Understanding Closing Costs

courtesy of Barbara Shelhart

Application Fee: Fee charged by 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 an origination fee and is generally computed at 1% of the mortgage amount.

Discount Points: Each point is equal to 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 and 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.

Prepayables: Adjustment to escrow accounts from the date of closing to the date of the 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. 2 months of PMI are collected. 2 months of homeowners 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.

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

Title Insurance: Provides protection for lenders and homeowners against financial loss resulting from legal defects in the title.

Underwriting Fee: Usually included in the application fee. However, practices vary from lender to lender.