During a mortgage settlement, or closing, there are several various closing fees involved. The mortgage settlement process can be confusing for home buyers who are not familiar with all the different types of closing costs fees. During settlement, the buyer may have to pay as much as 3-6 percent of the price of the home in closing costs. The cost for each closing fee varies from lender to lender. However, understanding what these closing costs mean and getting an idea of how much to expect for the cost of each fee will help the borrower avoid unexpected costs during closing.
Application fee
The application fee is paid to the lender to cover the cost of processing the loan and also covers the expense of running a credit report. Application fees vary from lender to lender and can be as little as $65 or as much as $600.
Loan origination fee
A loan origination fee is the amount charged by the lender to evaluate and prepare the mortgage loan paperwork. This includes charges for preparing documents, attorney’s fees, notary fees, and other similar fees. The more the home buyer pays as a down payment, the less this fee will cost. Loan origination fees can range anywhere from $2,000-$3,000.
Appraisal fee
An appraisal is ordered for the purchased property before the loan closing to ensure that the property is worth at least the amount of the loan. The appraisal fee pays for determining the value of the home. In some instances, the appraisal fee may be included in the application fee. The buyer should always receive a copy of the completed home appraisal. The appraisal fee can range from $200-$400 in most cases.
Points
Points can be applied as a one-time charge to reduce the interest rate paid over the life of the loan. Each point is equal to one percent of the amount of the loan. Home owners can sometimes negotiate with the lender to include the points with the amount of the loan financed. If the buyer elects to pay the points at the time of closing, these points can be deducted from their income taxes in the year they are paid. The seller may also agree to pay a portion of the points. Generally, points are around three percent of the amount borrowed.
Private Mortgage Insurance
The lender may require the borrower to purchase private mortgage insurance, especially if the buyer does not make a down payment of at least 20 percent of the value of the home. This insurance gives the lender protection from losses if the buyer does not make the loan payments. Once home owners reach 20 percent equity in the home, they can request private mortgage insurance to be canceled. The lender must cancel the PMI insurance by law when the buyer reaches 22 percent equity in the home as long as the mortgage payments are current. PMI insurance can cost anywhere from $50 to $100 monthly. Some lenders are willing to pay this insurance, but in turn, will charge the buyer a higher interest rate.
Inspections fees
In some cases, lenders require various home inspections to be completed to ensure the property is in good condition. Some of the required inspections are septic system tests, termite inspections, or and engineering report analyzing the structural condition of the home. The costs for the various inspection fees can range anywhere from $200 to $500.
Homeowner’s insurance
The lender will require the buyer to obtain homeowner’s insurance to protect the home from physical damage and protect their investment in the home. Homeowner’s insurance covers damage caused by fire, theft, wind, hail, vandalism, and other causes of loss. Costs for homeowner’s insurance vary depending on the value of the home and other factors determined by the insurance company. The premiums are generally for a one-year term and can vary from a few hundred dollars to $1,000 per year.
Property survey
A property survey must be completed to confirm the legal location of the home and other property being purchased. Some property surveys are more detailed and costly than others. Depending upon the type of property survey the lender requires, the prices can range from $80-$600.
Escrow funds
Escrow funds are held in a reserve account to pay expenses such as homeowner’s insurance, flood insurance, and property taxes. This money is required by some lenders to protect their interest in the home. The lender holds this money and pays the fees when they are due. If the lender requires an escrow account, the buyer must fund the account at the time of closing.
These are only some of the fees that may be required by the lender at closing. Check with the lender before closing to make sure there are no hidden closing fees. The buyer may negotiate with the seller to pay some of the closing costs. Home buyers should keep closing costs in mind before submitting a purchase offer for the home. The lender is required to disclose all closing costs to the buyer in writing and must also provide in writing to the borrower a “good faith estimate” of expected closing costs within three days of receiving the loan application.
