Closing Costs

One of the areas that borrowers ask about most often is closing costs. Some people understand what the items are that make up the closing costs and just what a quotation. Some people think of closing costs as some disease-like "death and taxes" thing and just want to know "what the damages are". Some people have had bad experiences where they found that the actual closing costs were a lot higher than they were led to believe.

One of the problems that people have with understanding closing costs is that the bleeping forms mandated by the government at just a bit confusing. I would like to explain closing costs in a manner that makes most sense to me.

Closing costs fall into four types:

1) non-recurring closing costs
2) points
3) recurring closing costs
4) fees associated only with purchase transactions

1) Non-recurring closing costs

Lenders Title Insurance - whether you are purchasing or refinancing your existing loan the lender will require a policy of title insurance. This gives them a guarantee (by the title insurance company) as to what liens are associated with the property the day the loan funds. If they miss something, it's their problem.

Escrow (or attorney's) fee - an escrow company performs, essentially, two functions:
getting the paperwork together for you to sign and managing the escrow funds. They get all the money from everyone who has to put money in and they dispense it to whomever needs to be paid.

Appraisal Fee - this goes to the appraiser. Often it is paid at the time of inspection. Otherwise it is collected at escrow.

Appraisal Review Fee - If the appraiser is not on the list of approved appraisers for the lender or if the value seems, shall we say, a bit creative, or if it is a large loan the lender will request that another appraiser “reviews" the appraisal. This may be a desk review (just going over the paperwork and the databases) or a field review (going out and taking a look at the property).

Broker’s origination fee - this is a number that varies widely. In some state a common practice is for the broker to charge a 1% "origination fee". Some brokers require an "up front" non-refundable deposit.

Lender's Fees - these vary over a wide range and are sometimes divided into 2 or 3 pieces. This is what the lender is charging to underwrite your file, print the documents and fund the loan. This varies from a low of $300 to as high as $850.

Flood Certification - every little bit of the old USA is divided into FEMA flood zones. This specifies how susceptible the lot is to flooding. If it is in a flood zone you need flood insurance. The Flood Certification is an assurance to the lender as to what the flood zone classification is. The Flood Certification is not flood insurance, it is a guarantee (in most cases) that flood insurance
is not needed.

Tax Service Fee - this goes to a data processing entity which assumes the responsibility of informing your lender if you become delinquent in your property taxes. This is in no way the same thing as an escrow or impound for taxes.

Credit Report - this is what the broker and/or lender pay to get your credit report. The
credit reports used in the mortgage industry are called RMCR's and cost about $18-$50.

Statement Fee - If this is a refinance, your old lender may charge as much as $60 for providing the payoff information to the escrow agent. For the work done, this little fee is - in my opinion - the biggest "burn" in the whole industry.

Reconveyance Fee - charged by your old lender in the case of a refinancing. This is the cost of generating and recording the Deed of Reconveyance, a public record that your old loan is paid off.

Notary and Recording Fees - someone is going to charge you to notarize certain of the loan documents and the Country Recorder is going to charge the escrow company for recording them.

Other Stuff - this is not too elegant but I always allow another $150 estimate for
things such as courier fees, Overnight Delivery and wire transfer of the loan funds.

Taxes on Loans - some states (e.g. Florida, have taxes even on refinance transactions). This may make refinancing a lot less attractive in these places.

2) Points

This is a one-time fee that you can spend to bring your interest rate down over the life of the loan. This is a "you pay me now or you pay me later proposition". I suggest that you calculate the "recovery time" for the extra expense and decide if it is worth it. For relocation situations, your employer may be paying this. Shut up and let them do so.

3) Recurring closing costs

This is the stuff that you have to pay anyway but will pay early because of the timing of your loan. This is one area that you must pay attention to when refinancing because
1) people's quotes may not be consistent and
2) if you do not make allowances you may not have enough money to close.

Recurring closing costs consist of:

a) prepaid interest. Take a time out and remember this: mortgage interest is paid in arrears. That is, when you are making your December payment, it is for the use of the money for November. If your loan is funding on December 15 and the first payment date isFebruary 1, then you must pay interest on the new loan from December 15 to December 31. Thus, the expression "prepaid interest". If you are refinancing you must pay interest on the old loan until the day that the old lender receives the funds. This usually has the effect of creating an "overlap" of at least 2 days during which you are paying interest to both lenders. The mitigate this we, as a practice, avoid funding loans on Fridays. Otherwise, you must pay at least 4 days "overlapping interest".

b) Property Taxes - this is a matter of timing. In California, the property "tax year" runs from July 1 - June 30 and one's property taxes are due in 2 installments. The 1st is delinquent on December 10. If you are refinancing in October and the first payment date on your loan is not until December than you can be delinquent on your taxes before your first payment is due. Bottom line is this: if you have not made your 1st installment and the 1st payment date is in December or later that you must pay your first installment at escrow. If it is getting close to that date, your loan officer and the escrow company must coordinate to make sure that the payment is made and made only once. Every year there is at least one borrower who says: "Well, I put my check in the mail to the tax collector".

This is not going to work. The escrow officer must be able to verify that the tax collector has received and posted the payment.

c) Insurance - when you loan is funding your lender may require that 3-4 months of
"fire" insurance be in place. This is important in the case of refinancing when you have, say, 3 months left on your policy. You will have to plan on paying another half year at least.

This must be coordinated between the escrow officer and your insurance agent or broker.

If your property is a condo and insurance is paid thru the homeowners association this is not relevant.

d) Impounds - If you are refinancing near the time when your tax payment is due (the discussion above) this is another pain in the neck. Your old lender may have all or most of your tax payment impounded but will be unwilling to part with it before they are paid off. Thus, you have to pay for one installment of your taxes and will be refunded the impound from your old lender.

Apart from this detail, impounds consist of a certain number of months of PMI, taxes and insurance.

4) Fees associated with purchase transactions These include: a) an owner’s title insurance policy. This you will keep as long as you own the property. If you refinance, you will not need a new owner's policy but you will need a new lender's policy. This is often paid by the seller.

b) inspections - termite, roof, well & septic (for rural property), surveys and heaven knows what else.

c) Transfer Fees - these are charged by the county and municipalities, vary greatly and are most often paid by the seller.

d) Prorations - the seller may have prepaid part of the property tax for the period during which you own the home and will be entitled to a reimbursement from you.

These "fees associate with the purchase" bring up a confusing matter. Often the Realtor and the loan officer are communicating partially correct closing cost information to the buyer. If you are buying you should insist that the Realtor and the loan office make clear to you what the real closing costs are.

Note that when we talk about "no cost" loans we are talking only about the "non- recurring" closing costs."