6. A Look at "Closing Costs"


Closing_Cost“Closing Costs” are the expenses over and above your down payment that most buyers normally face when it comes time to close a loan. And these costs generally are not included in your loan amount. Closing costs are therefore usually “out-of-pocket” money. And though you can do your best to get the other side to pay the closing costs, you’d better understand what’s included in that very loose term.

An advance warning: Be wary of television and Web ads from mortgage companies that promise “No closing costs and no points!” These mortgage companies typically build in bigger penalties and penalty charges into their contracts.

A nice note: We tell you here in advance exactly what Directions Credit Union charges for these fees. Most lenders don’t do that. And in some cases, we’ve negotiated you a cheaper fee for these costs. All members like that!  Below in 'Lender’s Fees' you’ll see what the closing costs consist of. Any dollar amounts referenced in this chapter were accurate at the time of printing and are subject to change without notice.

LENDER’S FEES

  • Loan Origination fee - A fee charged by lenders to procure your mortgage loan. Most lenders charge an origination fee because it is an important source of income for the lender and helps to cover operational costs. The industry standard is 1% of the loan amount; however, because this fee is set by the lender, it can vary. This is not considered a “junk fee.” Directions Credit Union does not charge this fee.
  • Discount Points - A fee charged to buy down the interest rate. When Directions Credit Union quotes you a rate, it doesn’t include any discount points unless you request them.
  • Appraisal fee - An independent written opinion that identifies the property’s market value. This document is generally required either by the lender’s regulator or if the loans are to be sold by the lender into the secondary market, which most are. The fee can vary widely depending on the type and location of the property. For homes located in urban areas, this fee usually runs $300.00 - $700.00. Directions Credit Union requires an appraisal on all mortgage loans and charges $350 for the appraisal. If you request it, we will always give you a copy of the appraisal.
  • Credit Report - A document summarizing the applicant’s history of repaying debts. Credit reports usually cost $11.00 to $60.00, depending on the source. A credit report is required for all mortgage loans. Directions Credit Union charges $34.35 for credit reports on most loans.
  • Mortgage Broker fees – Fees paid to individuals who produce mortgage loans for lenders, usually an independent contractor. Directions Credit Union will never charge you a mortgage broker’s fee.
  • Tax related service fee - A fee required by lenders to cover the cost of annually researching tax records to insure that the borrower is current on their property tax payments. Directions Credit Union does not charge this fee.
  • Processing fee (also sometimes known as an application fee) – A one-time fee to process your mortgage loan application. Like the loan origination fee, this is a source of income for the lender that helps to offset operating costs.  If someone offers you a "no fee" or a lower fee than $100, they may be making up the difference by adding so-called “junk fees.” Call us to compare the total cost for your mortgage. Directions Credit Union charges a $350 processing fee.
  • Underwriting fee – A fee charged by many lenders to review and approve the mortgage application. Directions Credit Union does not charge this fee.
  • Flood certificate - Fee charged to obtain the government-required document used to determine whether the subject property is located in a flood plain. Directions Credit Union charges a $15.50 fee.

ITEMS REQUIRED BY LENDERS TO BE PAID IN ADVANCE

  • Pre-paid interest - Mortgage loan interest is paid in arrears. This is daily interest paid from the day your loan closes and you take possession of the home until the end of the month. For example, your mortgage payment made on April 1 pays for interest accrued from March 1st to March 31st of the previous month.
  • Private Mortgage Insurance (PMI) - If your loan is more than 80% of the value of the property, lenders require this insurance premium. For certain loans, like FHA, this premium may be paid in a lump sum at closing. For most loans, this premium is paid monthly into your escrow account. Directions Credit Union requires mortgage insurance if the loan is more than 80% of the property value.
  • Hazard insurance premium - This is the annual premium for your homeowner’s insurance.

RESERVES DEPOSITED WITH LENDER

  • Hazard insurance premiums - In addition to the annual premium collected at closing, the lender collects an amount equal to one or two months of hazard insurance as a buffer for any possible increases in premium. For the life of the loan, then, these funds are collected monthly along with the mortgage payment and held in an account until the lender receives, and pays, the bill for the hazard insurance.
  • Mortgage insurance premium reserves, school tax, property taxes and assessment reserves, flood insurance reserves - The lender collects an amount equal to one to three months of estimated taxes as a buffer for any possible increases in tax rates or property values. These funds are collected monthly along with the mortgage payment and held in an account until the lender receives, and pays, the tax bill.

TITLE CHARGES

  • Escrow fee, document preparation fee - These are fees collected by the Title Company or attorney handling the closing. The funds are collected and paid as part of the transaction. Directions Credit Union does not charge these fees.
  • Notary fees – A fee charged for having the signatures on all legal documents of the sale notarized. Directions Credit Union does not charge a fee for a notary. Lots of people do.
  • Attorney fees or Closing fees - Fees paid to an attorney or title insurance company to prepare the closing documents. Directions Credit Union does not charge attorney fees and charges a $250 closing cost fee.
  • Title insurance - Provides insurance to owners of real estate to insure that they have clear title to the property they are buying, subject to any exceptions contained in the policy. Title insurance also insures the lender that they have an enforceable lien on the property, subject to any exceptions on the policy. Most lenders would never originate a mortgage without title insurance. The charge for title insurance is generally determined by each state’s Department of Insurance and is determined by loan amount.
  • Tax deletion – Fee to pay the title companies to determine that all current and prior years’ property taxes are paid.

GOVERNMENT RECORDING AND TRANSFER FEES

  • Recording fees - Fee charged by the county to record the Mortgage/Deed of Trust or any other legal documents in the real estate loan transaction. Directions Credit Union charges $148.

ADDITIONAL SETTLEMENT CHARGES

  • Pest inspection - Required for an FHA loan by the government or possibly by the underwriter/investor as a condition of the loan. Directions Credit Union does not require a pest inspection unless the inspection indicates a problem.
  • Survey - Document outlining the exact dimensions of the property. Usually required for a purchase or anytime improvements (e.g. deck, fence, pool, etc.) have been done since the last survey.


Next chapter: 7. The Mortgage Guide in a Nutshell

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