Understand Your Closing Costs
Anytime you purchase or refinance, you are going to pay closing costs. Closing costs come in three main categories. These are broker fees, lender fees, and title/escrow fees. The first set of fees comes from your broker. Typically the largest of the fees will be the origination fee or “points.” One “point” is equal to one percent of your loan amount. So if your broker is charging one point and your loan size is $300,000, then you will pay $3,000 in origination to your broker. In addition to origination or points, you will usually pay a few smaller fees to your broker as well. For example, often times your broker will charge you a credit report fee, a processing fee, and an application fee. Your broker may charge a few other small fees as well. Sometimes your broker will ask you to pay your appraisal fee directly to the broker because they have already paid the fee. Typically though, your broker will ask you to pay for your appraisal out of pocket at the time of your appraisal inspection. Usually this is the only fee you will up front. The remainder of your closing costs is paid at the time of closing.
The next major set of fees will come from your lender. Standard lender fees include an underwriting fee, a document prep fee, a tax service fee, a flood certification fee, a wire fee, and sometimes discount points. Discount points are only paid when you decide to “buy down” your interest rate. This means that you are paying a premium to the lender in exchange for a lower interest rate. Underwriting fees and document prep fees off set the lenders costs for underwriting your loan application and preparing all of your loan documents when the file has been completely approved. The tax service fee and flood certification fee are simply fees that pay for the lender to get official tax information and official information as to whether your property is in a flood zone and therefore requires flood insurance.
The final set of fees comes from title and escrow. The main title and escrow fees you will see include title insurance, an escrow fee, endorsement fees, a reconveyance fee, an email fee, and overnight delivery or courier fees. Title insurance will almost always be your most expensive title fee and this fee varies based on the size of your loan. Larger loans require more insurance and therefore have a higher title insurance fee. Your escrow fee can also vary based on your loan size. That is the case when you are purchasing your home. However, when you refinance you will typically pay a flat fee for escrow, and this is much lower than the escrow fee you will pay for a purchase. The newest fee added on by title companies is an email fee. Over the last few years almost all lenders have switched from overnighting their loan documents to the title company and instead now email the documents to the title company. So now title companies have to print out multiple sets of loan documents for each borrower and so title companies have begun to charge a very small amount for this service.
In addition to the above mentioned fees, there are a few more you may come across. The first is a recording fee. This fee goes to your county or municipality so that they can officially record the transfer of the property. Another fee you may come across is a pest inspection fee. This will only affect purchases and not refinances. Lawyer fees may also come into play depending on what state you live in.
When you purchase a home, then you will need to pay your closing costs out of pocket when you close escrow and sign your loan documents. However, when you refinance, typically the fees are not paid by you out of pocket. Instead, they come out of your loan proceeds. At the time you sign, you will receive what is called a HUD-1 Settlement statement. This statement line items each fee and shows how much the fee is and to whom the fee is paid. Overall, the most important thing to remember when it comes to closing costs is to obtain a Good Faith Estimate when you first start the application process. And then review your closing costs with your broker before you go into sign your loan documents. If these fees have changed, then your broker should provide you with a new Good Faith Estimate. Finally, remember to compare your Good Faith Estimate to your final Settlement Statement. And never be afraid to ask for clarification of a cost you don’t understand. It’s your money.
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