Mortgage Closing Costs

What are the closing costs in a mortgage?

Closing costs are the final charges you pay when you get a new mortgage, whether it is a refinance or a purchase loan. They are not necessarily out of pocket. All or some of the charges can be included in the loan.

A real estate purchase is a complex transaction that takes lots of different players to pull off. Each of them usually has their own fees, except the buyer.

For example, in the purchase of the property there may be:

• the seller of the property
• the buyer of the property
• the seller real estate agent
• the buyer real estate agent
• the appraiser
• pest inspectors
• escrow officer
• title officer
• the lender
• the loan broker
• the notary public
• the public filings to update public real estate records

Every part of the process costs money.

Your closing costs are listed in your final closing statement in detail.

When you apply for a loan, within 3 days you are supposed to receive a “good faith estimate” from your lender or broker of what your closing costs will be. This is only an estimate, and may change over time.

It is important to separate your closing costs into several types:

Third party fees

• These are “neutral party” charges that you will incur anyways in a mortgage transaction, such as the fees for a public filing
• Escrow charges – this is the service that a neutral third party (the escrow company) charges for being in the middle of everyone and handling the money in a fair and unbiased manner, in compliance with lender instructions and contracts
• Title insurance – this is the insurance policy that you pay, with the new mortgage lender as the beneficiary. This is a policy that protects the lender from future title issues on your property. Just in case it turns out that the person who sold the house to you was an imposter, didn’t really have title, etc. In case lawsuits are filed by new parties after a transaction claiming to own all or part of the property, this title insurance policy protects the lender. Title insurance costs increase with the value of the property.
• Hazard insurance – this is the hazard insurance policy on the property. The lender wants to make sure the policy is in place and paid up for a reasonable amount of time into the future – sometimes up to a year.
• Document preparation fees, filing fees – these are usually relatively small
• Notary public fee – for notarizing the loan documents

Although there may be some room to maneuver on these costs, they are incurred regardless of who you do your loan with.

Loan fees

• Your broker’s fees can include a percentage of the loan (each 1% of the loan amount is known as a point), a broker processing fee, broker admin fee, etc.
• The lender fees – including underwriting fee, document drawing fee, etc.
• Buy down – this is money you pay up front out of the loan to the lender to get a lower mortgage rate

Prepaid charges

• Lenders may require you to prepay several months of property taxes, a couple of weeks of interest, etc. These are prepayments of bills you would pay anyways, so in that sense it is different than other charges.

This is a basic summary of fees. As you can tell, the list is fairly long. There are items you can negotiate on and shop around, and then there are items that are pretty constant across different service providers. One loan broker may charge you a point up front on a $500,000 loan, another may charge only half a point, so that is a $2,500 difference (all other things being equal).