You have your downpayment. Great. You are ready to close the deal on your loan and start making bids on houses! Soon you get your closing statement and there are extra charges you might not be expecting. Wait — is someone trying to pull a fast one and pad their profits? Well no. The mortgage lending industry is set up to block anything like that. Fortunately, there are whole books of legislation that protect the borrower from such tricks and scams. But what are closing costs?
Here are some questions that might occur to you with simple answers.
OK, so what are “closing costs”?
Closing costs are fees paid at the close of a real estate transaction, at the point when the title to the property is conveyed to the buyer. They can be paid by either the buyer or the seller.
There are two different categories of closing costs. Recurring closing costs, also called prepaid items, and nonrecurring closing costs (NRCCs). We’ll describe more below.
What are prepaid items?
These are costs that are associated with the maintenance of the borrower’s loan and normal property maintenance that are regular recurring costs that are paid monthly or annually. These costs include normal interest due on the loan, property taxes that are paid twice a year or monthly, and insurance.
What kind of insurance is in prepaid items?
Insurance includes home owner’s insurance/fire insurance/hazard insurance — three terms for the same exact thing — and in some cases, private mortgage insurance (PMI). PMI is required when the loan amount is greater than 80% of the purchase price/value of the property.
Homeowner/fire insurance makes sense, but what is private mortgage insurance (PMI)?
When the loan amount is greater than 80% of the property price/value the lender requires you to have insurance on the loan. This protects the lender in case something happens and the mortgage goes unpaid. The lender will then be able to recoup their losses.
I pay the PMI bill. When do I do that?
When the loan amount is greater than 80% of the property price/value (greater than 90% in California), the lender will require the property taxes and home owner’s insurance to be collected monthly as part of the total mortgage payment.
The loan servicer will make the biannual property tax and annual home owner’s insurance payments on the borrower’s behalf when due.
The loan servicer pays the PMI for me, but how do I send the money to the loan servicer?
In order to start this process, you will have to set up an escrow/impound account (both terms for the same exact thing in California) with the new lender/servicer. You can then pay monthly property taxes and homeowner’s insurance as part of the total monthly mortgage payments.
What is an escrow/impound account?
An escrow/impound account is simply a bank account that your loan servicer has access to. You put your money into the account and the loan servicer is able to send it out to the various recipients as needed. This is the service that a loan servicer provides.
How do I know how much money to put into the escrow/impound account at closing?
You can estimate between 4 and 10 months of property taxes and 2-3 months of fire insurance impounded (collected) at closing to set up the escrow/impound account. That is your money that sits in the escrow account accruing a negligible amount of interest. That money grows each month until it pays your property taxes that are due twice a year and your home owner’s insurance premium that is due once a year. There will always be at least 2 months property tax payments and 2-3 months fire insurance payments sitting in the Escrow/Impound account at all times Aside from these collected (but not submitted yet) payments, you will then pay a 12-month fire insurance premium at closing.
That takes care of taxes and insurance, but what about the interest on the loan?
You will pay the lender an amount of mortgage interest equal to the number of days left in the month in which you close and then your first mortgage payment will be due the 1st day of the 2nd month following the date of closing.
Due on the 2nd month? I get a free month?!
This is actually a bonafide “frequently asked question”. Short answer: Not really — you already paid for it!
Your mortgage payments will always pay the prior month’s interest so you will likely not have a mortgage payment due the 1st day of the 1st month after the closing date because there will be no full month’s prior interest for such a payment to cover. That is why we take the interest for the month in which you close through the closing.
Taxes, fire insurance, interest… anything else?
Sometimes, yes! More taxes! Congratulations you may now be a contributing citizen to the city you live in.
In some cities like San Francisco, Oakland, and Berkeley there is a one-time city transfer tax that is required to be paid at closing that the seller and buyer split 50/50. This amount can be as much as 1.5% of the sales price so don’t let it sneak up on you come closing day! A good mortgage broker will make sure you are in the know.
What are NRCCs? I thought we already paid all the closing costs?
NRCCs are nonrecurring closing costs. They are one-time charges. All the previous items are ongoing.
So what are these are one-time charges?
It is time for a bullet list. Then we will go over each item in more detail.
- The Appraisal Report
This was likely ordered to determine the current value of the subject property.
- The Preliminary Title Report
This was needed to ensure a successful transfer of ownership.
- Escrow Fees
These are allocated to the bank or servicer that collects and distributes funds to actually make the financial transaction possible.
- HOA Fees. Homeowners Association Fees
Fees paid to the Association of your Condominium or neighborhood
- Termite/Pest Inspection Report
Someone may have been required by the Lender to go to your property and make sure it was not full of termite holes or swarming with varmints. They will submit their fee at closing time.
- Loan Processor Fee
This is the poor person who is responsible for contacting all the different people involved in all the complexities of the loan and making sure each person has the correct paperwork, signed at the right time, and going to the right place.
What are the Appraisal Costs?
If a single unit, owner-occupied, residential property value is less than $1 million, the cost of the appraisal is around $450 – $550, no matter which lender the borrower works with or that we contract with.
If a single unit, owner-occupied, residential property value is over $1 million, the cost of the appraisal could be $100 – $150 more than the standard appraisal cost.
If the property is a rental property, there could be an additional $100 cost because the appraiser must do additional rental property research and add additional forms to the appraisal report.
Multi-unit residential properties (2-4 Units) will also add to the cost of an appraisal. Depending on the lender and the appraisal management company that lender requires for the appraisal, the cost could be anywhere from $650 – $1000.
When needed, there is a $100 fee to rush the appraisal and get it back within a few days.
Commercial property appraisals are a whole different category but expect these costs to be $3000 and up! Any residential building with more than 4 units is considered commercial.
What are escrow and title fees?
Escrow and title fees are the same no matter who you choose for the loan. Those fees are quoted by the escrow/title company. The cost of these fees is dependent on the purchase price and loan amount.
For a refinance transaction, these fees are usually between $1000 and $1500 depending on the size of the loan. For purchase transactions, these costs go up and are quoted for each specific transaction but should be similar regardless of the escrow and title company used because these fees are state-regulated.
What are HOA fees?
When there is a Home Owner’s Association (HOA) involved in the transaction for condominiums and townhomes, there are additional fees that the HOA collects to provide documents and reports that pertain to the HOA that the lender may require. These costs are usually up to $350 and vary from HOA to HOA.
What are termite/pest inspection fees?
We don’t count the home inspection and pest inspection costs in the loan costs but when purchasing a home, be prepared to pay between $350 – $500 for each of these inspections if you elect to have these inspections as part of the contract to purchase a property.
What are loan processor fees?
We collect a $945 fee for the loan processor who coordinates the paperwork with all of the various entities involved closing the transaction such as the lender, property appraiser, and escrow/title companies. We do not charge any application, administrative, or underwriting fees. We don’t even charge for the credit report as we consider it a cost of doing business.
What about the mortgage broker? Does he have a fee?
Typically, our commissions are already included in the rate and point combinations we quote. You will not pay that in addition to any of the other closing costs because, in most cases, the lender pays our commission. There are some circumstances where it is more advantageous from a rate and cost perspective to have the borrower pay our commissions and we present those options if it makes a more advantageous deal for you!
More questions about closing costs and mortgage loans?
Get off to the right start before starting your property hunt by reading our page About Mortgage Loans. Or just call! We’re happy to consult with you at no obligation, too. Feel free to email us or call the office at (510) 655-2868.