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Loan Closing Costs
So...what can you expect to pay for closing costs when you purchase or refinance a home? Of course, NO ONE wants to pay closing costs. Some believe that most closing costs are "bogus", sometimes referred to as "garbage fees". In most cases, they are not bogus, although I will inform you of some that may be as we go along. But first, you should know that closing costs will vary from broker to broker, and from lender to lender. Is that fair? If there is a small difference, YES. If there is a huge gap, NO! Secondly, you need to understand what each fee is...and then you can shop and compare with confidence. The closing costs associated with the biggest outlay are the POINTS, or ORIGINATION FEE. Although there is another section on my website that will explain the pros and cons of paying points, this section will focus on an explanation of each closing cost...and whether you should be paying for it. This section will educate you on closing costs and what you should expect, whether buying or refinancing:
Loan Origination Fee:
This fee, charged by both brokers and lenders, is referred to in terms of "points", and covers the administrative expenses and lender's profit for setting up and distributing the loan. A "point" is one percent of the loan amount. An average origination fee is 1%. To explain, 1 point on $400,000 = $4000. Some borrowers simply shop for the lowest origination fee, which could be zero; however, don't be fooled...nothing is for free. They don't realize that a higher rate comes with lower cost. The decision to pay points or not is thoroughly discussed on my "points vs. no points" web page. Points are usually charged in increments of 1/8's (for example, .125 of a point = 1/8th, .25 of a point = 1/4; .375 of a point = 3/8th's, etc.)
There is no distinction in this fee whether a purchase or refinance! This is not a bogus fee, although some lender/brokers may charge an exhorbanant origination, which could be bogus...or referred to as "ripping you off!"
Loan Discount Fee: Very few lenders/brokers will explain this charge. Most borrowers have never heard of it. That's because lenders/brokers erroneously just refer to it as origination and lump the two together. This charge is the wholesale cost to the lender/broker which is passed on to you, the consumer. It is also referred to in terms of "points". As would be expected, the lower the rate, the higher the discount fee. And vice versa.
For example, the cost of a 5.75% interest rate may be 1 discount point. However, the lender/broker will generally charge you 2 points (one discount & one origination) for the loan. At a 6.0% interest rate, the discount may be zero; however, the lender/broker will charge you 1 point (zero discount and 1 point origination).
When the discount fee falls below zero, depending on the rate quoted, it is referred to as a rebate, where money is actually paid to the lender/broker for the rate quoted. This can be passed on to the borrower in the following way: For example, at a rate of 6.25%, the rebate may be 1/2 point. The lender/broker could then charge you only 1/2 point origination, saving you money and still making a profit.
There is no distinction in this fee whether a purchase or refinance! This is definately not a bogus fee!
Appraisal Fee
The fee for having the house appraised by an independant appraiser. They are paid directly for this fee. It is usually a requirement of the lender; however, there are circumstances in which an appraisal may not be required. A standard residential minimum appraisal fee is in a range somewhere between $300 and $400. However, depending on the loan amount, the area, and the size of the home, appraisal costs can be much higher, into the thousands. It int may be required by the lender at the time the loan application is submitted. In many cases, the appraisal fee will be required up front. In others, the broker may work with you to deduct it through escrow. Just in case you were wondering...I DON'T ASK YOU FOR PAYMENT UP FRONT!
There is no distinction in this fee whether a purchase or refinance! This is definately not a bogus fee!
Credit Report
The lender uses a credit report to determine the creditworthiness of the loan applicant. This fee is often paid when the loan application is submitted.
Interest Payment
Typically the buyer is required to pay interest on the mortgage loan to cover the time between the closing date and when the first mortgage payment period begins. For example: If closing is on May 15. Your first monthly payment begins to accrue interest on June 1 with your first mortgage payment due July 1. At closing an interest payment covering the accrual period between May 15 and May 31 may be required.
Escrow Account
At closing a payment may be required to fund the escrow account if the lender is paying home insurance, property taxes and/or other expenses out of the escrow account.
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