the property is indeed owned by
the person(s) stated (either the seller for a
purchase or the borrower for a refinance). The
fees listed assist the lender/broker in
determining the current owner of the property
and ensuring that information is correct.
Title Search - A fee charged by the
title company or another party to search public
records to determine if there are any liens on
the property being financed.
Title Insurance - Sometimes included
in the title search fee, this insurance
guarantees your lender that the title company
completed their title search correctly and also
closed the loan correctly so that your lender is
in first lien position.
Settlement or Closing Fee - Your
closing agent will be responsible for the
financial and property transfers associated with
your property and mortgage loan. A fee is
charged based on these services.
Notary Fee - This fee can be included
in the Settlement or Closing Fee. It is a charge
for a licensed notary public to notarize your
loan documents.
Attorney Fee - This fee is similar to
the Settlement or Closing Fee. In some states,
attorneys act as closing agents and charge this
fee instead of the Settlement or Closing
Fee.
Government
Fees
When you purchase or refinance your home, the
local government requires the changes resulting
to become public record. The government also
collects the appropriate taxes.
Recording Fee - After closing, your
mortgage and property transaction is recorded
with the appropriate county. A fee to record the
mortgage or deed of trust is charged by the
county.
State Mortgage Tax - Not all states
charge a mortgage tax and the tax rate depends
on the jurisdiction of the property. States that
do charge a mortgage tax are Alabama, Florida,
Georgia, Hawaii, Kansas, Maryland, Minnesota,
New York, Oklahoma, Tennessee, and Virginia.
Property Tax - This tax rate is
dependent on your where your property is
located. All states collect property tax on a
yearly basis.
Third Party Fees
The lender will
require some additional items that are paid to
third parties.
Appraisal Fee - An appraiser will
evaluate your home to determine it's fair market
value. This fee is paid to the appraiser for
this report.
Credit Report Fee - Your lender will
order a credit report to determine your
creditworthiness. A fee is paid to the credit
service agency.
Tax Service Fee - A tax service fee is
collected and paid to an outside source that
monitors your tax account and alerts the lender
to any unpaid tax bills.
Flood Certification Fee - A flood
certification determines if your property is
located in a "flood zone," an area of high risk
of flood damage. If your property is in a flood
zone, flood insurance will be required by your
lender.
Survey Fee - A survey, or an
Improvement Location Certificate, is done by a
licensed surveyor and determines that your lot
has not been encroached upon.
Pre-paid Items
These items are
required by a lender/broker and will vary
depending on your specific situation.
Interest - You will owe your lender
interest for the number of days that you "use"
your mortgage in a month. If you were to close
on the first day of April, you would owe the
lender 30 days of interest. The daily amount of
interest is based on your interest rate.
Hazard Insurance Premium - You must
have hazard insurance on your home if you have a
mortgage lien on your property because it
protects the lender's investment. Your insurance
agent determines the amount of your yearly
premium.
Mortgage Insurance Premium - Mortgage
Insurance (MI) is required by lenders on any
property where the loan amount is over 80% of
the home's purchase price (or appraised value if
a refinance). The actual premium amount is
determined by a MI company. Your lender will
typically choose the MI company.
Impounds - At closing, you will
deposit money into an escrow account. These
funds are called impounds. The money is used for
paying your hazard insurance, mortgage
insurance, and property taxes when they come
due. This escrow account will grow each month as
you make your mortgage payments because a
portion of your mortgage payment will be put
into it. When your yearly insurance or taxes are
due, your lender will then be able to pay the
amounts with the money available in your escrow
account.
Good Faith Estimate
Your lender/broker must provide to you a Good
Faith Estimate (GFE) of closing costs. By law,
your lender/broker is required to provide a GFE
within three days after you have applied for a
mortgage. Each fee that the lender/broker
expects to be charged at closing, should be
listed on the GFE. Because each lender's fees
may be different, HUD (Department of Housing and
Urban Development) has standardized all possible
closing costs with codes. The chart provided
here will provide you with the appropriate code
and typical fee associated with each cost. Each
fee listed here is an estimate. Your
lender/broker will provide you with the exact
costs depending on your loan
situation.
Equal Housing Lender.