One of the biggest mysteries in the home buying process is with the mortgage closing costs. There are many buyers who even after they close do not fully understand where their money went. Recent government changes have attempted to make this part of the process as transparent as possible. Within three days after your loan is submitted you will receive a loan estimate detailing all of the costs involved. You will also receive an estimated settlement statement at least 24 hours before your closing date. These steps will help you recognize the total amount of closing costs but may not help understand exactly what they are for. Here is a brief list of some of your loan closing costs and what you are paying for.
Tax escrows. Most loans require your property taxes and homeowners insurance to be included, or escrowed, in your monthly payment. To do this the new lender will have to establish an escrow account. They will always hold a cushion of property taxes in the event of a sudden increase. Depending on when you close the lender will require you to have anywhere from three to nine months in this account. Even though it is not technically a closing cost this makes up a majority of the money needed at closing.
Attorney fees. There are a handful of items included in this fee. For starters you have a fee to the attorney to handle the closing. They work for you and will represent your interests at closing. In addition they will also pull the title and supply title insurance. All property transfers need to be done with a clean title. If they are unwanted items on title they will work to get them removed. The title insurance is insurance against a lien coming on title that was not found at the time of the search.
Appraisal. This is typically the only upfront closing cost fee. The lender will order an appraisal to verify the value of the property. Each appraisal company has their own pricing schedule but for a single family property you should expect to pay $350-$450. For a multifamily property the fee would increase to $450-$600 depending on the exact number of units.
Lender fees. Regardless if you are working with a lender or a mortgage broker there will be fees. Lenders either get paid by origination charges or based on the interest rate you accept. By accepting a slightly higher interest rate the lender will pay the brokers fee. You also have the option of paying points to buy the rate down. Depending on the size of the loan this may make sense long term.
Inspection. This fee is usually outside of the true closing costs but nonetheless must be accounted for. Before the process gets very far you will order your inspection. Unlike with an appraisal this is done for your benefit to protect you from buying a property with defects. You and your real estate agent will review the inspection and see which items need to be repair or replaced and if you need to amend your offer. For a few hundred dollars this could be the best money you spend during the entire process.
When you get your loan estimate, don’t be afraid to review it with your loan officer and attorney. New laws permit that your final closing figures need to be within a few hundred dollars of your original estimate. If you have any questions on what you are paying or who you are paying it to, don’t be afraid to ask.