Mortgage Loan Closing Costs

Reviewing mortgage loan closing costs before the day of closing can result in a smoother process and perhaps in some savings for the buyer. Closing procedures are notorious for being a time when additional fees can be inserted, and anxious buyers may be willing to allow these fees to go uncontested rather than disrupt the process of obtaining the mortgage. The government requires that a good faith estimate (GFE), which gives an estimate of all charges related to obtaining the loan, be given to the buyer at least three days before the closing. Although some changes in charges is inevitable, the GFE can at least help the buyer to get an idea of the funds which will be required. However, it is merely an estimate, and 'mistakes' are not easily regulated. Happily, the GFE can be used as a tool in the buyer's hands as well, for this good faith estimate allows the buyer to compare deals available from the various lenders before commiting to any one of them. After all, as Proverbs 18:17 observes, "He that is first in his own cause seemeth just; but his neighbour cometh and searcheth him." A deal on a mortgage may seem great, until the terms are set up against another offer!

Mortgage-related expenses can vary by state and even a local community may have its own usual practices regarding these procedures. Some charges are set by law. In this case there is nothing to negotiate. However, other expenses, such as application fees, loan origination fees and discount points are within the lender's control and could be negotiated. Some closing costs are typically paid by the buyer, some are split between the buyer and the seller, and at times, even a lender may offer to pay for certain items. If the lender is willing to assume all of the closing costs, be sure to check the interest rate on the agreement, for it may be set higher than a similar offer from another lender. An attorney can advise you as to which mortgage loan closing costs are negotiable and which are set by state law.

There are some typical mortgage loan closing costs which a buyer can anticipate. The good faith estimate should cover most of these. Any special regulations regarding the method of payment (such as paying by certified check) should also be revealed by the lender before the closing. Closing costs may include the following items: points, PMI, loan origination fee, escrow deposits, homeowner's insurance, title insurance and fees, appraisal fees, inspections and property surveys. Other charges may result from items such as credit reporting, recording fees and the payment of transfer taxes. If applicable, flood insurance may be another requirement.

Let's take a closer look at these items. A buyer may have to pay points as part of mortgage loan closing costs. If the buyer has chosen (or is required) to pay points, these will be due at closing. Private mortgage insurance (PMI) may also be required, unless the buyer is able to put at least a 20% downpayment on the table. This insurance protects the lender if the buyer defaults on the loan. PMI usually costs 1/2 of 1% of the loan's total amount. Check to see how much of the PMI must be paid up front and how much can be paid over time, as this may vary. The loan origination fee is the charge for processing the agreement and other related paperwork. Escrow deposits may vary considerably from one state to another.

Homeowner's insurance premiums can vary widely, depending upon the property's value. The buyer pays for this insurance. Title insurance, which protects the buyer and seller in case someone else has a deed or claim to the property, is determined by the amount of the loan. Appraisal fees are for an independent appraiser to determine the value of the property. This assures the lender that the property is valuable enough to be used as collateral. A home inspection is generally standard practice, and sometimes is conducted along with a pest inspection. Property surveys may be required by the lender, in order to see that the correct boundaries are outlined in the mortgage agreement. If other buildings or fences are intruding upon the property, this will also be indicated on the survey.

Remember that mortgage loan closing costs may often be negotiated. Since expenses may typically run between 2-7% of the loan amount, it may be worthwhile to try to split some of the fees between the buyer, seller and lender. This may be especially effective if the seller is anxious to close on the property as soon as possible, or if the lender needs the customer's business. If a person is refinancing, it is important for him or her to consider the mortgage loan closing costs in relation to the monthly savings which will be obtained.

Because mortgage loan closing costs can involve thousands of dollars, it can take years to realize any savings on a refinance deal. If the homeowner is not intending to stay in the home for several years, it may not pay to refinance. Online mortgage and refinancing calculators can help determine the best decisions to make in these cases. Some calculators are designed to figure out ongoing monthly costs on a pro-rated basis as well. Although these tools only provide an estimate of actual costs, these can be useful for comparing different mortgage loan closing costs. Another useful tool is a booklet entitled 'Settlement Costs -- a HUD guide' which may be obtained either from the mortgage lender or from the Department of Housing and Urban Development (HUD).

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