The Closing Costs

Downloadable Home Loan Toolkit

Buying a home is an important financial decision that requires careful attention. This toolkit will help you become familiar with the various stages of the home buying process, including Closing Costs.
There are certain "standard costs" that must be paid for any loan transaction. In addition, there are other costs that apply to specific loan types. Finally, the money collected for your escrow account and pre-paid interest are also often referred to as closing costs but are not truly a cost of doing the loan but rather a "deposit" made into an account from which your taxes and insurance will be paid.

Closing costs go towards both your lender and settlement company. The lender's closing costs are for services provided by the lender or on behalf of the lender in order to get your loan underwritten. Many of the fees charged by a lender are fees paid to third parties to perform services such as an appraisal or credit report. These fees are paid to the lender and passed on to the third party to pay for their service. The settlement costs are charged by the settlement company and are not determined by the lender. Although the lender discloses these fees to the buyer on their Closing Disclosure form, the lender does not determine these costs, but discloses estimates for these fees based on current information provided by settlement companies. If you have questions regarding these settlement fees, you should address these with the settlement company you or your Realtor select.

Loan Estimate

The Loan Estimate is a three-page form designed to help you understand the key features, costs, and risks of a mortgage loan offer. All lenders are required to use the same Loan Estimate form, making it easier to compare mortgage offers from different lenders.

The Loan Estimate provides you with important information about your loan, including the estimated interest rate, monthly payments, total closing costs, estimated costs of taxes and insurance, details on any special loan features, as well as how payments and/or interest rates may change in the future.

The lender must provide you with the Loan Estimate form within three business days after receiving your loan application. When you receive the Loan Estimate, your loan has not yet been approved nor denied. Rather, the form outlines the terms the lender expects to offer should you decide to move forward.

Breakdown of Closing Costs

There are so many different charges involved in buying a home, it is important to know what to expect at settlement. At First Heritage Mortgage, we provide you with a Loan Estimate, which includes an estimate of your itemized closing costs, during the loan application process. Though the settlement company prepares the final set of closing numbers, we try and get as close to this as possible with the Loan Estimate. Please review it so you'll be familiar with the various costs paid at closing.

There are three basic categories of settlement costs:
Mortgage Closing Costs
  • Loan Closing Costs
    This includes lender fees and points, as well as a host of other charges involved in obtaining and processing your loan.

  • Tax Closing Costs
    This includes fees to state and local governments and fees to establish and transfer ownership of the property.

  • Insurance Closing Costs
    This includes fees from Homeowner's insurance policies, to fees related to the protection of the buyer and seller via Title insurance.

Loan Closing Costs

Loan Origination Fee (optional)

An option for the home buyer is to pay points to lower the interest rate at which the loan will be repaid. Each point equals 1 percent of the mortgage amount. For example: on a $150,000 loan, 1 point would equal $1,500. The first of any points paid (or portion thereof) is called the origination fee.

Discount Points (optional)

Discount points are any points paid over and above the origination fee.

Appraisal Fee

The fee for having the house appraised may be incorporated into the closing costs or payment may be required by the lender at the time the loan application is submitted.

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.

Tax Closing Costs

Property Taxes

This is the one closing cost that is often prorated between the buyer and seller. If the seller has already paid the annual property taxes, the buyer typically reimburses the seller for the period in which the buyer will be occupying the property. Likewise, if the taxes have not yet been paid, the seller typically reimburses the buyer for the period in which the seller occupied the property.

Transfer Taxes and Recording Fees

This is the cost for transferring ownership of the property and recording the purchase documents. The fee is often calculated as a percentage of the sales price.

Insurance Closing Costs

Homeowner's Insurance

This insurance covers replacement costs for damages caused by fire, wind or other disaster that might affect the value of the property. Typically, the insurance also includes personal liability and theft coverage.

Flood or Quake Insurance

Additional hazard insurance coverage that is required for homes located in a designated hazard zone as established by the Federal Emergency Management Agency (FEMA). First Heritage Mortgage checks the FEMA database on very loan to determine if the property resides in a flood plain. An appraiser, inspector, or your realtor can let you know if a property resides in a hazard zone.

Private Mortgage Insurance (PMI)

Insurance required for conventional mortgage loans when the borrower's down payment on the house is less than 20 percent of the price or appraised value and there is no second mortgage being used in the transaction.

Title Insurance

This policy protects both the buyer and lender by insuring a clear chain of title. This means the title has no outstanding issues and insures that that the person who sells the house has the legal right to do so.

Financing Closing Costs

If you've built up some equity in your home, when you refinance, you may be able to "cash out" some of that equity to pay off credit cards or other revolving debt, improve your home, help pay for college, or anything else you can think of. The same is true of refinancing costs: If you have enough equity in your home, you may be able to roll some of the cash due at closing into your loan.

Some of the "cash needed to close" as it's sometimes called includes settlement costs and fees, prepaid interest, escrow reserves, state or local government charges, or even extra funds needed to pay off your existing mortgage. Depending on how much equity you have, some or all of those costs can sometimes be financed as part of your new mortgage loan.

But you have to be careful. Many loan programs are based on what's called a "loan-to-value" ratio which requires a certain amount of equity in the home. In order to finance your closing costs, you will need to have built up a certain amount of equity. You may qualify for a very advantageous refinanced mortgage if you borrow no more than 80 percent of your home's value, but may not qualify for the same terms if you borrow 90 percent. We can help you qualify for refinance loan programs for as much as 95 percent of your home's value in most cases, but the lower your loan-to-value ratio (that is, the less you borrow), the better terms you'll generally qualify for.

The bottom line is that in many cases you can reduce your up-front costs for refinancing your mortgage in exchange for slightly higher monthly payments for the life of the loan. But whether, and to what extent, you can do this depends on the value of your home, the amount of your new mortgage, and what options you decide are best for you.

If you've had your current mortgage for a few years, chances are you've built up enough equity to finance cash needed to close and still have a smaller loan balance than your original -- and a balance that will qualify you for a favorable mortgage program tied to your loan-to-value ratio. We can help you decide!

Many people find that it's advantageous to pay the cash needed at closing from checking, savings or money market accounts or from other assets. This is because the less you borrow on the new refinanced loan, the lower your monthly payment will be. But we'll work with you to find the most advantageous refinancing program. It will be based on your ability and willingness to pay closing costs and other fees and the amount you wish to borrow.