In this installment in the series of articles that focus on common mortgage terms and what they really mean to the consumer, I will focus on the typical closing costs associated with purchasing a home and obtaining a mortgage.
Appraisal fee: For usually about $350, a licensed appraiser will create a detailed report that encompasses his professional opinion of the value of the property. The appraiser uses recent sales of similar homes in close proximity to the property to determine a reasonable value.
What it means: An appraisal gives the purchaser a good idea if he is paying too much for the property when compared to recent sales of similar homes. For example, if there are three similar homes that sold within six months in a price range between $400,000 and $425,000, an appraiser might valuate the subject property within this range.
If the house is under contract for $450,000, the buyer has an indication that he may be paying too much.
An appraisal report also protects the buyer because most contracts are contingent upon the property appraising at or above the contract price.
Credit report fee: Anywhere between $15 and $40. A credit report taps the three national repositories and provides information to the lender about your debts and payment history. A credit report will also provide credit scores, which are comprehensive “measurement” of an applicant’s credit worthiness.
What it means: The lower an applicant’s credit scores, the harder it will be to obtain a mortgage.
Underwriting fee: Sometimes called a commitment fee, this is simply a lender “junk” fee. While many in the media encourage consumers to refuse to pay such fees, my experience has been that lenders don’t waive these fees.
What it means: An applicant should know all lender fees upfront at the time of application. If the loan officer doesn’t disclose the lender fees upfront and they show up as charges at settlement, the borrower should, indeed, refuse to pay them because they are direct fees charged by the lender.
The loan officer is required to provide an estimate of closing costs at application. While he may not know the exact amount of certain third-party fees, such as an attorney fee, he should certainly know all the fees directly charged by the lender.
Origination fee: This is an antiquated term that used to be an unavoidable charge of 1 percent of the loan amount, described as the cost of originating the loan.
What it means: Avoid paying origination fees.
Discount points: Technically, discount points are prepaid interest in order to bring the interest rate down. One discount point is equal to 1 percent of the loan amount paid at settlement. A lender may offer 6 percent with one point, 5.75 percent with two points, or 6.25 percent with zero points.
What it means: The more points, the lower the note rate. It usually takes at least eight years to recoup the cost of the points in the form of a lower interest rate.
In a practical world, most loans aren’t held long enough to validate the payment of points. Avoid discount points.
Title insurance: A one-time fee that protects the buyer from a clouded title to the property. The fee varies and is usually between $3.50 and $4 per thousand dollars of the purchase price.
What it means: While some consumer advocates have criticized the cost of title insurance as excessive because the title agent or settlement attorney receives the bulk of the fee, the fact is that while it’s unlikely a homeowner will ever need to make a claim, title insurance has come in handy to the few homeowners who have faced problems.
As to the amount of the fee, settlement attorneys and title agents carry considerable liability in a real estate transaction, and they need to be compensated accordingly.
Attorney or settlement fees: Usually about $400, these charges come from the settlement company. The services provided range from conducting the actual settlement and getting the papers signed to recording the deed and note, providing any payoffs to lenders and conducting the title search.
What it means: The settlement agent or attorney charge accordingly for services.
Recording fees/transfer tax: These are government charges and are often the most expensive item on the closing cost list. Charges vary from state to state and county to county and can run into the thousands of dollars.
What it means: See if there are any exemptions for first-time home buyers.
Survey fee: Usually about $300, a professional surveyor will create a boundary-line survey to ensure that there are no encroachments on the property. Many lenders don’t require surveys.
What it means: If the lender or title company doesn’t require a survey, the buyer doesn’t need one. However, it never hurts to have a survey of a property you will own.
Prepaid interest/escrow deposits: These charges are not considered closing costs, but they are items that need to be paid at settlement.
What they mean: Prepaid interest is the interest charged from the day of settlement to the end of the month. The first actual mortgage payment isn’t due until the end of the first full month.
An escrow deposit is a lump sum that the lender collects for future payments of real estate taxes and homeowner’s insurance.
Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@ pmcmortgage.com).
Please read our comment policy before commenting.