CLOSING COST TERMS

 

Closing Costs- Expenses (in addition to the down payment) incurred by the buyer when a home is purchased. Common closing costs include escrow fees, title insurance, document recording, and loan points and fees. Often, the seller/builder will pay a portion of these fees. There are two categories: non-recurring and recurring costs.

 

NON-RECURRING COSTS:

Loan Origination Fee- This fee, also know as points, is a one-time fee charged by the lender to arrange the financing for the property. The amount of points paid for the loan includes the lenders fee and the cost to buy down the interest rate. One point equals one percent of the mortgage amount. Typically, lenders may charge anywhere from zero to two points. Loan points are tax deductible when paid by the buyer at closing. Often, points are referred to as a loan origination fee.

Processing Fee- This fee is paid to the lender/broker to process the paperwork for the loan (i.e. verification of deposits, ordering and analyzing the credit reports, opening escrow and title, etc.)

Appraisal Fee- This fee pays for a written statement of the value of a property expressed by a licensed real estate appraiser.

Credit Report- This amount covers the cost of a credit report, which demonstrates how the borrower has handled other credit transactions.

Tax Service- An outside service contracted by the lender to investigate and confirm property taxes and current throughout the life of the loan.

Escrow Fee- The escrow fee pays for the services of the escrow company/office. Other fees that are charged by escrow are notary fees, messenger fees and document preparation fees specific to the transaction. It is escrow's job to hold documents and money as a neutral third party. They also make sure all the terms of the escrow are complied with.

Underwriting Fee- This fee is charged by the credit grantor for evaluating a loan application and all supporting documentation to determine if it meets the lender's/investor's criteria.

Document Preparation Fee- A fee that covers preparation of final loan documents; such as a mortgage/deed of trust, promissory note, and all the legal paperwork required.

Association Transfer Fee- This fee is charged by the homeowner's association property management company for the transfer of the homeowner's association membership.

Title Insurance/Endorsements- This charge is for insurance to protect the buyer and the lender against losses arising from disputes over the ownership of a property.

Recording Fee- These fees are for the process of filing documents (such as your deed) at the recorders office.

PMI (Private Mortgage Insurance) Premium- This expense is for the insurance issued by private insurers which protects lenders against a loss if a borrower defaults on a mortgage with a low down payment. PMI is normally required on mortgages with down payments of less than 20 percent. PMI is paid in monthly installments based on the size of the loan and the loan-to-value ratio. For some loans, a twelve-month reserve (called a premium) is paid in advance, at closing.

Lender Paid Broker Fee- This fee is paid by the lender to the broker outside of closing.

 

RECURRING COSTS:

Estimate for Advanced and Accrued Interest- Lenders usually require that borrowers pay at settlement the interest that accrues on the mortgage from the date of the loan funding to the beginning of the period covered by the first month's payment, usually the first of the month.

PMI Impounds- An account established by a lender to collect a borrower's mortgage insurance payments. PMI impounds are normally required on mortgages with down payments of less than 20 percent. For some loans, a one year premium is required to be paid in advance, at closing.

Fire/Hazard Insurance Premium- This premium is for insurance that covers the property from damages that might materially affect its value. The lender requires one year paid in advance at the close of escrow.

Property Tax Impounds- At the close of escrow the lender may require a reserve account for property taxes so that they have enough to pay property taxes when due. The amount of the reserves required varies based upon the proximity to the date property taxes are due.

Property Tax Proration- The proportional division of a tax levied by the county or local authority based upon the value of real estate. The buyer generally reimburses the seller for property taxes paid in advance by the seller based upon the date of the close of escrow. The escrow officer coordinates the prorations of the property tax.