Closing Costs are the expenses of the borrower at the time of closing of the mortgage loan. These costs comprise of the following charges.
- Loan origination fee
The origination fee includes the cost of making the mortgage loan. It is also known as origination point. These points are not tax-deductible.
- Discount points
These are prepaid interest demanded by lenders in return of lower interest rate charged on the loan amount. Each discount point equals 1% of the loan and reduces the loan amount in most cases by 0.125%. These points are tax-deductible.
- Appraisal fee
The Appraisal fee is charged for making an estimate of the value of the property which is kept as security for the mortgage loan. An appraiser appointed by the lender carries out the appraisal. The loan amount is based on the appraised value or the sale price, whichever is the least.
- Credit report fee
Lenders ask for a credit report of the borrower from any of the three credit reporting agencies like Equifax, Experian and Trans Union. This is mainly done to assess the credit worthiness of a borrower. Lenders demand a fee for reviewing the credit report.
- Attorney's fees
These fees are paid to an attorney for preparing and reviewing all the documents needed to close the loan. The attorney demands charges for conducting the closing on behalf of the lender.
- Survey fee
Lenders require a fee for conducting a survey which includes a verification of the official boundaries of the property.
- Pre-paid items
Lenders often require the payment of prepaid items like insurance premiums for private mortgage insurance, homeowner's insurance including hazard insurance, and real estate taxes. The maximum amount that a lender can demand from a borrower is limited by the U.S Department of Housing and Urban Development.
- Title fees
Title fees include charges for title search and title insurance. Through a title search, the lender verifies who the actual property-owners are and whether the property is free of liens. The title search company then issues a title insurance which protects the title of the property against any unpaid mortgages and judgments. In case a claim is made against the property, the title insurance provides legal protection and pays for court fees and related costs. The title insurance policies are of two kinds - lender's policy and borrower's policy.
- Loan processing fee
It includes fee charged by the lender for preparing the mortgage loan application and other legal documents related to the mortgage.
- Recording and transfer charges
These charges include fees paid to the local government for filing official records of a real-estate transaction.
The closing costs vary from one lender to another across different states and counties. Often the seller may finance the closing costs. Generally, it amounts to 3%-5% of the loan amount. Borrowers get a rough estimate (Good Faith Estimate) of the closing costs within 3 business days of applying for the mortgage loan. They also get a list of the actual costs a day before closing. The document with the actual loan fees is known as the HUD-1 Settlement Statement.
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