Closing costs are fees paid at the closing of a real estate transaction. This point in time called the closing is when the title to the property is conveyed (transferred) to the buyer. Closing costs are incurred by either the buyer or the seller depending on the terms outlined in the purchase contract agreement.
The fee the lender and any mortgage broker charges the borrower for making the mortgage loan. Origination services include taking and processing your loan application, underwriting and funding the loan, and other administrative services.
Many lenders will require that an appraisal be performed as a condition of the mortgage loan. The purpose of this appraisal is to verify that the sale price of the property, upon which the underwriting of the loan is based, is equal to or less than the fair market value of the property.
A title search is done to make sure there are not any unpaid mortgages or tax liens on the property.
Title insurance is a policy that protects the owner by guaranteeing the title to the property is clear of any defects, liens or encumbrances on the property that may affect the rights of ownership, possession, or use of the property.
The lender may require that a surveyor conduct a property survey. A survey is not required on a platted residential lot.
Points are a percentage of a loan amount. For example, when a loan officer talks about one point on a $100,000 loan, this is 1% of the loan, which equals $1,000. Lenders offer different interest rates on loans with different points. You can make three main choices about points. You can decide you don’t want to pay or receive points at all. This is a zero-point loan. You can pay points, also called discount points, at closing to receive a lower interest rate. The more points paid up front, the lower the interest rate. One point equals one percent of the loan principal, and usually reduces the interest rate by 1/8%. Note that the interest rate does not drop by one percent per point. Alternatively, you can choose to have points paid to you (also called lender credits) and use them to cover some of your closing costs.
Most mortgage lenders require a down payment of at least 3%. Federal Housing Administration (FHA) loans (mortgages insured by the government) require a down payment of at least 3.5%. Depending on your credit history, the type of dwelling and your reason for buying, the minimum down payment could be 5%, 10%, 20% or more.
When the down payment is less than 20% of the purchase price, you are required to carry PMI to protect the lender should you default on your loan. The buyer can request cancellation of PMI once their equity reaches 20% of the market value, and the lenders are required to automatically cancel the PMI once the equity reaches 22% by federal laws.
Cost for recording sale (deed and/or security instruments) in the public record.
Your monthly mortgage payments are likely to include a pro-rated amount to cover payments for property taxes and insurance premiums to ensure that they are paid on time. This money is held in a “reserve” or “escrow” account by the lender who makes the payments for you. At closing, your lender may require you to make advanced payments to ensure the reserve fund has enough money to pay the bills. Federal law limits the amount of "cushion" to two months of escrow payments.
Prepaids or "prepaid costs" are not a fee, as such, but are costs associated with your home that need to be paid in advance when getting a loan. These include Property Taxes, Homeowner's Insurance, and Mortgage Interest that will accrue between the closing date and month-end.
The monthly mortgage payment is calculated and payable on a specified day each month. If the closing does not actually fall on that specified date, which is usually the case, then an adjustment must be made to calculate the interest on the loan for the number of extra days until the first payment is due.
This policy is required by the lender to protect the lender against loss from fire, wind, or other natural disasters.