Allocation Of Closing Costs
Closing costs and pre-paids are additional fees associated with your mortgage loan and the closing of your property. Your Realtor and Lender should explain and review these fees as you start the home buying process and then clarify actual amounts as you get closer to the closing table.
Below is a brief description of the various costs that are commonly paid by the purchaser. It should be noted that the seller or lender can participate in paying some or all of these costs.
Loan Origination Fee-This fee covers the administration costs of processing the loan. It may be expressed as a percentage of the loan (i.e. 1% of the loan amount).
Loan Discount Points-These are the “points” charged by the lender to adjust the yield on the loan to market conditions. Each point equals 1% of the mortgage amount. Additional points can be paid to lower your interest rate.
Appraisal Fee-The lender orders the appraisal to determine whether the value of the property is sufficient to secure the loan should you default on the loan. The appraisal fee will be collected up front.
Credit Report Fee-The lender orders the credit report, which is used to determine your credit worthiness. Like the appraisal fee, this fee will sometimes be collected up front, other times it will be collected at closing.
Interest-You will probably have to pay the interest on the mortgage from the date of settlement to the beginning of the following month. For example, suppose you settle on February 10th. Your first monthly payment begins to accrue on March 1st and will be payable at the beginning of April. At closing, you will be required to prepay the interest for the period from February 10th through the end of February. This means that if you settle later in the month, your closing costs will be less than if you close earlier in the month.
Mortgage Insurance Premium-There are a variety of ways to pay mortgage insurance. It can be paid up front or monthly, or as in the case of FHA can be added to your loan. Your Loan Officer can explain your options in detail.
Hazard Insurance Premium-(Homeowner’s Insurance Policy) - You may be required to pay the first year’s premium at settlement. Or, you may be expected to bring proof that you already have paid for such a policy.
Escrow Accounts or Reserves-Reserves are required if the lender will be paying your property taxes, mortgage insurance, and hazard insurance.
Title Charges-Primarily these charges are payable to companies or persons other than the lender. This includes the settlement (or closing) fee, title search/title insurance premium (lender’s and owner’s coverage), and attorney fees (for legal services provided to the lender). Note that the fees you pay for your own attorney are not part of the settlement procedures.
Recording and Transfer Fees-Most states impose a tax on the transfer of property and require a payment of a fee for recording the purchase documents.
Additional Charges-These charges can include but are not limited to: ILC (Improvement Location Certificate), which may be required for any purchaser obtaining a new loan, and any other inspections or requirements from the lender.
Adjustments-Another part of the settlement statement involves looking at items paid by the seller in advance and items yet to be paid for which the seller is responsible. The most common expense to be pro-rated between the Buyer and Seller is property taxes.
Final Figures-In calculating the total amount that the borrower must pay, the Settlement Statement begins with the sales price and adds in the total closing costs for which you are responsible. Any pro-rated adjustments payable by you (as discussed above) are then calculated in. From this total, your deposit is deducted (which has been held in escrow since the seller signed your purchase offer) as well as the principal amount of your mortgage. Then, any adjustments payable by the seller are deducted. The resulting figure is the amount you must pay at settlement.
Summary-The complexity of the mortgage world has increased dramatically over the last few years. The pricing differences are dramatic based on not only credit but down payment and the property itself. It is advisable that you consult with an experienced, professional mortgage banker. When it comes to choosing a lender, ask for referrals, especially from your Realtor.