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Closing Costs Explained

Many of my clients ask me about closing costs when purchasing a home.  Your lender is the best source of information as fees vary from one lender to another and also vary with the type of loan you choose.  Here are at least some of the expenses you can expect to incur.

Loan Origination Fee: This fee covers the lender’s administrative costs in processing the loan. It is a one-time fee, sometimes calculated as a percentage of the loan or as a fixed dollar amount.   Fees vary from lender to lender, so it’s important to shop for the best deals.  Keep in mind, however, that sometimes you get what you pay for.  You need a lender who can provide a high level of service, respond in a timely way, and help you through any challenges that may surface during the loan process.  Sometimes, who you chose as your lender can make the difference between getting your home or maybe not.  I am happy to refer lenders that I’ve worked with who are up to the challenges of today’s mortgage market.

b1Loan Discount: Often called “points”, a loan discount is a one-time charge used to adjust the yield on the loan to what market conditions demand. One point is equal to 1% of the loan amount. This fee is rare when interest rates are low.

Appraisal Fee: This is a one-time fee that pays for an appraisal, which is a statement of property value for the lender. Fees vary from appraiser to appraiser, but they tend to run in the neighborhood of $400 to $500.  In compliance with changes made in the lending process, the appraiser for your home will be randomly selected from a pool of appraisers approved by the lender.

Credit Report Fee: This one-time fee covers the cost of the credit report that is run by an independent credit reporting agency.

Title Insurance: There are two types of title insurance policies: a lender’s title policy (which protects the lender against loss due to defects on title) and a buyer’s title policy (which protects you). These are both one-time charges.  Your lender will require you to purchase a lender’s title policy.  A buyer’s policy is optional, but before waiving this charge, speak with your title attorney to understand the value and benefits in owning this type of insurance. Your title attorney can explain differences in insurance policies and coverages and why this type of insurance coverage is so common, not just in Louisiana, but across the US.

Miscellaneous Title Charges: The title company may charge fees for a title search, title examination, document preparation, notary fees, recording fees, and a settlement or closing fee. These are all one-time charges and they can add up.  Talk to your title attorney so you understand all the charges involved and why that step in the process is important.

Document Prep Fee: There may be a separate, one-time fee that covers preparation of the final legal papers, including the mortgage and the title.

Lender Fees: Other possible lender fees may include an underwriting fee, a flood certification fee, and other miscellaneous fees that should be disclosed by your mortgage lender at loan application. These fees vary from lender to lender.  So, ask questions and feel comfortable about the process.

Prepaid Interest: Depending on the time of month your loan closes, this charge may vary from a full month’s interest to just a few days’ interest. If your loan closes at the beginning of the month, you will probably have to pay the maximum amount. If your loan closes at the end of the month, you will only have to pay a few days’ interest.

PMI (Private Mortgage Insurance) Premium: Depending on the amount of your down payment, you may have to pay an up-front fee for mortgage insurance which protects the lender against loss due to foreclosure. You may also be required to put a certain amount into a special reserve account held by the lender for PMI.

Beginning of the Escrow Account: Your lender will typically have an account where your property taxes and property insurance will be held. Typically, this account will be started with taxes approximately equal to two or three months in excess of the number of months that have elapsed this year. (If 6 months have passed, they will collect 8 – 9 months of taxes.) Your property insurance will be collected one year in advance, plus two or three months will be kept in your escrow account.  The escrow of property taxes and insurance is there to protect the lender in the event of default on your loan or increases in your homeowners insurance and property taxes.

Deposit: It is important to have an understanding of the money you deposited when the purchase agreement was signed by all parties.  In Louisiana our purchase agreements clearly state the conditions under which a deposit can be refunded and when in the home buying process a buyer can “back out” without penalty.  Also understand that treatment of a deposit and where the deposit is held is part of the negotiation process.  This is something you should discuss with your agent.

Reminder: For the closing, you must bring a valid picture ID, a cashier’s check for any amounts over $2,500 made out to the title company, or arrange for a wire transfer of funds needed for closing.  The title company that closes the loan will let you know how much money to bring or wire in advance

There’s certainly a lot to know! Have additional questions?  I’m happy to introduce you to lenders, title companies and attorney’s I’ve worked with who have done an exemplary job for my clients.