A Rundown of Closing Costs When Settling a Mortgage

When closing, or settling a mortgage, there are a variety offees that you, as the buyer, are responsible for. It is important to knowapproximately how much you should expect to pay for closing costs. The averageamount paid for closing costs is three percent of the cost of the loan, but itcan range from one percent up to six percent.

The most important thing to realize about closing costs isthat they can often be negotiated. Most people do not give much thought to allof the costs associated with closing on the loan, because the fees are rolledinto the loan rather than coming directly out of pocket. Still, severalthousand dollars over the life of the loan adds up to a substantial amount ofinterest. Knowing what to expect in closing costs is one way to reduce yourexpenses.

Fees that Generatefrom the Lender

An application fee is the first fee that you can expect topay when borrowing for a home. The application fee covers the initial cost ofchecking the credit report of each loan applicant and filling out the initialpaperwork. An underwriting fee or loan-originating fee is also part of theinitial closing costs from the lender. This fee compensates the lender forworking with you through the loan process and covers the cost of documentpreparation, the cost of having documents notarized and the fees paid to anattorney for legal paperwork.

A lender also charges points. Points are used to lower theinterest rate of your loan. One point is the equivalent of one percent of theloan amount. You can close a loan with no points, or decide on paying one tothree percent of the amount of the loan in points. The lender will pay to havethe home you are purchasing appraised and often inspected. These fees are addedto the closing costs charged by the lender. The lender will also determine howmuch the interest is on your loan before you make your first payment. Thisprepayment of interest is common, and happens because there can be up to twomonths after closing before the first mortgage payment is due.

Fees for Transferof Ownership

When the ownership of a home changes hands, there are avariety of expenses due to keep the paperwork in legal compliance. A titlesearch is conducted to ensure that the person selling the property has thelegal right to sell, and there are no outstanding liens on the property. Thereis always the chance that the title search company or attorney who conductedthe search may make a mistake.

Some courthouses have all of their records computerized, whileothers require a visit to the courthouse in person and manual search. Toprotect the lender from errors, many require that the borrower purchase titleinsurance. Title insurance is a one-time purchase that is rolled into theclosing costs.

Miscellaneous Fees

There are a variety of miscellaneous fees that can raise thecost of purchasing a home. The fees vary depending on the type of loan you aretaking on and the area where you live. They can even vary from lender tolende. An assumption fee is charged when the borrower takes over anexisting mortgage. When this happens, the mortgage company charges the borrowera fee of up to one percent of the amount of the loan. Certain lenders will require different types of homeinspections. Some will want testing for water quality, some for radon andothers for structural damage. The requirements depend on the lender as well asthe location of the home.

Some lenders require that the borrower place money in anescrow account. The money in this account is held to cover the cost of repairsor other expenses. Similar to escrow account funds are closing cost monies thatare designated to pay costs split between the buyer and seller. These arenegotiated, but some expenses that are commonly split include prorated propertytaxes, annual homeowners' fees and any other fees that are typically paid inone lump sum. Closing costs can be very expensive. It is important tounderstand exactly what you are being charged, and shop around to determine ifother lenders will charge you less. Some lenders, for example, require avariety of very extensive home inspections, while others choose what type ofinspections are required by the location of the home and known issues in thearea.

Once you have chosen a lender and know how much to expectfor closing costs, it is wise to consider paying some or all of the costs outof pocket rather than having them rolled into the cost of the loan.