Closing Cost Explanations
When evaluating different lenders and loan programs, it's always important to consider closing costs, as they can add thousands of dollars to the mortgage on your home. Here are definitions for
the most common terms.
801 - Points
1% of the loan amount per point, this is a one-time charge from the lender that you pay to buy down the interest rate on your loan. You can normally secure a lower interest rate by paying more points, however, getting the lowest interest rate does not necessarily translate into getting the best deal. Points are fees that must be included in the calculation of "what is the best deal." Generally, the higher the charge, the lower the interest rate, and vice versa.
803 - Appraisal Fee
Is usually between $300-$800 The appraisal fee covers the cost of a professional appraiser evaluating your home to estimate its fair market value. The appraisal is used to calculate the loan amount as a percent of the property value. This loan-to value (LTV) ratio is one of the factors that dictates whether a lender is willing to approve the mortgage application and whether additional fees may be required (e.g., Private Mortgage Insurance). The cost of the appraisal will depend on the location of your property (rural vs. urban), the complexity of the appraisal and the going rates for appraisers in that area.
804 - Credit Report
This fee covers the cost of a credit report that will be used by the lender to review your credit history and help determine whether to approve your application. Although the fee is collected by your lender, that payment goes to the credit service agency. Because lenders require an independent credit report, we cannot reuse any prior credit reports you may have. One report is required per borrower, unless the borrowers are married to each other.
810 - Tax Service Fee
The lender needs to know that the property taxes are being paid in full and on time because a tax lien would take priority over their lien as a lender. This fee covers the cost of a tax service agency hired to monitor your account. If your taxes are impounded, the agency provides the lender with your tax bills so that the lender can pay your taxes on time. If you pay the taxes yourself, the agency monitors the tax rolls for the life of the loan, and informs the lender if they ever become delinquent so that they can take action to protect their lien position. This one-time fee is set by the lender.
814 - Processing Fee
This fee is a payment to the lender or mortgage company to cover its loan processing costs.
815 - Underwriting Fee
Underwriting is the name of the analysis lenders perform to determine if they are willing to lend you money and under what conditions. Lenders will review a number of factors including your financial situation, your credit history and the property appraisal. This fee covers the cost of reviewing your loan application and is lender-specific.
816 - Document Preparation Fee
This charge covers the cost of drafting the loan closing documents.
819 - Courier Fee
Companies will often charge for the costs of sending documents to various parties using counters or express mail services. These costs are generally based on actual usage and will generally be higher when the process is rushed, but some lenders may use a fixed charge.
820 - Wire Transfer Fee
When your loan funds, it is a common practice for the lender to wire the funds to the settlement provider (escrow holder, title company, or attorney). This is a fast and efficient way to transfer funds in a transaction where time is crucial. The receiving account charges a nominal fee for the wire transfer.
822 - Flood Certification Report Fee
Lenders want to ensure your property (their collateral) is well protected from likely hazards. In addition to requiring hazard insurance to cover events like a fire, they want to know if know if floods are of concern in your area. This fee covers the cost of a report to determine if the property is in a flood-risk area. The Federal Emergency Management Agency (FEMA) designates flood zones to indicate that certain areas have a high risk of flood damage. If your home is located in one of these flood zones, you will be required to secure flood insurance. Most homeowner's policies do not cover flood damage, so a separate policy will be required. This fee only covers the cost of the report.
Title Company Fees/Settlement cost
These fees are not controlled by the lender. They are actually performed by a separate company that you the consumer have the right to choose. If you are refinancing, you can be entitled to reduced title fees by providing a copy of your current title insurance policy and also a copy of the survey of your property. The fees paid to the Settlement/ Title Company often include the following items and vary by state and company:
1101 - Settlement or Closing Fee
This fee pays for the services of the escrow or settlement agent that handles all the financial transfers and payments associated with the transaction. These fees are set by the title company and depend on several factors including the property value and complexity of the transaction.
1102 - Abstract or Title Search
$85 for residential properties
1103 - Title Examination
1104 - Title Update
1108 - Title Insurance: Lender's Coverage
Title insurance guarantees that your home has no other liens on the property. The title company will check that no other entity has a lien, unpaid claim or other restriction on your ownership of the property. The insurance protects the lender in case a lien does exist that the search did not uncover. The premiums depend on the loan amount being insured.
1109 - Title Insurance: Owner's Coverage
Owner's coverage also insures against the possibility that there is an unknown lien on your property and ensures your undisputed ownership. The difference is that is protects the owner and insures the entire value of the property (not just the loan amount). The premiums depend on the property value but if issued at closing with the Lenders Coverage a nominal fee will be charged. This is sometimes called a "Simultaneous Issue." The owner's policy is not necessary in a refinance situation as that policy remains in full force and effect for as long as the owner owns the property.
Unlike other types of insurance which protect a policyholder against loss from some future occurrence (i.e. a car accident, fire etc.), owner's title insurance protects you against some occurrence that has already possibly happened, such as a forged deed somewhere in the title.
The title policy remains in effect for as long as the property is owned by the insured, and only requires a one-time payment to set it up.
1301 - Survey
This is an architectural sketch to the property which shows things such as house and improvement locations, fence and driveway locations, power line and utility easements, overlapping boundaries, flood hazard information, encroachments, and the physical size of the property. Basically, the lender is looking to see that your property (structure and improvements) does not encroach onto an adjacent property and vice versa. The costs for a survey vary with the size and complexity of the property.
1201 - Recording Fees
These fees are required to record the important documents for your transaction (deed, mortgage and release of liens) in the public records. The recordings are done at the county courthouse where the property is located.
1203 - State Tax/ Documentary Stamps
Documentary Stamps on Deed
$0.70 per $100 based on sales price rounded to the nearest hundredth
Documentary Stamps on Mortgage
$0.35 per $100 based on loan amount rounded to the nearest hundredth
1204 - Intangible Tax
$0.20 per $100 based on actual loan amount
Borrowers are required to prepay the following and put taxes and insurance in escrow. These fees are industry standard practices and do not vary greatly between lenders.
901 - Pre-Paid Interest (also called Interim Interest)
Lenders require that you pay the interest due on the new loan from the date of funding to the end of that same month. The interest due is calculated using the loan's interest rate and the appropriate number of days remaining in the month of closing. On an estimate of closing costs a conservative approach would be to estimate 30 days of interest, but on average the borrowers pay 15 days of interest.
903 - Hazard Insurance Premium (Homeowners Insurance)
Lenders will require that you insure the property you are buying, since the property is collateral for the loan. At the time of closing you must pay the entire first year's premium or prove that you already have coverage (i.e., in the case of refinancing). If you are purchasing a condominium, your association policy will already cover your unit and you will not need to purchase a policy. The cost of hazard or homeowners' insurance depends on many factors, including location, property value, types of coverage and deductibles. Although lenders try to make realistic estimates as to what it will cost you for property insurance, you should consult with an insurance company for a more accurate quote.
904 - Flood Insurance Premium
If your property is located in a Flood Hazard Zone, you will also be required to carry flood insurance. The same details that apply to hazard insurance also apply for your flood insurance policy.
An escrow (or impound) account is an account used when the lender will be paying your hazard (homeowner's) insurance, flood insurance and property taxes on your behalf. You prepay the amounts due into the account at the time of closing and the lender pays the costs as they come due. Typically, 1/12 of the annual premium or installment is collected with your monthly payment. The amounts that are normally required are: (1) two months of hazard insurance, and (2) two to three months Real Estate Property Tax Escrow (depends on the date of closing).
1001 - Hazard Insurance Escrow (and Flood Insurance…if applicable)
This impound represents the amount the lender withholds to ensure your hazard insurance and flood insurance policies are paid on time. Typically, the lender will escrow two months of premiums at closing, and then collect 1/12th of the annual premium with each monthly mortgage payment. Although we will estimate your insurance premiums and escrow on the "Good Faith Estimate of Closing Costs," the actual figures will be established by the insurance company you choose to write your policy.
1004 - Property Tax Escrow
Similar in rationale to the insurance escrow, this impound account represents the amount the lender withholds to ensure your property taxes are paid on time. The lender will escrow two to three months of taxes at closing, and then collects 1/12th of the annual premium with each monthly mortgage payment. Both the setup of escrow account and the monthly escrow payment will be based on the actual property taxes which will be verified with the county tax assessor's office.
Special Note on Escrows: Borrowers who desire to maintain their own escrow accounts can do so by adding .25 points to the total points or 1/8%to their interest rate with no additional charge (20% equity requirement).
For people refinancing: Your Property Tax and Insurance escrow accounts need to be set up in such a way that there will be enough in those accounts to pay the full amounts when they come due. That being said, your insurance escrow account will be setup with between 2 and 12 months. How many months will be determined by the anniversary date of your insurance policy(s) and the month you close in. Your tax escrow account will also be setup with between 2 and 12 months. This will be determined by which month you close in. Because you probably have escrow accounts set up with your current mortgage lender, the setup of the new escrow accounts will be a near duplication of your current ones.