Explanation of Closing/Settlement Costs
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What Are Closing/Settlement Costs?
Closing and settlement costs are every borrower's least favorite subject when financing real estate. While everyone understands that the cost of the property and the interest rate of the home purchase loan are the most significant financial concerns of the home owner or buyer, closing costs can seriously impact the overall cost of the mortgage loan and your current bank account balance. While some unscrupulous mortgage brokers and lenders attempt to increase their income by adding unnecessary and sometime exorbitant fees to the costs of settlement, there are a number of costs that must be included whether we like it or not. Here are the common costs that all settlements will include:
- Recording fees – the cost of recording a new mortgage and deed, discharging former mortgages, and all other fees a municipality charges to place new information on a real estate parcel.
- Title examination fees – the cost of having someone examine the chain of title of your new property. In states east of the Mississippi, the title to your new property is examined backward at least 60 years to verify that all former owners transferred their rights properly. In most states west of the Mississippi, prior ownership in real estate has been certified by the Land Court, making title examination easier.
- Attorney or escrow company closing fees – the cost of document preparation, examination, and delivery at settlement along with moderating the closing for buyer and seller.
- Title insurance – a lender's policy must be written equal to an amount of the balance of the mortgage loan they are giving you. If you are purchasing a home, you should consider also getting an owner's policy, which will insure the entire amount of your purchase price. The extra cost for an owner's policy is nominal.
- Appraisal fee – your home must be appraised to determine its fair market value (FMV). A single family home appraisal should cost between $200-$400.
- Credit report fee – a mortgage credit report is more extensive than one for a credit card or auto loan and should cost around $15.
- Home inspection fee – a home inspection is required by your lender but is also advantageous to you. The inspector checks every component of your prospective new home and submits a detailed report on each area (roof, heating system, pluming, electrical, etc.); the cost varies but should be in the $300-450 range.
- Survey and/or plot plan – this activity examines and verifies your property's lines and boundaries.
These costs may or may not be included in your closing:
- Tax stamps – many states and municipalities charge a tax on the transfer of real property, evidenced by the stamps that are added to the new deed and/or mortgage. These fees vary widely so check your state/city/town for information.
- Origination and/or discount fee – these fees represent the immediate income for your mortgage broker or lender. The discount fee should equate to an amount that you pay that reduces your interest rate by some portion of a percentage.
- Processing, underwriting, and/or document preparation fee – commonly called “junk fees”, these amounts go to your mortgage broker, lender, and/or closing agent for managing all the paperwork involved in your new loan.
- Pest inspection – many lenders require this inspection, which determines whether or not your new home is inflicted with termites or other common pests that need to be eliminated.
Other monies will often be collected but are not closing costs.
- Prepaids: One year's homeowner's insurance premium. One year's mortgage insurance premium, if necessary. Property taxes. Interest from the day of the closing to the end of the current month (e.g., close on the 18th; collect interest applicable until the 30th or 31st).