Closing Costs: An Explanation of Terms

NON-RECURRING CLOSING COST ASSOCIATED WITH THE LENDER:

Loan Discount Fee: Often referred to as "points".   On a government loan, the loan origination fee is normally listed as one point or one percent of the loan.  Any points in addition to the loan origination fee are called "discount points".  On a conventional loan, discount points are usually lumped in with the loan origination fee.

Appraisal Fee: This is a one-time fee for an "appraisal"  - a statement of property value required and ordered by the Lender for most loans.  Since the property serves as collateral for the mortgage, lenders want to be reasonably certain of the value.  The appraisal is used to determine if the price you are paying for the home is justified by recent sales of comparable properties.  The appraisal fee varies, depending on the value of the home and the difficulty involved in justifying value.  Unique and more expensive homes usually have a higher appraisal fee.  Appraisal fees on VA loans are higher than on conventional loans.

Credit Report Fee: This one-time fee covers the cost of your credit report, which is processed by an independent credit-reporting agency.  As part of the underwriting review, the mortgage lender will want to review the borrower’s credit history. The cost varies depending upon the type of report requested.

Lender's Inspection Fee: This is generally associated with new construction and is associated with what is called a 442 inspection.  Since the property is not finished when the initial appraisal is completed, the 442 inspection verifies that construction is complete with carpeting and flooring installed.

Mortgage Broker Fee: About seventy percent of loans are originated through mortgage brokers and sometimes the points associated with the loan are listed here instead of under Loan Origination Fee.  They may also add in any broker processing fees in this area.  The purpose is to clearly indicate how much is being charged by the wholesale lender and how much is charged by the broker.  Wholesale lenders offer lower costs/rates to mortgage brokers than you can obtain directly, so you are not paying "extra" by going through a mortgage broker.

Tax Service Fee: During the life of the loan the borrower makes monthly property tax payments, either on one’s own or through an impound account with the lender.  Since property tax liens can sometimes take precedence over a first mortgage, it is in the lender’s interest to pay an independent service to monitor property tax payments.

Flood Certification Fee: The lender must determine whether or not the property is located in a federally designated flood zone.  This fee is usually charged by an independent service to make that determination.

Flood Monitoring: From time to time flood zones are re-mapped.  Some lenders charge this fee to maintain monitoring on whether this re-mapping affects the property.

OTHER LENDER FEES:  

Document Preparation Fee: There may be a separate, one-time fee that covers preparation of the final loan papers, including the note and the deed of trust. 

Underwriting Fee: A fee is charged for the cost of underwriting the loan.

Administration Fee: If an Administration fee is charged, then generally there will not be a fee for underwriting.

Appraisal Review Fee: Even though a borrower will probably not see this fee on a Good Faith Estimate, it is charged occasionally. Some lenders review appraisals as a quality control procedure and charge for the activity.

Warehousing Fee: This is rarely charged, however, some lenders have a warehouse line of credit and add this as a charge to the borrower.

ITEMS REQUIRED TO BE PAID IN ADVANCE:

Prepaid Interest: Mortgage loans are usually due on the first of each month.  Depending on the day of the month your loan closes, this charge may vary from a full month of interest to just a few days of interest.   (Remember: Interest is paid in advance and principle in arrears). 

Homeowner’s Insurance: This is the insurance paid to cover possible damages to the home and other items.  Normally the first year’s insurance is paid at the close. When purchasing a condominium, the Homeowner’s Association Fees normally cover this insurance.

VA Funding Fee: On VA loans, the Veteran’s Administration charges a fee for guaranteeing the loan. Based upon the use of the borrower’s VA eligibility, the fee is either two or three percent of the loan balance.  Instead of paying for this as an expense, commonly it is financed into the loan balance.

RESERVES DEPOSITED WITH THE LENDER:

Taxes and Hazard Insurance:
Based on the month you close, property taxes will be prorated between you and the seller.  You may also be required to pay a full year’s hazard insurance (or homeowner’s insurance) premium in advance.  In addition, you may also be required (or may have the option to elect) to place funds into a special reserve account (impound account) for taxes and insurance, which will be held by the lender.  You absolutely must have Hazard/Homeowners Insurance to obtain a mortgage.

Mortgage Insurance Impounds: When required, lenders allow this premium to be paid monthly. However, a borrower may be required to put two months' worth of mortgage insurance payments as an initial deposit into the impound account.

NON-RECURRING CLOSING COSTS NOT ASSOCIATED WITH THE LENDER:

Closing/Escrow Fee: The fees associated with the closing.

Notary Fees: Most loan documents have multiple sets that must be notarized.

Recording Fees: Certain documents are recorded with the local County Recorder’s Office.

Pest Inspection: This is also referred to as Termite Inspection.  This inspection tests for pest infestations and other items such as wood rot and water damage.  If repairs are required, the amount to cover those repairs is usually covered by the seller, but it is a negotiable item.  Usually the pest inspection fee is paid by the seller and is not normally reflected on the Good Faith Estimate.

Home Inspection: Since it is the homebuyer’s choice to obtain a home inspection, this cost may not be reflected on the Good Faith Estimate.  However, it is highly recommended.

Home Warranty: This is an optional item. A Home Warranty usually covers such items as the major appliances, should they break down within a specific time.  Often this is paid by the seller.

Homeowner’s Association Transfer Fee: When buying a condominium or a home with a Homeowner’s Association, the association often charges a fee to transfer all of their ownership documents to the buyer.

REFINANCING ASSOCIATED COSTS:

Interest: When closing the transaction on a refinance, there may be outstanding interest due on the old loan.

Demand Fee: The existing lender may charge a fee for calculating payoff figures.

Sub-Escrow Fee: This fee is actually charged by the Title Company.

Loan Tie-In Fee: This fee is charged by the Escrow Company.