Understanding Closing Costs

lr1_430Application Fee: Fee charged by the lender to offset fixed costs related to mortgage loan processing such as appraisal, credit report, and underwriting.

Closing Fee: The fee charged by the closing agent who prepares the closing documents and closes the loan on behalf of the lender.

Commitment Fee: This is often called the origination fee and is generally computed as 1% of the mortgage amount

Discount Points: Each point is equal 1% of the mortgage amount. Points are used by the lender to adjust the yield on the mortgage when it is sold to an investor.  By paying more points, the borrower can obtain a lower mortgage interest rate.

Funding Fees: Normally applicable on VA loans only, equal to 1% of the loan amount. The fee is due at closing or may be added to the loan amount to be financed.

Homeowner’s Insurance: One year premium is due in advance at time of closing.

Mortgage Insurance: Insurance required by the lender when the down payment is less than 20%. In the case of loan default, this insurance reduces the lender’s loss.

Pre-payables: Adjustment to escrow accounts from the date of closing to the date of first payment.  Interest is paid through the end of the month of closing, taxes are paid through the end of the month of closing plus the following month. Two months of PMI (Principle Mortgage and Interest) are collected. Two months of homeowner’s insurance may be collected. A homeowner’s insurance policy must be provided along with a receipt showing that the first year’s premium is paid.

Processing Fee: Fees charged by the escrow processor, either working for the escrow company, title company, or real estate company, for administrative escrow services performed from the point of contract through closing.

Recording Fees: Fees charged by state or municipal entities for entering the closing documents into public record.

Survey Fee: Is usually required and is used by the lender to check for encroachments from within or from outside the subject property.