Here is an overview of the types of closing costs you may incur on your loan. Some are one-time fees, while others recur over the life of the loan. When you apply for your loan, you should receive a Good Faith Estimate of Settlement Charges, and a booklet that will explain these costs in detail.
Loan Origination Fee: This fee covers the lender’s administrative costs in processing the loan. It is a one-time fee, often expressed as a percentage of the loan. The origination fee is typically 1% of the loan, but you can obtain a loan with no origination fee and a slightly higher interest rate.
Title Insurance Fees: There are two title policies: a lender’s title policy (which protects the lender against loss due to defects on title) and a buyer’s title policy (which protects you). These are both one-time charges, but the on you usually pay as a typical buyer is approximately $400, based on a $200,000 mortgage. Higher or lower rates will apply depending on the mortgage amount.
Miscellaneous Title Charges: The title company may charge fees for a title search, title examination, document preparation, final legal papers preparation, notary fees, recording fees, and a settlement or closing fee. These are all one-time charges and can add up to around $350-$450.
Prepaid Interest: Depending on the time of month your loan closes, this charge may vary from a full month’s interest to just a few days’ interest. If your loan closes at the beginning of the month, you will probably have to pay the maximum amount. If your loan closes at the end of the month, you will only have to pay a few days’ interest.
PMI (Private Mortgage Insurance) Premium: Depending on the amount of your down payment, you may have to pay an up-front fee for mortgage insurance (which protects the lender against loss due to foreclosure). As of 2007, PMI is tax-deductible.
Beginning the escrow account: Your lender will typically have an account where your property taxes and property insurance will be held. This account will be started with taxes approximately equal to two months in excess of the number of months that have elapsed this year. (If 6 months have passed, they will collect 8 months of taxes.) Your property insurance will be collected (one year in advance, plus two months) and be kept in your escrow account.
Earnest Money Deposit (EMD): It is important to have an understanding of the earnest money deposit, so you will not be placed in an uncomfortable position when you purchase a property. At the time a written offer is initiated, you will generally be required to give an EMD in an amount equal to between 1–3% of the purchase price. This amount is credited to you as a partial down payment and represents your intent to purchase the property. The EMD check is usually made payable to your Buyer’s Agent’s Brokerage (unless the home is new construction or a bank-owned property). If the purchase offer IS accepted, the EMD is deposited within two (2) banking days into a non-interest bearing account and applied to your buyer settlement numbers as a credit. If the offer is not accepted, this amount is returned to you promptly. Or, in the event that you do not qualify with a lender for a new loan, the earnest money is refunded to you, provided the sellers are given written notice regarding the lender’s disapproval, and provided you have supplied the lender with all documentation they have requested.
Prorated Taxes & Insurance: These are insurance policies or taxes such as school and county taxes, that may have to be split between you and the seller as a result of the due dates. Usually prorated taxes are paid based on the number of days of homeownership.
Prorated Association & Assessment: Similar to the prorated taxes and insurance, if an association with dues is in place at the prospective property, or if there is an assessment from the city or township, the days of homeownership determine the amount paid by each party (buyer and seller).
REMINDER: For the closing, you must bring a valid driver’s license and a cashier’s check for the remainder of your down payment, typically made payable to yourself. At the closing, you may sign the cashier’s check over to the title company.