Seattle Real Estate Blog - Understanding Mortgage Closing Costs

Understanding Mortgage Closing Costs
When you apply for a loan your lender is required by law to give you a Good Faith Estimate of your closing costs. This estimate is based on local practices as well as the sales agreement with the seller. Both the buyer and the seller are responsible for portions of the closing costs. Some of the costs depends on where you live and the local custom as to who pays what.

The majority of the fees are in relation to the loan where the lender charges certain fees for giving you a mortgage. The RESPA (Real Estate Settlement Procedure Act) HUD-1 Statement outlines who pays what and a copy is given to the buyer at the end of the closing for his/her records. The RESPA HUD-1 is signed by the buyer, seller and closing agent. RESPA is governed by the Department of Housing and Urban development (HUD). This act was passed to help the buyer and seller and ensure an ethical transaction.

Depending on your situation, the following costs for getting a mortgage must be paid at or by closing. These costs cover items that were part of the loan application process:

Loan Origination Fee: The loan origination fee covers the administrative costs of processing the loan. It may be expressed as a percentage of the loan (for example, 1 percent of the mortgage amount).

Loan Discount Points: Loan discount points are the dollar amount paid to a lender for making a loan. Each point equals 1 percent of the mortgage amount. For example, if you take out a $100,000 loan, one point equals $1,000. The more points you are willing and able to pay at closing, the lower your interest rate should be.

Appraisal Fee: The appraisal fee pays for the appraisal, which the lender uses to determine whether the value of the property is sufficient to secure the loan should you default on the loan. This is usually paid by you when you apply for the mortgage and may appear on the settlement form as "POC," or "paid outside closing."

Credit Report Fee: The credit report fee covers the cost of the credit report, which the lender uses to determine your creditworthiness. You probably also paid this fee when you applied for the mortgage, so it may appear on the settlement form as POC.

Assumption Fee: An assumption fee is charged if you take over the payments on the seller's existing loan. The fee may range from several hundred dollars to 1 percent of the loan amount.

Prepaid Interest: Interest is the fee you are charged for borrowing money from your lender. You will probably have to pay the interest on the mortgage from the date of settlement to the beginning of the period covered by the first monthly mortgage payment. For example, suppose you settle on February 10. Your first monthly payment begins to accrue on March 1 and will be payable at the beginning of April. At closing you may be required to prepay the interest for the period from February 10 through the end of February. This means that if you settle later in the month, your closing costs will be less than if you settle early in the month.

Escrow Accounts: Escrow accounts (or reserves) will be required if your lender will be paying your homeowner's insurance and property taxes. Your lender sets up the escrow account by adding the cost of the insurance policy and taxes to your monthly mortgage payments. That portion of your payments is kept in reserve until the bills are due. Each year, the bills will be sent directly to your lender, who will make the payment for you.

As mentioned above, there will also be costs outside the closing. These are referred to as considered payments outside closing (POC). Most state and local governments impose property taxes, recording fees, and transfer taxes, which are outlined below:

Property Taxes: Property taxes for the real estate you own must be paid annually to the local government. Property taxes are the most common expense to be prorated between the buyer and seller. This process is referred to as an "adjustment." (Other typical adjustments include annual homeowners' association or condominium fees and unpaid water or utility bills.) Your closing agent will split the taxes so that you take responsibility for them at closing. If the seller already has paid taxes beyond that date, you reimburse the seller. Or, if taxes for the current period have not yet been paid, the amount owed is deducted from your settlement payment. Your lender may include property taxes in your monthly mortgage payments and put them in an escrow account for you.

Recording Fees and Transfer Taxes: Recording fees and transfer taxes are charged by most states for recording the purchase documents and transferring ownership of the property. Your closing agent will usually calculate these costs as a percentage of the sales price. In some localities it is customary that the seller pay one fee and the buyer pay another. Your real estate sales professional can advise you about this.