Closing Costs - An Enduring Topic

Probably the issue that troubles borrowers the most,
and that I receive the most questions about is closing
costs.

In the scope of home transactions that are in the
range of hundreds of thousands of dollars and sometimes
millions of dollars, the closing costs represent a small
percentage.

But, when a borrower looks over their Good Faith Estimate
and sees a long list of fees that accumulate to several
thousand dollars, it's difficult to make sense of what
seems to be repetitive costs.

Let's go through a typical transaction and see where the
money goes, and what services are provided for the fees
being paid.

At the time the offer is accepted, the agents will open
escrow and the title insurance order. These services
would be needed even if there were no new financing
involved, although the title insurance requirement would
be different.

As you begin the loan application process, the first fee
that you encounter is for the credit report. This fee
is paid to a credit reporting agency, and usually costs in
the range of $20.

Next would be the appraisal fee, which is usually paid
for by you at the time it is ordered. This fee is paid
to an appraisal management company who chooses the
appraiser from an approved panel. Typical cost is
$450-$550, depending on the value of the home, and we
usually arrange payment via credit card.

Most originating lenders will have some form of
processing fee. This is paid to the originating
company and is for the work involved in putting
together a file for presentation to the lender's
underwriter. Typical processing fees are in the
$500-$600 range.

Once the file goes to the underwriting group, they
have a fee for the review of the file for approval.
Even if this fee is paid to the originating lender
as a continuation of their process, it is not
uncommon to have two distinct procedures with two
distinct companies involved. This fee is paid to
the underwriting company and is in the range of
$400-$500.

After the file is approved and it is prepared for
closing, the next step is the preparation of loan
documents. This fee may be paid to the lender or
to a contract company for this service. The
typical fee is $250-$300.

Additional fees that come into play include a
flood certification fee of approximately $20
paid to an independent company that looks over
the FEMA flood maps to determine if the property
is required to have flood insurance or not.

Also, there is a tax service fee of approximately
$85 that is designed to do one of two things: If
your loan has an impound account, they supply the
tax bill to the lender for payment. If your loan
does not have an impound account, they monitor your
property so that they can inform the lender if
taxes go unpaid.

If you negotiate an interest rate that involves a
loan origination fee and/or discount fee, these
costs are usually disclosed to you as "points".
One point equals one percent of your loan amount,
so let's say on a loan of $400,000 a point equals
$4000.

There will be a charge, paid to the title insurance
company, for the lender's title insurance. It is
based on the loan amount, and these fees are supposed
to be reguated by the California Insurance Commissioner.

At closing, you will also be requested to deposit
funds if you create an impound account for the payment
of taxes and insurance. You will have pro-rated
interest from the date the loan funds to the first
of the following month to put the loan on a standardized
30-day billing cycle.

You will be asked to prepay your first year's property
insurance premium, and may have a pro-ration of property
taxes depending on whether the seller has already paid
them covering the escrow closing date.

As you assess the closing costs, it is important to
separate them into categories:

Even if there was no new loan: escrow and owner's title
insurance.

Transactional fees that are lender related: processing,
underwriting, document preparation, appraisal, credit,
tax service and flood certification. Negotiated loan
origination and/or discount fees.

Recurring charges: interest on the new loan, pro-rated
taxes, pre-paid property insurance.

Grouping the closing costs in this manner allows you
to make better comparisons between competing lending
companies and loan programs.

Even though the list of closing costs can be rather
imposing, if the lenders were not able to collect
them in their current fashion, they would add the
equivalent to the cost of borrowing in some different
form.

Be wise in shopping for your loan, and make sure to
make valid comparisons among the many choices you
have. As always, contact me for any information that
you may need.