How to Figure Closing Costs
Closing costs are usually one of the first concerns my clients ask me about, and rightly so I might add. The one myth I'd like to clear up to everyone is that no closing costs loans do not exist.
The lender simply diguises the costs of the loan with a higher interest rate. With that being said, sometimes it does make sence to wrap your closing costs up with the rate.
For instance, if you are relatively sure you are going to move in a year or two you will usually do better taking a higher rate and low or no closing cost as long as you are saving enough on your monthly payments.
On the other hand, if you are reasonably sure you will be there, and more importantly in the loan, for an extended amount of time you will usually do better taking the lowest rate and paying some closing cost.
The real trick to lowering your closing costs is to take a few minutes to understand them. Most of my clients tend to glaze over when I try to explain each charge on the settlement statement.
They tend to fixate on the one number at the bottom of the paged that says "total closing costs". Doing this opens the door for tricky lenders.
There are six different sections of closing costs outlined on a Good Faith Estimate (sample GFE) . It is impossible to compare closing cost from lender to lender without looking at a GFE. It puts all of the lenders on a level playing field. I highly suggest that you insist that each lender you speak with prepare one for you.
We have outlined the six sections of closing costs below and have broken them down line by line. Notice, all sections of the closing cost are the same from lender to lender except for the "800" block of fees.
When comparing lenders the ITEMS PAYABLE IN CONNECTION WITH LOAN "800" are the only fees you should look at to accurately compare what each lender is charging you. The third party costs are what they are.
These costs are the lenders fees. They represent overhead and profit to the mortgage lender. All other fees below this group of numbers will becharged by third parties. When comparing the lenders costs this block is essentially the only one you need to compare.
ITEMS PAYABLE IN CONNECTION WITH LOAN:
- 801 - Loan Origination Fee - This fee represents profit for the lender/ broker.
- 802 - Loan Discount - This is an up front charge paid to the lender to get a lower mortgage rate – same as “buying the rate down”. However some use it like an origination point.
- 803 - Appraisal Fee - This is the cost of the independent appraisal. It is usually paid by the buyer
- 804 - Credit Report - This is the cost of the credit report
- 805 - Lender's Inspection Fee - This is the lender’s cost of inspecting a property – some may double check the appraisal provided by an independent appraiser. Usually a junk fee.
- 808 - Mortgage Broker Fee - This is the up front charge that a mortgage broker charges. Brokers can also earn a “rebate” from the lender which is not listed here.
- 809 - Tax Related Service Fee - Lender fee, usually small, for handling tax related matters.
- 810 - Processing Fee - This is the charge for processing the loan – collecting your application, running credit, collecting pay stubs, bank statements, ordering appraisal, title, etc.
- 811 - Underwriting Fee - This is the cost of the loan underwriter (approver)
- 812 - Wire Transfer Fee - This is the cost of wiring the money around, which is usually done by the escrow company.
- 813 - 825 - These are rare lender costs of a specific nature and should be labeled accordingly.
ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE 900's
- 901 - Interest for days X $ per day - This fee assumes that you close on a day other than the first of the month. As you may or may not know, all lenders set everyone to pay on the first of each month. Should you close on the 15th of the month you will have 15 days of interest added to the loan until your first payment.
- 902 - Mortgage Insurance Premium - This is the prepaid mortgage insurance premium, if you have MI. This is the insurance premium some lenders charge for loans with little equity.
- 903 - Hazard Insurance Premium - This is your home’s hazard insurance being prepaid.
- 905 - VA Funding Fee - This is the Veterans Administration funding fee, which is something you will not incur unless you go through a VA program
RESERVES DEPOSITED WITH LENDER
These costs are NOT fees. These costs represent money that is paid for you on your behalf to your escrow account to pay your taxes and insurance. If you are refinancing, the amount here will roughly match the funds your already have in your current escrow account. If you are not escrowing, they represent the current taxes and insurance that are due on the property.
- 1001 - Hazard Insurance Premiums # months @ $ per month - This is any prepayment of your future hazard insurance expense into an escrow account. If you have an existing escrow account it should roughly mirror that account.
- 1002 - Mortgage Ins. Premium Reserves months @ $ per month - This is any prepayment of your future mortgage insurance expense, very unusual.
- 1003 - School Tax months @ $ per month - This is any prepayment of your future school tax expense, very unusual.
- 1004 - Taxes and Assessment Reserves months @ $ per month - This is any prepayment of your future tax expenses, such as property taxes.
- 1005 - Flood Insurance Reserves months @ $ per month months - This is any prepayment of your future flood insurance expense. Only if your home is in a flood zone and you elect to "escrow" this insurance.
- 1101 - Closing or Escrow Fee - This is the cost of escrow. This is the service of a neutral party that actually handles the money between all the different parties in a real estate transaction, including: the lender, the buyer, the seller, the agents, notary, etc. This is often done by the “Title Company” – a related entity in the same office that provides title insurance.
- 1105 - Document Preparation Fee - This is the charge for preparing the loan documents. Lenders often email the loan documents to the escrow company, which in turn prints them out and reviews them before signing.
- 1106 - Notary Fees - This is the cost of the notary. This is to have all of the legal documents surrounding this transaction notarized.
- 1107 - Attorney Fees - Legal fees, some states require that all loans be closed by an attorney.
- 1108 - Title Insurance - This is the cost of insuring the title of the property. If there is a question about title (who really owned the property), after the transaction is done then this insurance protects the lender from future problems
1200 GOVERNMENT RECORDING & TRANSFER CHARGES
- 1201 - Recording Fees - This is the cost of updating relevant government records.
- 1202 - City/County Tax/Stamps - Unavoidable government charge that varies from county to county.
- 1203 - State Tax/Stamps - Unavoidable government charge that varies from State to State.
1300 ADDITIONAL SETTLEMENT CHARGES
- 1302 - Pest Inspection - This is the cost of the pest inspector. Their purpose is to document the state of the property that the lender is making the loan on.
- Other charges - These can be additional charges that change within different loan sources Pay particular attention to these charges, but they can also be listed in other sections.