Closing Costs Types: Loan Fees and Pre-Pays
Whenever you're talking about Mortgages, there's really two types of closing costs. It's easy to get confused, so I thought I'd write this post to keep it clear. First up are what we could call mortgage related closing costs. These are the costs a bank or other lender typically needs to pay in order to make sure that the property and the buyer are able to be financed. They may have different names to different lenders but they usually are things like:
1) Credit Check - to check the buyers's credit worthiness
2) Plot Plan - to make sure the house is where it's supposed to be and doesn't have any obvious location problems
3) Appraisal - a third party opinion of the home's value.
4) Origination fee - the fee charge by whoever is doing the paperwork, could be a bank or a mortgage rep.
5) Attorney or Title Company Fees - these fees are paid to the person who conducts the closing, prepares the HUD, etc.
6) Recording Fees - These are fees owed to the state/county in order to record the sale at the local registry, generally required by most lenders.
7) Lender's Title Insurance. Title insurance is generally required for all mortgages. It's not inexpensive, and varies with the price of the house. Although almost always required, Lender's Title Insurance is rarely included in any advertised "no closing costs" mortgages. The other closing costs in this section are usually included (either all or most) in no closing costs loans.
These costs are generally similar no matter how expensive the home you purchase is (except Lender's Title Insurance). I've found lenders can charge different prices for each one, but the total of these fees, typically, should be under $3500.
Pre-pay Mortgage Expenses
Pre-pays are actually money you are paying yourself for future expenses. They are typically:
1) Home Insurance - generally, a full years home insurance policy is paid up front.
2) Real Estate Taxes - although most banks pay the taxes for you out of the escrow fund, someone has to fill up the escrow fund - and that's you!
3) Water/Sewer bills
4) Other municipal bills
5) Pre-pay Mortgage - often times you will need to make a partial mortgage payment at close. It all goes to the house, but it can add to your initial costs.
These costs generally VARY with home much your house costs. So a home that costs 100K has much smaller pre-pays than a house that is 400K, or 600K.
Optional Closing Costs
There are some other fees that are optional, but may have significant impacts to your over all "home purchase bill".
Mortgage points: If your loan has points, you're likely paying money to insure a lower interest rate over the life of the loan. Generally, points make sense if you hold the loan a long-time and the cost of the points (which varies) isn't too much vs. the interest rate discount you are getting. As a rule of thumb, I generally think a point should pay for itself in about 18 months or less. (so if a point was $3000, you should be saving about $170 a month vs. the same loan with no points). That's just a guideline, everyone should review their own situation carefully to determine the "value" of a point.
Buyer's Title Insurance: Ah, more title insurance. This policy is for you the buyer. While not required, it's generally recommended.