Closing Cost Explained

By: CLA Title And Escrow

Below is a list of what makes up closing cost

Closing Cost ExplainedCommissions

This is usually six percent, divided up equally between the buyer and seller agents. This is what the agents are looking for when handling properties, and is the only payment they will receive throughout the whole process.

The seller typically handles this, unless dictated otherwise in the sales documents. The second most common arrangement is for the expenses to be split equally between the buyer and seller. These costs are not included in the lender’s ‘good faith’ in lending estimate.

General Loan Fees

Loan Origination Fee

This fee is usually just one percent of the total loan amount. In financial circles, this is called a ‘point.’ The mortgage company usually handles this administrative fee, unless specified otherwise in the mortgage contract.

The buyer usually handles this, though in some areas it may be split between the buyer and seller.

Loan Discount (Points)

A loan discount may be given for every ‘point’ of the loan that is paid in advance. Paying multiple points will result in both lower principal payments, and a discount on the interest rate charged. If at all possible, pay as many ‘points’ as possible, for you will be saving a great deal of money over the life of the loan.

The buyer usually handles this, unless the seller agrees to help in some way.

Application Fee

This fee is charged by the lending institution, and can range between $300 and $500. In certain circumstances, this fee may be even higher.

The buyer usually handles it, since it is a core component of the mortgage process.

Appraisal Fee

This fee is associated with the third-party appraiser, who is trusted with stating a fair value for the property. This fee is normally around $300, though that varies between different regions and jurisdictions.

The buyer, regardless of whether or not the home actually is sold, usually pays this fee.

Credit Report Fee

A credit report verifies three major things before a home can be sold. The first is credit-worthiness for the lender. The second is for income verification. The final report makes sure there are no other properties tied to the buyer that are distressed (in the process of foreclosure.)

Under normal circumstances, this fee is only $25. However, different agencies have been known to charge more.

Lender’s Inspection Fee

This fee is associated with new construction. This pays an independent inspector to verify that the new home will be habitable, and was constructed with materials worth the assessed value. The homebuyer pays this.

Mortgage Insurance Application Fee

Mortgage insurance is only required in instances where the buyer paid less than twenty percent of the home value as a down payment. There is usually a fee for starting this process and the insurance payments last until the equity in the home exceeds twenty percent.

Assumption Fee

In rare situations, the mortgage is transferred with the home sale. This means that everything merely switches parties, rather than having the old note closed and a new one opened. There is a fee associated with this, though it is possible to negotiate it down to a minuscular amount.

Lender’s Attorney Fee

If the lender brought an attorney on board to help clarify some sticking point, the cost is passed down to the homebuyer. The basic, most common, fee is $400. However, the more expensive the home the higher this fee can go.

Advance Loan Fees

These are the fees due when the loan starts. This includes the down payment, initial insurance payments, and any taxes associated with the transaction.

Interest

Most mortgage companies require the interest that will be acquired on the loan before the first payment be handled in advance. The buyer typically handles this, since it is a mortgage related issue.

Mortgage Insurance Premium

Depending on the creditworthiness of the buyer, a mortgage company can either require the first year of mortgage insurance be paid in advance, or even the entirety of the insurance (up to the 20% mark) be paid at closing.

Hazard Insurance Premium

This is charged for homes built in areas that they probably should not be built in. Hurricanes, earthquake, and volcanos all qualify in rendering a property an insurance hazard.

Flood Insurance Premium

Depending on the state, most mortgage companies require homes in traditional flooding zones to carry special flood insurance.

Earthquake Insurance

Depending on the state, most mortgage companies require homes in traditional earthquake zones to carry special earthquake insurance.

Reserve Account Funds

It is common for there to be a special escrow account set up, guaranteeing that funds will be available to cover property taxes and homeowner’s insurance. This is handled in advance, and is normally slightly higher than the actual expected amount to cover instances of delayed payment.

Homeowner’s Insurance

If the mortgage company covers the homeowner’s insurance, then two months’ worth of premiums will be required.

Mortgage Insurance

If the mortgage company covers the mortgage insurance, then two months’ worth of premiums will be required.

City Property Taxes

If the mortgage company covers the property taxes, then two months’ worth of expenses will be required.

County Property Taxes

If the mortgage company covers the property taxes, then two months’ worth of expenses will be required.

Annual Assessments

If your homeowner’s association requires an annual assessment, then this fee may be included in the loan payment.

By John Coester