Explanation of Closing Costs

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.

Annual Percentage Rate (APR)

Under the Truth In Lending Law, a lender/broker must provide for you in writing the APR for your particular loan. The APR is the percentage cost of the credit for which you are obtaining on a yearly basis. The APR was designed by the federal government to reveal the true total cost of getting a loan. The APR includes the interest rate and other added costs such as points, origination fees, and mortgage insurance (if applicable). The APR is designed so that you can compare credit costs. Keep in mind that the APR is not the same as the note rate. The note rate is the rate with which your monthly mortgage payments are calculated. The APR will always be higher than the note rate because it includes other closing costs required by the lender/broker.

You can use the APR to assist you as you shop for a mortgage. All written advertisements must include the APR with the note rate. If the APR is considerably higher than the note rate, you will recognize that there are many costs associated with the loan thus resulting in a higher APR. If you are speaking with a lender/broker over the telephone, ask him or her for the APR for any rate you are quoted.

The APR is one tool that can be used to assist you in getting your best deal. You will still need to get a Good Faith Estimate that breaks down all closing costs that you will be charged.

Final Decision
Here are a few tips to use as you compare interest rates among lenders.

• Get an updated GFE when you lock-in your interest rate.
• If your lender/broker doesn’t know the cost of a particular fee, ask him or her to find out.
• Remember that it’s a Good Faith Estimate, but your lender should still be confident that your GFE is close to the actual charges.
• Some fees can be negotiated, some cannot.
• Verify your settlement statement before closing, providing adequate time for correction of mistakes.