CLOSING COSTS

Paying closing costs is one of the final steps in getting your mortgage. Your mortgage closing will likely seem like a whirlwind, so understanding all of the components of your closing costs ahead of time will ease your mind.

One fee you may or may not pay at closing is the application fee. While some lenders include the application fee in your closing costs, other lenders will require you to pay the application fee when you apply for the mortgage. Typically, an application fee is non-refundable if you're declined for the mortgage or if you go with a different lender.

Another fee is for the appraisal of the property you wish to buy. The cost for an appraisal fee varies with the price of the home. Typically, appraisal fees range from $150 to $400. The lender needs to know the market value of the property in order to establish how money money you can borrow. The lender will use appraisal to establish the Loan to Value Ratio (LTV Ratio) on your mortgage. Many lenders will require you to pay the appraisal fee at the time you apply for your mortgage, rather than at closing.

Your closing costs will also include one of two different types of points. Points are a percentage of the amount of money you're borrowing. For example, a $150,000 loan that has 2 points means that you'll pay 2% of that $150,000, or $3000.

Discount points are used to reduce your interest rate by paying a fixed amount up front. The more discount points you pay, the lower your interest rate. A general rule of thumb is that one discount point reduces your interest rate on a 30 year mortgage by 1/8th of a percentage point.

The other type of points you may pay in closing costs are called origination points. These are sometimes referred to as a "loan origination fee." Origination points cover the lender's cost for preparing your mortgage.

Your closing costs will also include a fee for pulling up your credit report, although some lenders will require you to pay for the credit report at the time you apply for your mortgage.

Yet another fee in your closing costs will be for a title search. A title search involves checking all records concerning the property you're buying. The search will include court records, deeds, the seller's name, and other records. This is done to insure that there are no liens, special assessments, claims, or other restrictions on the property which could affect the value of the title.

But a title search may not discover things which could later come back to haunt you as well as the lender. There are many things that could escape a title search: an undisclosed divorce on the seller's part, fraud, forgery, and so on.

That's why your closing costs will include a fee for title insurance. A title insurance policy will safeguard against any problems not found during the title search process. If a problem arises, the title insurance company will pay for legal defense and court-related fees.

Your lender will require that you pay for title insurance for the lender. Getting a buyer's policy for yourself is optional, but it's a good idea. You can opt for getting a buyer's policy from the same company that did the title search. The title insurance fee is a one-time fee that you'll pay along with your other closing costs.

You may also pay a survey fee in your closing costs. The survey is done to ensure that the property you're buying conforms to the legal boundaries as recorded by your city or county government for the property.

Other items you'll likely pay for in your closing costs include attorney's fees for preparing the closing documents, recording and transfer charges, and, depending upon your location, possibly flood certification.

Also included in your closing costs will be the interest on your mortgage from your closing day until the end of the month. Most people try to minimize this interest cost by scheduling their mortgage closing as late in the month as possible.

You will likely also have to pay for costs that won't be due until after the closing, including homeowner's insurance, private mortgage insurance, and real estate taxes. The lender will hold these amounts in escrow until they are due to be paid. The lender is bound by Department of Housing and Urban Development (HUD) regulations on how much money the lender can require you to pay into this escrow account.

Different lenders may have different closing fees, so it pays to shop around. A lender will give you a Good Faith Estimate of what your closing costs will be, so you can use this estimate to compare lenders. You should recognize that an estimate is just that, though: an estimate.