CLOSING COSTS

  Today's word is actually two words...closing costs.  What exactly are closing costs?  Isn't it enough that the lender is going to make all that money on the interest rate??? They have to charge closing costs too?

  We have already learned that lenders are risk adverse.  The truth about closing costs is that what they really are is fees to pay for services that decrease risk.  Let's begin at the beginning and go over what they are and what they are for:

The administration/underwriting/processing fee:  This is a fee that the lender charges to underwrite the loan. The underwriter reads through all the financial and credit information and issues an opinion on whether or not the loan meets the criteria for the mortgage application. (The approval)  Some lenders are doing away with this fee in light of Federal regulations with regard to high cost loans.  We work with one lender that does not charge this fee at all.) But normally the cost of this fee can run from $395-$995 depending on the lender.

Third Party Fees that are required to approve the loan: These would include fees such as the appraisal fee to establish value, credit report fee, electronic underwriting fee, and if your bank charges the lender to verify bank accounts or your employer charges to verify employment you can expect to see these fees as well.  All are legitimate third party fees that must be invoiced. Typically these fees will run about $550 in total.

 The next section of fees that are a part of any loan are the title company fees.  The title company researches the property for any imperfections in title or liens or judgments on title that might have to be paid prior to closing so that the title can pass free and clear to you, the buyer.  The title company also will close the transaction legally, being sure that all funds are dispersed as per Federal Law.  The cost for closing a real estate purchase transaction normally runs about $350-$400.  The title company also issues a title insurance policy to cover any unforeseen defects in title so you as the new owner are not at risk if Uncle Fred who disappeared in Alaska in 1953 turns up saying he owns a share of the property.  A title search will also be conducted on both buyer and seller to be sure once again no liens or judgements exist that can impact title. Your portion of this cost is $100.  The seller (in Indiana) pays for the title insurance policy and their own lien search.

  Then there are the recording fees to record your deed and mortgage and tax exemptions plus the deed transfer. These fees vary county to county but $100 should cover it in most cases.

  The very last piece of the closing cost puzzle is escrow accounts.  Remember we spoke of escrow accounts in an earlier post.  This is money that goes to seed your accounts so that you will have enough money in them to pay your real estate taxes and your home owner's insurance when they come due. The amount for these is going to depend on the cost of the home owner's insurance which can vary for all kinds of reasons such as credit score, size of mortgage, property location, amenities covered and deductible. Of course property taxes can vary wildly.  And-how much taken for the escrow account depends on when taxes are due next.

  The last item legitimately considered a closing cost is one year of home owner's insurance paid up front. This will cover your home for the first year. Meanwhile your escrow account will be used to save for next year's premium payment by payment.

 Some government loans require inspections such as termite and well and septic tests. These are really inspection fees and are paid prior to closing.  The whole house inspection is not a closing cost and is paid at the time of the inspection.

  Normally the total for closing costs is $2500-$3000 depending on insurance and escrows. The lender fees and title company fees are pretty well fixed.

  It is a rule of thumb that closing costs can't be rolled into a new mortgage. You have to come with them yourself or it is not unusual to negotiate for all or some of these costs in your sales contract and have the seller pay them.  In any event, they are a lending fact of life and are not likely to disappear any time in the near future.