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The Facts on Closing Costs
Closing costs may vary when you purchase a new home or refinance your existing property. Your mortgage lender will provide an estimate of the closing costs associated with your real estate transaction, but having a clear understanding before you buy will offer the peace of mind of no unexpected surprises.
There are two categories of closing costs: Non-recurring costs are incurred one-time only; Recurring costs are paid numerous times over the course of home ownership. For example, property tax and home owner insurance are both considered recurring closing costs. Some of the closing costs listed below are hidden costs that lenders are not required to communicate to buyers. Be aware that they do exist.
Most refinances will include the closing costs in the new loan amount. This is helpful as it requires little or no expense to close the deal.
Lender Associated Non-Recurring Closing Costs
- Loan origination fee - Often referred to as a points system, where one point is equal to one per cent of the mortgage loan, paying more points will usually result in a lower interest rate.
- Loan discount - The loan origination fee is generally one point or one per cent of the loan. Any additional points to the loan origination fee are called "discount points". These points are usually included with the loan origination fee.
- Appraisal fee - Lenders require a property appraisal because it is collateral for the mortgage. The appraisal determines if you are paying a comparable and reasonable price for the property. Appraisal fees vary depending on the value of the property and how difficult it is to assess this value.
- Credit report - Lenders will review your credit history as part of the underwriting process. The credit report is a minimal fee ranging from $7 to $60, depending on the type of report requested by the lender.
- Lender's inspection fee - This fee is generally associated with the construction of new homes as the property may not be finished when the initial appraisal is completed. This inspection verifies that construction is complete and inspected as such.
- Mortgage broker fee - Loans originated through a mortgage broker may list points under this fee, or as a processing fee, instead of as a loan origination fee. These fees indicate to the buyer what is being charged by the wholesale lender and attributed to the mortgage broker. Mortgage brokers can attain lower rates from wholesale lenders than can buyers directly, thus your overall payments will still be lower by using a mortgage broker's services.
- Tax service fee - As a property owner you will be making property tax payments over the life of your mortgage loan. Since property tax liens can take precedence over a first mortgage, the lender may pay an independent service to monitor property tax payments which can run from $70 to $80.
- Flood certification fee and flood monitoring - Your lender may hire an independent service company to determine if your property is located on a designated flood zone. As these zones are periodically re-mapped, some lenders charge a fee to monitor whether or not this re-mapping will affect your property.
Other Lender Non-Recurring Closing Costs
The following vary by lender and cannot be associated directly with the loan cost as these fees generate income for lenders and are used to offset the fixed costs of loan initiation:
- Document preparation - Lenders used to hire document preparation firms to draw loan documents, but now these are drawn in-house. This fee is charged on almost all loans and is approximately $200, but varies by lender.
- Underwriting fee - This fee can range from approximately $300 to $350. The underwriter is usually a paid employee of the lender.
- Administration fee - This fee may replace the underwriting fee, but in some cases may also stand alone.
- Appraisal review fee - Lenders will occasionally review appraisals as a measure of quality control, usually for high valued properties. This fee can range from $75 to $150.
- Warehousing fee - This fee is rarely charged, but some lenders use a warehouse line of credit and will charge the fee to the borrower.
Costs Requiring Payment before Closing
- Pre-paid interest - Mortgage payments are usually due on the first of each month, but because loans can close on any day, a certain amount of interest must be paid at closing to get the interest paid up to the first of the month.
- Homeowner insurance - This insurance covers any possible damages to the property and other items. If buying a house, the first year's insurance is generally paid when you close the transaction. If buying a condo, your Homeowners' Association Fees normally cover this insurance.
- Mortgage insurance - Some first-time homebuyer programs still require the first year mortgage insurance premium to be paid in advance, but this is becoming rare. Most mortgage insurance is simply paid monthly with your mortgage payment. Mortgage insurance covers the lender and covers a portion of the losses in those cases where borrowers default on their loans.
- Reserves deposited with lender - if making a minimum down payment, you may be required to deposit funds into an impound account or escrow account. The lender uses these funds to make the payments on your homeowner's insurance, property taxes, and mortgage insurance (as applicable). Each month, in addition to your mortgage payment, you will deposit additional funds into your impound account, ensuring the lender always has sufficient funds to pay these bills as they come due. Impound accounts are not required, but some lenders will reduce loan origination fees if you open one.
- Homeowner insurance impounds - Your annual premium is divided by 12 for an estimated monthly amount to be deposited into your impound account. To start the account, two months of payments must be deposited as per the lender's allowance for two month's reserves.
- Property tax impounds - The amount deposited towards taxes to start an impound account varies according to when you close your real estate transaction.
- Mortgage insurance impounds - Most lenders allow this to be paid monthly, but you may be initially required to deposit two months of mortgage insurance into this impound account.
Non-Recurring Closing Costs Not Associated with the Lender
- Closing/Escrow/Settlement fee - Methods of closing a real estate transaction vary, as do the fees. A general rule for calculating the closing cost is $200 plus $2 for every thousand dollars in price. Refinances usually involve a flat fee of $400 to $500.
- Title insurance - This insurance assures the homeowner that they have clear title to the property. Lenders require title insurance, to ensure the new mortgage loan is in first position. Costs vary depending on whether you are purchasing or refinancing a home.
- Notary fees - Most loan documents include two to three forms that must be notarized. This fee is approximately $40.
- Recording fees - Certain documents are recorded with a local recorder. Fees vary according to your location.
- Pest inspection - This inspection looks for pest, wood rot, water, and other damages and costs approximately $75. If repairs are required, the amount will vary. The seller may pay for the repairs, but this is negotiable.
- Home inspection - This cost is usually incurred by the homebuyer. However, some home sellers will offer to pay for the inspection to protect themselves from future legal actions.
- Home warranty - This item may be optional. A home warranty usually covers major appliances in case of breakage within a specific time. This fee is often paid by the seller.
Refinancing Associated Costs (Not Charged by the New Lender)
- Interest - When closing the transaction on a mortgage refinance, there will most likely be some outstanding interest due on the original loan. For example, if closing on August 20th (and you made your last payment on the 1st of the month), you will have 20 days of interest due on the original loan and 10 days prepaid interest on the new loan.
- Reconveyance fee - This fee is charged by your existing lender when they reconvey their collateral interest in your property back to you through recording of a reconveyance. This fee can vary from $75 to $125.
- Demand fee - Your existing lender may charge a fee for calculating payoff figures.
- Sub-escrow fee - This fee is charged by the title company as an income-generating fee, similar to some lender fees.
- Loan tie-in fee - This fee is charged by the escrow company.
- Homeowners' association transfer fee - If buying a condo or home with a homeowner association, the association often charges a fee to transfer all of their ownership documents to the buyer.
Having the Seller Pay Closing Costs
It has become customary to have the seller pay for the closing costs when you purchase a new home. This is put into writing in the offer letter and must be accepted by the seller. The seller generally accepts because the buyer is probably paying slightly more for the property than he or she would if paying their own closing costs. Consider the following points:
- If asking the seller to pay the closing costs, what they can pay will vary depending on the type of mortgage loan obtained by the borrower. For example, on conventional loans, you can only ask the seller to pay non-recurring costs and not those costs that must be paid in advance.
- Your down payment amount will also affect how much of the closing costs a seller can pay. If you put down ten per cent or greater, the seller can only contribute six percent of the purchase price. If you put less than ten per cent down, the seller can only contribute three per cent.