For most of us, obtaining a mortgage loan is a very significant financial transaction. The issue of closing costs, whether the mortgage is for the purchase of a new house or to refinance an existing obligation, is extremely important. In fact, the closing costs on a single real estate transaction can be several thousand dollars. While the items included as closing costs and the amount charged differ from state to state, there are some closing costs attributable to nearly every mortgage loan. The closing costs fall into three specific categories: title fees, government fees, and the costs of obtaining the mortgage itself.
- Title Search: The purpose of a title search is to determine the status of the title. Generally speaking, a title search involves a detailed examination of the public records to determine who owns the property and whether any other party has a claim it. Usually, a title search is conducted by an attorney or a title company.
- Title Insurance: Title insurance gives the lender protection in the event a mistake is made in the title search. For example, if the title search fails to show a cloud on the title, such as a judgment lien against property, the lender would receive assistance in its efforts to remove the cloud from the title. Usually, title insurance affords protection to the lender only, not to the borrower; however, a borrower may obtain title insurance to protect his or her interest for an additional charge.
- Transfer and Recordation Costs: The cost of recording the mortgage in the appropriate public office or offices and effectuating the transfer of the subject property will be collected as part of the closing costs. The permissible charges for transfer and recordation costs are determined by state and local law.
Costs of Obtaining the Mortgage Itself
- Application Fee: The application fee is charged by the lender and covers the lender’s cost in processing the loan and in examining the borrower’s credit report. It is not uncommon for an additional fee to be included among the closing costs for the cost of the borrower’s credit report.
- Appraisal Fee: In connection with almost every mortgage transaction, an appraisal of the property is required by the lender. The appraisal involves an examination of the subject property, as well as an examination of recently sold, comparable properties in the area surrounding the subject property. The purpose of the appraisal is to determine whether the value of the subject property provides sufficient security for the mortgage loan.
- Survey: A survey is used to determine the exact location and size of the subject property. The surveyor will make a determination as to whether the subject property conforms to the legal description of the subject property as it was set forth in any previous transfers. Also, the surveyor will determine the existence of any encroachments on the subject property.
- Points/Origination Fees: The lender may seek to collect a percentage of the loan as part of its cost in making the loan. One point equals one percent of the amount of the loan. The points may be collected as a closing cost or may be financed as part of the loan amount. In addition, the lender may seek to collect an origination fee as payment for its work in preparing the loan.
- Mortgage Insurance: If a borrower is unable make a down payment of at least 20 percent of the value of the house, the lender may require the borrower to purchase private mortgage insurance, also known as PMI. Private mortgage insurance provides a measure of protection to the lender in the event the borrower defaults on the loan.
- Hazard Insurance: At closing, the lender will require the borrower to have in place a policy of insurance covering damage to or destruction of the subject property. The lender will be named as the beneficiary on the policy. It is not uncommon for the entire annual premium on the insurance policy to be collected as part of the closing costs.
- Flood Insurance: If the property is at risk for flooding, the lender may require flood insurance.
Depending on the area, other charges may be included as closing costs as well. In reviewing the closing costs attributable to your loan, consider:
- whether you feel that you have made a fair comparison of the mortgage packages offered by several different lenders
- the customary fees for similar services in your area
- whether the fees are negotiable or waivable
- whether any fee is duplicative of any other fee
- whether you fully understand what it is you are paying for
It is important to keep in mind that many closing costs are negotiable or waivable. Your real estate agent should be able to provide you with additional information on the customary rates of closing costs in your area. Also, you can contact:
U.S. Department of Housing and Urban Development
451 7th Street, SW
Washington, DC 20410