Understanding Closing Costs | Closing Costs for a Mortgage
Are you looking for an explanation when it comes to understanding closing costs? Closing costs for a mortgage can be easily explained in a very simple and straightforward manner. This blog will help answer the questions:
- When are closing costs are due?
- Can closing costs be included into a mortgage?
- And with understanding closing costs.
Closing Costs for a Mortgage Made Simple
In some cases, closing costs can be overly complex and we are going to make it simple. I will go over a Loan Estimate, which is over disclosed for compliance purposes – these are not the real fees associated with the loan. There are several sections on a Loan Estimate:
- 1st section: A. Loan Costs.
- 2nd section: B. Services You Cannot Shop For.
- 3rd section: Services You Can Shop For.
- 4th section: Closing costs estimate.
- 5th section: Prepaid.
- 6th section: Initial Escrow Payment at Closing.
- 7th Section. H Other Costs.
Here is an example of a Loan Estimate with its variances: essentially, the closing costs, aside from your down payment, are broken into two categories:
- Pre-paid items, also known as “other costs” on your closing disclosure.
- Closing fees from banks, title companies, attorneys, appraisals and any “fees” that you paid in connection with obtaining your loan which are called “loan costs” on your closing disclosure (CD).
Here is an example of a Loan Estimate with its variances:
Origination Closing Costs for a Mortgage
In the 1st section “A”, let’s start by examining “Loan Costs” first as they are the actual costs and fees you paid for obtaining your loan. You will incur your first loan cost the moment you pay for a credit report, appraisal or “application fee”. It makes no difference when you pay for any loan costs that are required to fund your mortgage loan. You will still see the complete charges on your final closing disclosure, but they will be distinguished as paid in advance of the close.
The loan costs typically paid at closing will consist of bank/lender fees, discount or origination points, any FHA or VA related “up-front” mortgage insurance premium (MIP), title company charges, escrow account, funds and any other 3rd party expenses like a home inspection.
Appraisal and Credit Report Fee
The next section are costs that you cannot shop for, which typically is the appraisal and credit report costs. Under rules, most lenders must use an appraisal management company to order the appraisal, too keep it arms-length. This assures the lender and appraiser are not involved in any improper conduct and why the exact cost is not known and is usually slightly over-estimated. The credit report cost is usually the exact fee the lender will be charged by the credit reporting company that provides your report.
Title Closing Costs Charges
The 3rd section is where you will find your title charges. These are costs you can shop for, but usually the lender will have a greatly discounted charges, so it is rare that a borrower dictates the title company. I also want to add that sometimes lenders do use title companies that charge a lot more than others, so it is important to make sure they are reasonable.
Understanding Closing Costs are Over Disclosed
Section “D” is simply an estimate of the total closing costs you will have to bring to close. It is important to acknowledge that these numbers are not the actual costs, but actually a high estimate. This is done intentionally because the lender may be responsible for any of your costs above the amounts they disclosed to you. Thus, these costs can sometimes be greatly exaggerated. At this point, you can go over the actual fees that can be charged on your loan with your Loan Officer.
Government Recording Fees, Prepaids, and Escrow
In the Loan Estimate sections “E” – “J” you will find other costs, such as:
- Any government recording fees.
- Transfer taxes or stamps.
- The initial deposit for your taxes and insurance escrow.
- Any owed or due property taxes and any other costs for other services like home inspections.
- A warranty, etc.
That is why they are referred to as prepaid & other costs.
Generally, these amounts all depend on:
- Exactly when you close in the tax cycle.
- The tax jurisdiction and any fees they charge the day of the month you close.
- If you had any additional costs, such as a home warranty.
So, just like in the other sections, these costs may be overstated on the Loan Estimate. In some higher tax states like Illinois, you may find this section has the most costs. This is because, depending on which month you close in the billing cycle, you will have to fund 3-10 months of taxes into the new escrow account that will be collected that the close.
Rolling Closing Costs into Mortgage
Example: If the tax bill is $12,000/ year and you close and need to put 7 month of taxes down, that is a lot of money. Even though you will be refunded any amounts in your old escrow account, it is critical the Loan Officer is able to do an accurate estimate in this section to make sure you will have sufficient funds to close.
The good news is, in many refinance cases, you can roll these costs into the loan amount and wait for the refund from your old lender to pay the loan back down.
Closing Costs for a Mortgage Summed Up
In order to protect the client, lenders are forced to overestimate the closing costs. I know it is confusing but if you think about it, If you were disclosed a $200 fee that actually was $800 at closing, do you want to be the one to make up the difference? Of course not, that would be on the lender. As confusing as all this can be, lawmakers have adopted this process to protect you, the consumer.
Due to the changes in the mortgage industry, there are a lot more rules and disclosures to protect consumers. This can complicate the process, but an experienced Loan Officer will go over fee variations and continue to update fees as the loan process progresses. The actual fees associated with the loan will not be final until a final Closing Disclosure is issued.